Job SearchJob Search

David L. DickinsonDavid L. DickinsonAppalachian State UniversityAppalachian State University

April 2006: GATE.April 2006: GATE.

““Direct tests of the reservation Direct tests of the reservation wage property.” J.C. Cox and R. wage property.” J.C. Cox and R.

L. Oaxaca, 1992, L. Oaxaca, 1992, The EJThe EJ..Job Search models depend critically on an Job Search models depend critically on an individual’s reservation wageindividual’s reservation wage Search duration or Search duration or acceptedaccepted wage data is an wage data is an indirectindirect test of the finite horizon model. test of the finite horizon model.

Direct tests require data on reservation wages Direct tests require data on reservation wages themselves…..not observable in field data.themselves…..not observable in field data.

Is reservation wage data from lab consistent Is reservation wage data from lab consistent with job search model predictions? For risk with job search model predictions? For risk neutral/risk averse agents? Can a naïve neutral/risk averse agents? Can a naïve decision rule predict just as well?decision rule predict just as well?

Experimental InstitutionExperimental Institution

Subjects state minimum acceptable offers Subjects state minimum acceptable offers with binding pre-commitment (part II).with binding pre-commitment (part II). Part I trials are more field-parallel Part I trials are more field-parallel

accept/reject responses of known offers to accept/reject responses of known offers to identify any institutional (pre-commitment identify any institutional (pre-commitment effects).effects).

Trials (rounds) in both parts I and II differ Trials (rounds) in both parts I and II differ by:by: Offer probability (1/2 or 1/4)…finite horizonOffer probability (1/2 or 1/4)…finite horizon ““Unemployment” insurance (i.e., search Unemployment” insurance (i.e., search

subsidy)=$0 or $.05 per round.subsidy)=$0 or $.05 per round.

TestsTestsPre-commitment treatment effect?Pre-commitment treatment effect? Yes, but it’s gone after 1Yes, but it’s gone after 1stst two treatments two treatments

Search Model vs. Naïve RuleSearch Model vs. Naïve Rule Even naïve rule does well when theory is tested Even naïve rule does well when theory is tested indirectlyindirectly by search terminations. Conclusion: indirect by search terminations. Conclusion: indirect test is weak (Table 1) (a critique of previous papers).test is weak (Table 1) (a critique of previous papers).

Direct tests of reservation wage propertiesDirect tests of reservation wage properties Entire path of reservation wages was tested against Entire path of reservation wages was tested against

the predicted path of reservation wages (equation (3))the predicted path of reservation wages (equation (3)) Concave (risk averse) model is the winner. Concave (risk averse) model is the winner.

That is, one cannot reject hyp that coef. from (2) are equal to That is, one cannot reject hyp that coef. from (2) are equal to those implies by the optimal reservation wage path for risk-those implies by the optimal reservation wage path for risk-averse agent (I’m not clear on averse agent (I’m not clear on UU(x) function assumed).(x) function assumed).

Final ThoughtsFinal ThoughtsExperimental Institution is specifically designed Experimental Institution is specifically designed notnot like like the real world in order to test this particular theory.the real world in order to test this particular theory.

Highlights the importance of the theoretical parameters as Highlights the importance of the theoretical parameters as opposed to natural institutions to create a convincing and fair opposed to natural institutions to create a convincing and fair test of a theory.test of a theory.

Direct test results are consistent with the “Risk averse” Direct test results are consistent with the “Risk averse” model only.model only.

The test is, therefore, a joint test of risk aversion and the The test is, therefore, a joint test of risk aversion and the reservation wage hypothesis (if subjects are really risk neutral, reservation wage hypothesis (if subjects are really risk neutral, then some off-setting effect could still occur to generate data then some off-setting effect could still occur to generate data consistent with the risk averse reservation wage path.)consistent with the risk averse reservation wage path.)

Results consistent with more recent results (e.g., Holt and Laury, Results consistent with more recent results (e.g., Holt and Laury, 2002) indicating that lab subjects are, on average, risk-averse 2002) indicating that lab subjects are, on average, risk-averse for in lottery choice environmentsfor in lottery choice environments