11 - AB - Gorgens - Reservation Wages and Working Hours For

Labour Economics 9 (2002) 93 123
www.elsevier.com/locate/econbase
Reservation wages and working hours for

recently unemployed US women
Tue Grgens *
Economics RSSS, Australian National University, Canberra ACT 0200, Australia
Received 1 September 2000; received in revised form 29 January 2002; accepted 29 January 2002
Abstract
This paper estimates a structural model of job search behavior where jobs are characterized by
both wages and working hours. Worker heterogeneity is taken into account by including covariates in
the job offer distribution and the utility function. The estimates are bias-corrected using a statistical
model of measurement error designed to accommodate recent evidence on the empirical distribution
of measurement errors. The results suggest that the difference between full time and part time
reservation wages vary from 16% to 31%, depending on the characteristics of the individual. The
hypothesis that full and part time reservation wages are identical is rejected. D 2002 Elsevier Science
B.V. All rights reserved.
JEL classification: C24; J22; J64
Keywords: Job search; Reservation wage; Female labor supply; Measurement error; Structural modeling
1. Introduction
This paper estimates a structural model of job search behavior where jobs are
characterized by wages and working hours. Firms are assumed to offer take-it-or-leaveit contracts stipulating both the wage and working hours. The model implies that workers
have conditional reservation wages which depend on the hours offered, and the main
objective of the paper is to investigate empirically how much conditional reservation
wages depend on hours. The data, taken from the Current Population Survey, consist of
accepted wage hours pairs for a representative sample of US women who were working
in March 1990 and who experienced a spell of unemployment in 1989.
*
Tel.: +61-2-6125-3369; fax: +61-2-6125-0182.

E-mail address: Tue.Gorgens@anu.edu.au (T. Grgens).
0927-5371/02/$ - see front matter D 2002 Elsevier Science B.V. All rights reserved.
PII: S 0 9 2 7 - 5 3 7 1 ( 0 2 ) 0 0 0 0 7 - 6
94
T. Grgens / Labour Economics 9 (2002) 93123
Most models of workers job search focus exclusively on the wage rate and ignore
working hours and other nonwage job characteristics.1 They are wage search models in
the sense that the workers optimal search behavior is characterized by a reservation wage
strategy: a job offer is accepted if and only if the offered wage exceeds the reservation
wage. For working hours, the underlying assumption is typically that workers may freely
choose their working hours given the wage. This paper assumes that firms offer contracts
which fully specify the job. Workers have preferences defined over jobs, and it is shown
that their optimal search behavior is a reservation utility strategy. Corresponding to the
reservation utility, there is a reservation wage function which yields a conditional
reservation wage given the nonwage characteristics of a job. If the reservation wage
function is constant, then the conditional reservation wages are identical, and thus the
model reduces to a wage search model with a single reservation wage.
Ignoring the relationship between conditional reservation wages and working hours can
lead to incorrect inference and misleading policy advice. For example, in wage search
models, the reservation wage is often estimated by the minimum observed wage in the
sample. If the conditional reservation wages vary with nonwage job characteristics, then
the minimum observed wage will estimate the lowest of the conditional reservation wages.
Since some conditional reservation wages are higher, the model will underestimate the
probability of an offer being rejected. This could lead to incorrect conclusions about such
questions as whether unemployment is caused mainly by infrequent job offers or by high
offer rejection probabilities.
It is therefore necessary to investigate the effect on reservation wages of all job
characteristics such as working hours, health insurance, paid vacation and sick days,
pensions and so forth. Here the focus is on working hours, because data on working hours
are readily available and the importance of hours in other contexts is already well
documented.2 The empirical model distinguishes only between part time and full time
jobs. Since many of the nonwage job characteristics mentioned are only available to full
time workers, one of the benefits of this simplification is that the model may implicitly
capture some of the effects of job characteristics excluded from the analysis.
The underlying theoretical model is based on wage search models with infinite search
horizon, such as those by Mortensen (1986) and Mortensen and Neumann (1988),
extended to incorporate nonwage job characteristics as in Kiefer (1987). The structural
parameters of the model are estimated by maximum likelihood allowing for worker
heterogeneity and measurement error. Since it is computationally easier to estimate a
search model on a sample of homogeneous workers, some authors choose to split their
sample into approximately homogeneous groups and estimate the model separately on
each subsample. For efficiency reasons, worker heterogeneity is here accounted for by
including covariates in the model, as done for instance by Wolpin (1987) and Blau
(1991).
See the survey by Devine and Kiefer (1991).

See the surveys by Killingsworth and Heckman (1986), Nickell (1986) and Pencavel (1986). The
importance of other nonwage benefits has been studied, for example, by Woodbury (1983).
2
95
It is well known that most labor market data contain large measurement errors. This is a
problem in any empirical work, but search models are particularly sensitive to measurement error. In wage search models this is often dealt with in an ad hoc manner, for example
by removing observations of low wages from the sample. This paper follows the example
of Wolpin (1987), Blau (1991) and Christensen and Kiefer (1994) among others, and
incorporates a statistical model of measurement error. However, whereas previous studies
have based their measurement error model on computational practicability, the model
proposed here is designed to fit recent findings on the empirical distribution of measurement errors by Rodgers et al. (1993) and Bound et al. (1994). This paper also investigates
how robust the empirical results regarding working hours and conditional reservation
wages are to changes in the assumptions about the measurement errors.
This paper appears to be the first to examine the relationship between conditional
reservation wages and working hours for women. The relationship for recently unemployed US men was studied by Blau (1991). Although Blau found that conditional
reservation earnings clearly depend on hours, he did not reject the hypothesis of constant
conditional reservation wages for recently unemployed US men. The finding of this paper
is that the reservation wage function is not constant for women.
The main conclusion of the paper is that the conditional reservation wages of the
women in the sample are from 16% to 31% higher for full time than for part time jobs,
depending on the characteristics of the worker. Women whose expected wage offers are
relatively high, e.g. older, well-educated women living in a central city in the Northeast,
have higher part time than full time reservation wages. Women whose expected wage
offers are relatively low, e.g. younger women with less schooling living in the rural
Midwest, have higher full time than part time reservation wages. Receipt of benefits while
unemployed increases part time reservation wages substantially, but has negligible effects
on full time reservation wages. The presence of young children and husbands in the
household has a positive, but very small effect on the womens reservation wages. Only if
the husband earns a high hourly wage (US$15 or more) do the reservation wages increase
significantly.
Observed wages and hours reflect both opportunities (the job offer distribution) and
individual choices (preferences). The structural framework allows one to disentangle such
demand and supply factors. For instance, it is found that the mean wage offers
increase monotonically with the level of education. The implied returns to schooling
suggest that there are substantial premiums to graduating from high school and college,
whereas the premium for attending college but leaving before graduation is smaller. It is
also found that differences in observed wages misrepresent returns to schooling. Women
with less education tend to receive lower wage offers, but they also reject a larger
proportion of them. The difference in wages across education groups is therefore smaller
when measured on observed wages, rather than offered wages. This result is similar to the
findings by Eckstein and Wolpin (1995) for young men.
Finally, the estimates suggest that measurement errors in observed wages are large, to
the extent that there is as much noise as information in the data, and that the distribution of
measurement errors is strongly leptokurtic (fat-tailed). These results agree with empirical
findings from data validation studies and imply that the common assumption of
lognormally distributed measurement errors in wages is inadequate. The estimated
96
reservation wages are somewhat sensitive to the specification of the distribution of

measurement errors, but the qualitative conclusion that hours matter is robust.
2. A job search model

This section presents a general model of workers job search where workers have
preferences defined over wage and nonwage characteristics. The focus is on the optimal
search behavior of workers. The behavior of firms is taken as given and equilibrium issues
are not discussed. As mentioned, the basic structure is taken from wage search models by
for example Mortensen (1986) and Mortensen and Neumann (1988), extended to
incorporate nonwage job characteristics as in Kiefer (1987).
2.1. Workers reservation utility
Consider an environment in which workers are either employed or unemployed. A job
is represented by a pair (w,h), where w is the wage rate and h is a vector of nonwage job
characteristics such as working hours, working conditions, fringe benefits, pensions, and
so on. Firms design take-it-or-leave-it job offers (wo,ho); there is no negotiation between
employers and workers about job contracts. Workers receive job offers according to a
Poisson process with a state-dependent parameter: unemployed workers receive offers at
constant rate k0, while employed workers receive offers at constant rate k1. There is no
recall; that is, once refused, a job offer is no longer available. Accepted jobs terminate
randomly according to a Poisson process with parameter d. The distribution of job offers,
offer arrival times and job termination times is constant over time and known to
everybody.
Workers live forever and maximize expected discounted lifetime utility. The rate of
time preference, q, is constant over time. The instantaneous utility when employed at a job
(w,h) is U(w,h), where U is strictly increasing and differentiable with respect to w.3 The
instantaneous utility when unemployed, denoted by U0, is the net of search costs and does
not vary over the duration of the unemployment spell. As utility functions are determined
only up to an affine transformation, a normalization is needed. A convenient choice is
U(0,h1) = 0 and U(1,h1) = 1 for some h1.
The defining characteristic of a wage search model is that the optimal search behavior
is a reservation wage strategy: a worker should accept a job offer if and only if the offered
wage is larger than a threshold, termed the reservation wage. In the wage search literature,
it is customary to assume that workers maximize the expected present value of the wage
stream. In other words, the instantaneous utility of work is proportional to the wage. This
special case will be referred to as the Constant Marginal Utility with respect to the Wage
(CMUW) wage search model.
3
A similar specification was used by Kiefer (1987). The function U can be formed by assuming that income
is fully consumed in each period and substituting the budget constraint into a direct instantaneous utility function
defined over consumption, leisure and other nonwage job characteristics.
97
Results derived for the CMUW wage search model can be used to characterize the
optimal search behavior of workers in the present, more general model. From a workers
perspective, all relevant information about a job is summarized in her (instantaneous)
utility function. Therefore, job search can be viewed as search for utility. In the CMUW
wage search model, workers receive wage offers and maximize the expected present value
of their wage stream. Similarly, in the job search model, workers receive utility offers and
maximize the expected present value of the utility stream. Mathematically, the two
models, and hence their solutions, are identical. The optimal search behavior in the
CMUW wage search model is a reservation wage strategy. Equivalently, the optimal
search behavior in the utility search model is a reservation utility strategy, where a job
offer should be accepted if and only if its associated instantaneous utility exceeds the
reservation utility.
To be specific, associate with each job offer (wo,ho) a utility offer uo = U(wo,ho), and let
Q be the distribution function of the utility offers; that is, define Q by
Qu Pruo Vu PrU wo ,ho Vu:
Results derived for the CMUW wage search model show that for employed workers the
reservation utility trivially equals the instantaneous utility of the current job, whereas for
unemployed workers the reservation utility r is the unique solution to the equation
r U0 k
Z
r
1 Qu
du,
1 j1 Qu
where k=(k0 k1)/(q + d) and j = k1/(q + d). Notice that k and j are unitless parameters. In
Eq. (2), r U0 represents the marginal cost of rejecting an offer of utility r, while the
second term on the right-hand side is the expected marginal benefit of continued search,
given that only offers of utility r or more are accepted.
2.2. Distribution of accepted jobs
The implied conditional distribution of accepted jobs is simply the job offer distribution
truncated at the indifference curve corresponding to the reservation utility level. Specifically, for a job offer (wo,ho) to be acceptable to an unemployed worker, it must satisfy
U(wo,ho) z r. The probability of this event is 1 Q(r). In the case where the nonwage
characteristics are all discrete, let w(wjh) denote the conditional density of wo at w given
ho = h and let p(h) be the marginal probability of ho = h. The (mixed) density w* of the first
job accepted by an unemployed worker is then
ww j hph
1U w,hzr,
w*w,h
1 Qr
where 1( ) denotes the indicator function (that is, 1(A) = 1 if the event A is true and 1(A) = 0
otherwise). The maximum likelihood estimates presented in Section 4 are based on a
version of this density adjusted for measurement errors.
98
2.3. Wage search

There are several ways job search can reduce to wage search. A possibility, which is
nested within the present model, is that workers do not care about job characteristics other
than the wage. This case is easily tested empirically. Of course, since some wage search
models are not included under the null, such a test is not a definitive test of the wage
search model.4
Define the conditional reservation wage function W by
W h U 1 r,h,
where the function U 1, defined by U(U 1(u,h),h) = u, represents an indifference curve;

that is, U 1(u,h) is the wage that yields utility u when combined with nonwage
characteristics h. The function W is the indifference curve corresponding to the reservation
utility level r, and a job offer (wo,ho) is acceptable if and only if wo z W(ho). By definition,
job search reduces to wage search when W is constant for all offered h. This hypothesis is
tested in Section 4.
3. Parameterization and measurement error

The parameterization is guided by several considerations including the availability and
limitations of data, heterogeneity among workers, and measurement errors. The model is
estimated by the maximum likelihood method. The likelihood function is based on the
density given in Eq. (3) of the first job accepted by an unemployed worker.
3.1. Data and dependent variables
The data set is a subsample of the March 1990 Current Population Survey (CPS)
consisting of 730 females who were working at the time of the interview and who
experienced a spell of unemployment in 1989. Details are provided in Appendix A. The
CPS was chosen because it is representative of the entire US population and because it is
large. A minor drawback of the CPS is that while it has information on whether a worker
had a spell of unemployment during the previous year and on the current job, it is not
known whether the current job is the first after the unemployment spell, as assumed in
deriving the density in Eq. (3). However, given that the maximum period between the end
of the unemployment spell and the beginning of the current job is only about 15 months,
assuming the current job is similar to the first seems rather harmless.
A more important drawback of the CPS is that the information about the duration of
previous unemployment spells is very limited. It has information about the total number of
4
Burdett and Mortensen (1978) among others considered models where firms do not care about working
hours and workers choose their hours freely given the offered wage rate. Bloemen (1997) estimated a wage search
model with unrestricted hours choice for a sample of recently unemployed Dutch men. These are examples of
wage search models which are not nested within the present model.
99
weeks of unemployment in the previous calendar year, but it is not known whether this
constitutes one or several spells, and it is not known if spells were ongoing at the
beginning or the end of the calendar year. In search models estimated on homogeneous
samples, identification of offer arrival rates often depends crucially on the availability of
duration data (see for example Flinn and Heckman, 1982). However, it can be shown that
data on accepted jobs are sufficient for identification in heterogeneous samples, where the
offer arrival rates are identified from the functional form of the relationship between the
reservation utility and worker characteristics. Since the duration data available are
extremely imperfect and since duration data are not needed for identification, duration
data are not used in this paper. Some consequences of this are discussed later.
The only nonwage job characteristic considered is working hours. Hours are usual
weekly working hours, as defined in the CPS. As can be seen in Fig. 1, the marginal
distribution of hours in the sample is very irregular. It is difficult to find a satisfactory
parametric distribution capable of generating this structure without introducing a parameter vector of very high dimension. Consequently, in order to economize on the number of
parameters in the model, jobs are assumed to be either part time, h = h1, or full time, h = h2.
As a positive side effect, this simplification may capture the difference in other nonwage
job characteristics which exists between part and full time jobs. For example, part time
jobs typically do not qualify for health and retirement benefits. Although these nonwage
characteristics are unavailable in the CPS data, their effect may show up in the empirical
results, for example as workers having strong preferences for full time jobs. Following the
CPS convention, part time is defined as 1 34 hours of work per week, and full time is 35
or more hours per week. Under this definition, there are 269 part time jobs (37%) and 461
full time jobs (63%) in the sample.
The other dependent variable, wages, is defined as usual weekly earnings divided by
usual hours. Earnings include overtime pay, commissions, tips, and so forth.
Fig. 1. Marginal distribution of hours.
100
3.2. Worker heterogeneity

In the literature, the usual method of accounting for heterogeneity is to group workers
according to their characteristics and estimate the model separately for each group. In
wage search models, this approach has the advantage that workers within a group have the
same reservation wage, which can be estimated consistently by the smallest observed wage
in the group. There is then no need for solving the reservation wage equation, and this
eases the computational burden considerably. The disadvantages are, of course, that
grouping becomes impractical for even a modest number of discrete covariates and
impossible if a covariate is continuous. Furthermore, grouping is inefficient if parameter
restrictions across groups are ignored. In this paper, worker heterogeneity is incorporated
in the traditional parametric way for efficiency reasons. The resulting problem of solving
the reservation utility equation for each observation in each evaluation of the likelihood
function is not impractical, given todays computing power.
The parameterization outlined below is a compromise between the desire to include
many individual effects and the need to limit the number of parameters. First, assume that
everyone faces the same marginal distribution of hours offers, so
8
< p1 if j 1
Prho hj
5
:
p2 if j 2,
where p2 is an unknown parameter and p1 = 1 p2.
There are a priori many reasons to expect a difference between the distribution of part
time and full time wage offers. These include, for example, compensating differentials for
nonwage job characteristics not included in the model such as health and retirement
benefits, compensating differentials to workers for working an undesirable number of
hours, nonlinearities in the tax schedule for employees as well as employers, and
differences in productivity between part and full time workers.5 Following a long tradition
in the labor demand literature, the conditional wage offers given hours are therefore
modeled as
8
< expn1 xo Vbm1 if ho h1
o
w
6
:
expn2 xo Vbm2 if ho h2 ,
where xo is a vector of worker characteristics, n1, n2 and b are parameters, and m1 and m2
are random variables independent of xo and ho. Specifically, assume that log mj is normally
distributed with mean zero and hours-specific variance rj2. The characteristics included in
xo are age and age squared, indicators of education (roughly high school drop-out, high
school graduate, college drop-out, college graduate), a central city dummy, regional
dummies, and a union membership dummy.
5
Although disentangling these factors is interesting and important, the current (partial equilibrium)
framework and the CPS dataset are not suited to such an analysis. Therefore, this paper must be content to take
the difference in part time and full time wage offer distributions as an empirical fact.
The utility of part time and full time work is assumed to take the form
8
< g10 xe Vg1 c1 w if h h1
U w,h
:
g20 xe Vg2 c2 w if h h2 ,
101
where xe is a vector of family characteristics, and g20, g2 and c2 are unknown parameters to
be estimated. By normalization (see Section 2.1), g10 = 0, g1 = 0 and c1 = 1. The linear form
implies that the marginal instantaneous utility of the wage is allowed to vary freely with
working hours but, following the tradition in the CMUW wage search literature, not with
the wage. The characteristics included in xe are a dummy variable which is 1 if there are
children under the age of 6 in the family and indicators of the husbands wage group (no
wage-earning husband present, husband earns between US$0 and US$15 per hour, and
husband earns US$15 per hour or more).
The utility when unemployed is similarly
U0 a0 xu Va,
where xu is a vector of family characteristics, and a0 and a are unknown parameters. The
characteristics included in xu are the same as those included in xe, with the addition of a
dummy variable which is 1 if the woman received unemployment benefits in the previous
year.6
Finally, assume that everyone has the same k and j. In the remainder of the paper, x
denotes the union of xo, xe and xu.
3.3. Measurement error
It is well known that labor market data often are of imperfect quality. Measurement
error is a problem in most empirical labor market studies, but search models are
particularly sensitive to measurement error because of the discontinuity between acceptable and non-acceptable jobs. To see this, first suppose that there are no measurement
errors. Ignoring worker heterogeneity, the density w* of the first job accepted by an
unemployed worker is given in Eq. (3). Notice that w* is discontinuous whenever (w,h)
satisfies U(w,h) = r and that the likelihood of the sample is zero if U(w,h) < r for any
observation. This implies that only parameter values such that U(w,h) z r for all
6
Receipt of unemployment benefits increases the instantaneous utility while unemployed and hence
increases the reservation utility level. In the USA, not all workers are eligible for benefits and of those who are,
most exhaust their benefits after a fixed period of time, usually 26 weeks. For such a system, search theory
predicts that the reservation utility should be decreasing over the period of benefit receipt and constant thereafter
(see e.g. Mortensen, 1977; Burdett, 1979). Unfortunately, the CPS has only information about whether benefits
were received and the total amount received in the previous calendar year. It is not known whether the individual
exhausted her benefits. In case of multiple spells, the distribution of payments across spells is not recorded. In
case of spells in progress at the beginning or the end of the calendar year, the full benefit amount is not recorded.
As a consequence, it is not possible to capture all effects predicted by search theory. Since workers with strong
labor force attachment are more likely to be eligible for benefits, the UI dummy may also proxy for a strong
preference for work. However, the results presented in Section 4 show that this effect is not large enough to
reverse the expected positive effect of benefits on reservation wages.
102
observations are candidates for the maximum likelihood estimates. However, with
measurement error it is possible that U(w,h) < r for some observations. Forcing the
restriction U(w,h) z r to hold then reduces the estimated reservation utility and renders
the parameter estimates inconsistent. Conclusions drawn from the estimated model could
be very misleading. For example, a lower reservation utility implies, ceteris paribus, a
smaller probability of an offer being rejected which, in turn, means that long spells of
unemployment will be attributed to low offer arrival rates rather than high rejection rates.
The issue of measurement error, therefore, cannot be ignored.7
In a likelihood framework, an attractive way of dealing with measurement error is to
model the joint distribution of the unobserved true values and the measurement errors.
This approach was taken in the search studies by Wolpin (1987), Blau (1991), Christensen
and Kiefer (1994) and Eckstein and Wolpin (1995) among others. The present paper also
follows this approach, but diverges from previous studies by choosing an empirically
appropriate rather than a computationally convenient distribution of measurement errors.
This is feasible because recent research on labor market data has uncovered many
properties of measurement errors.8
In the present context, the most useful information is provided by Rodgers et al. (1993),
who have analyzed a PSID validation sample. They found that measurement errors in
(accepted) log wages are large and negatively correlated with the true log wages. The
density of measurement errors is approximately symmetrical around zero, unimodal and
leptokurtic. The correlation between the measurement errors and covariates such as age,
tenure and education is small and statistically insignificant. Further details are given in
Section 4. Rodgers et al. (1993) also provided summary statistics for the measurement
errors in log weekly working hours; however, all subjects in the validation study worked
full time, and the study contains no information about the errors involved when classifying
workers as full or part time.
The measurement error model proposed here is designed to capture the above stylized
facts. It allows for (i) errors in the classification of part time and full time jobs; (ii)
correlation between true wages and measurement errors in wages, and (iii) a leptokurtic
distribution of the measurement errors in wages. To set up the model additional notation is
needed. Let (wo,ho), (wa,ha), and (w,h) denote offered, accepted, and observed random
wage hours pairs.
Firstly, assume that the probability of a classification error in hours is a constant, cc,
independent of the other variables in the model (x, wa, ha, and the measurement error in
wages). This implies, among other things, that the probability of misclassifying a part time
as a full time job is the same as the probability of misclassifying a full time as a part time
job. Specifically,
ij
Prh h i j ha hj c1I
1 cc Iij ,
c
where Iij = 1 if hi = hj and Iij = 0 otherwise.
7
A similar problem arises if there is unobserved heterogeneity among workers. Flinn and Heckman (1982)
derived the likelihood functions for two simple wage search models, one with unobserved heterogeneity and one
with measurement error. The likelihood functions are similar, although not identical.
8
See Duncan and Hill (1985), Bound et al. (1990, 1994), Bound and Krueger (1991) and Rodgers et al.
(1993).
103
Secondly, let ew = w/wa denote the measurement error in the wage. Following Bound et
al. (1994), assume that
log ew cw log wa Elog wa j x,ha log ,
10
where cw is a parameter and log has mean zero and is independent of all other variables
in the model (x, wa, ha, and the measurement error in hours). Eq. (10) ensures that E(log
ew) = 0 while allowing log ew to be correlated with log wa.
Finally, to ensure that the distribution of measurement errors in wages is unimodal and
leptokurtic, let Z be a standard normal variate and assume that log satisfies

Zg
log k lsinh
,
11
d
where
l sexpd 2 1expd 2 cosh2g=d 1=21=2 , k lexpd 2 =2sinhg=d:
Here g and d are parameters, and the formulae for k and l in terms of s, g and d ensure that
E(log ) = 0 and V(log ) = s2. The sinh-transformation implies that the distribution of log
is leptokurtic for all finite values of g and d; the more so, the smaller the value of d. In the
limit as d ! l, the leptokurtosis disappears and log becomes normally distributed. The
distribution is symmetric if g = 0.9
The parameters in the measurement error model are s, g, d, cw and cc. As is evident
from Eq. (10), the shape of the density log ew is determined by the distribution of log wa as
well as that of log , and there is no simple map from the moments of log to those of log
ew or vice versa. However, given the finding that measurement errors in log wages are
large, approximately symmetric, and leptokurtic, one would expect s large, g near zero,
and d fairly small. In addition, the evidence from Rodgers et al. (1993) suggests that
cw < 0, but has little to say about cc.
3.4. Likelihood function and identification
Let (wi,hi,xi), i = 1,. . ., n, be a random sample of n observations. The dependent
variables are wi and hi. Let Qi, ri and Wij be the quantities Q, r and W(hj) specific to an
individual with x = xi. For notational convenience, define lij = exp(nj + xioVb). The parameterization and the assumption that mj, x and ho are independent imply that the conditional
distribution function of the utility offers given x = xi has the form
Qi u
2
X
Prho hj j x xi PrU wo ,hj Vu j x xi ,ho hj
j1
2
X
pj F m j
j1
See Johnson et al. (1994).
!
u gj0 xei Vgj
,
cj lij
12
104
where Fmj is the distribution function of mj. The reservation utility becomes
Z l
1 Qi u
du,
ri a0 xui Va k
1
j1 Qi u
ri
13
and
Wij
ri gj0 xei Vgj

cj
14
is the conditional reservation wage given job type h = hj.

The density of observed jobs is derived from the density of accepted jobs, Eq. (3), by
adding and integrating out measurements errors. The derivations are somewhat lengthy
and can be found in Appendix B. The likelihood function is10
!
cw
Z
1I
n X
2
Y
scijw
w i sij
pj cc ij 1 cc Iij l
v
L
f 1c fmj
dv,
15
lij v1cw lij
1 Qi ri
v w
max0,Wij
i1 j1
where fmj and f denote the densities of mj and and sij = exp(E[log wajx = xi, ha = hj]).
Formulae for fmj and f as well as for sij are provided in Appendix B. The unknown
parameters of the model are n1, n2, b, r1, r2, p2, a0, a, g20, g2, c2, k, j, s, g, d, cw, and cc.
Theoretically, all of the parameters are identified, provided there is sufficient heterogeneity in the sample. In practice, however, some are difficult to estimate. For example, it
can be shown that the two unitless parameters, k and j, are identified by the nonlinear
relationship between ri and xi. However, if j is large, then the integrand in Eq. (13) is close
to 1/j, and k and j are nearly unidentified. The parameters related to measurement errors
are identified by the assumed functional form of their distribution. In general, it is not
possible to separate true information from measurement error without information about
the nature of the measurement error. The present paper diverges from previous studies by
choosing an empirically appropriate rather than a computationally convenient distribution
of measurement errors. However, the added flexibility comes at the price of weaker
identification. For the present model and data, estimation of s, g and d turned out to be
relatively unproblematic, while estimation of cw and cc was more difficult. The standard
deviations of the wage offers, rj, and the correlation between measurement errors and
accepted wages, cw, are related to the variation in wages: the rj are scale factors on offered
wages while cw, via the measurement errors, is a scale factor on accepted wages. If all
reservation wages are zero, then offered and accepted wages coincide, and it can be shown
that rj and cw are not separately identified. Even if the reservation wages are positive,
10
When j = 0, the assumptions that log mj and log are distributed N(0,rj2) and N(0,s2) imply that the
integrals in Eqs. (13) and (15) can be solved analytically. The only numerical problem is solving Eq. (13) for ri.
Newtons method seems to be the fastest. When j p 0 the integral in Eq. (13) must be evaluated using numerical
methods, and the same goes for the integral in Eq. (15) with more complicated distributions of mj and .
Experiments for various cases where an analytical solution can be found show that standard Gauss Legendre
numerical integration works well, especially after making the range of integration finite by changing variables
from u to u * = 1/[1 + u ri] in Eq. (13) and from v to v * = 1/(1 + v) in Eq. (15).
105
experiments with simulated data suggest that extremely large sample sizes are needed to
distinguish between small rj and large cw (implying that most of the variation in observed
wages is noise) versus large rj and small cw (implying that most of the variation in
observed wages is real). Finally, the probability of an offer being full time, p2, and the
probability of misclassifying hours, cc, are both related to the proportions of part and full
time jobs in the sample. Estimation of p2 and cc can be difficult, although theoretically
these parameters are separately identified as long as the job acceptance probabilities vary
sufficiently between workers.
4. Empirical results
The estimation strategy is the following. First, a benchmark model is estimated where
j, cw and cc are fixed at zero and the remaining parameters are estimated by maximizing
the likelihood function conditional on the fixed parameters. After discussing the results of
the benchmark model in detail, it is shown that the results are fairly robust to changes in
the model specification, including changes in cw and cc. This estimation strategy is
motivated partly by the weak identification of some of the parameters, and partly by the
(potential) sensitivity of the estimated conditional reservation wages to assumptions about
measurement errors.11
4.1. Benchmark model
The benchmark model assumes that there are no measurement errors in hours and that
measurement errors in log wages are uncorrelated with the true wages. Estimation results
are reported in Table 1 in column I (column II is discussed later).12 Consider first the
job offers. The estimated effects of age, education and so forth on the mean log wage have
the expected signs and reasonable magnitudes. Education is discussed in detail below.
Workers living in central cities are offered 30% higher wages than workers living
elsewhere, and workers covered by a union contract receive 34% higher wage offers.
The base region is the Northeast, and it has the highest mean wage offers, while the lowest
offers are given in the Midwest. The estimated constant terms imply that given a workers
characteristics, the wages offered in full time jobs are on average 23% higher than the part
time wage offers. The difference is statistically significant with a p-value of 0.001 by a
likelihood ratio test. The standard deviation is slightly smaller for full time than for part
time wage offers. The difference is statistically significant with a p-value of 0.029 by a
likelihood ratio test. The estimated probability, p2, of being offered a full time rather than a
11
It was not possible to obtain a sensible maximum likelihood estimate of cw. However, conditional on
cw = 0, the likelihood function is in fact maximized on the boundary of the parameter space with j = 0 and cc = 0.
12
The standard errors reported in Table 1 are computed by inverting the negative of the second-derivative
matrix of the log-likelihood function. Note that some of the standard errors are misleadingly large when compared
with likelihood ratio tests. For example, g20 does not appear significant, but the important ratio g20/c2, see Eq.
(14), is strongly significant.
106
Table 1
Estimated models
I
II
est
Job offers
n1
n2
b1, Age/10
b2, Age2/1000
b3, High school
b4, Some college
b5, College
b6, Central city
b7, Midwest
b8, South
b9, West
b10, Union covered
r1
r2
p2
se
OLS
est
se
0.46
0.23
0.73
0.75
0.34
0.50
1.04
0.30
0.39
0.26
0.17
0.34
0.33
0.28
0.67
0.44
0.44
0.17
0.20
0.11
0.13
0.15
0.07
0.10
0.08
0.08
0.08
0.06
0.05
0.05
1.12
0.85
0.94
0.98
0.37
0.53
1.14
0.39
0.43
0.26
0.21
0.36
0.43
0.37
0.66
0.58
0.59
0.22
0.26
0.12
0.15
0.18
0.09
0.12
0.10
0.10
0.10
0.07
0.05
0.07
3.76
0.15
0.12
1.63
1.14
16.14
0.14
0.53
7.38
4.09
0.17
0.23
0.23
0.46
0.29
15.75
0.76
0.89
7.20
3.24
3.60
0.10
0.21
1.47
1.21
37.41
0.15
0.35
16.29
8.61
0.15
0.24
0.23
0.48
0.30
62.44
1.79
1.77
27.34
13.07
Unitless parameters
k
j
0.04
0.00
0.07
0.03
0.00
0.05
Measurement errors
s
g
d
cw
cc
log L
0.32
0.38
1.52
0.00
0.00
2030.27
0.02
0.18
0.22
0.29
0.00
l
0.00
0.00
2046.77
0.02
Utility
a0
a1, Children under 6
a2, Husbands wage > 0
a3, Husbands wage > 15
a4, UI benefits
g20
g21, Children under 6
g22, Husbands wage > 0
g23, Husbands wage > 15
c2
est
se
1.16
1.37
0.20
0.19
0.12
0.19
0.55
0.13
0.18
0.21
0.11
0.20
0.11
0.11
0.06
0.08
0.04
0.04
0.05
0.03
0.04
0.04
0.04
0.05
est: estimate; se: standard error. If no standard error is given, the parameter is fixed.
part time job is 67%, while the proportion of full time jobs in the sample is slightly less,
63%.
For comparison, the result of a simple OLS regression of observed wages, log w, on xo
is reported in column OLS. It can be seen that ignoring the truncation of the job offers
and measurement error produces substantial bias towards zero. For example, the effect of
107
Table 2
Annual rates of return to schooling
Offered wages
Some high school to high school graduate

High school graduate to some college
Some college to college graduate
Observed wages
BYM
WYM
BYM
WYM
0.25
0.08
0.31
0.03
0.32
0.27
0.17
0.06
0.08
0.04
0.20
0.06
0.09
0.05
0.12
0.05
Estimates for women (W) based on model I in Table 1, estimates for black young men (BYM) and white young
men (WYM) from Eckstein and Wolpin (1995).
living in a central city on observed wages is only 13%, compared to the 30% effect on
offered wages mentioned earlier, and the effect of union contracts is only 20%, whereas
the effect on offered wages is 34%.
Eckstein and Wolpin (1995) argued that in order to measure the return to schooling it is
appropriate to compare wage offer distributions rather than distributions of accepted or
observed wages. The wage offer distribution reflects the opportunities available to
workers. Since not all offers are accepted, the distribution of accepted wages reflects
available opportunities as well as individual choices. To the extent that reservation wages
differ across education groups, differences in accepted wages may therefore provide a
distorted picture of the return to schooling. The estimates presented in columns I and
OLS in Table 1 confirm that the differences are substantial. The offered wages are 34%
higher for high school graduates than for high school drop-outs. Women, who have
attended, but not completed college, are offered 16% higher wages than high school
graduates, and the wage offers for women, who graduated from college, are additionally
54% higher.13 The percentages based on observed wages are much lower, 12%, 7% and
36%, respectively, because less educated workers tend to receive lower wage offers and
reject a larger proportion of their offers.
Estimates of annual rates of return are presented in Table 2, together with Eckstein and
Wolpins (1995) estimates for young men.14 The estimated returns to high school
graduation for women are remarkably similar to the return for white young men and
much larger than the return for black young men. The return to college education without
graduation is much lower for recently unemployed women than for young men, while the
return to graduating from college is much higher. Part of these differences are no doubt due
to factors such as occupational choice. Since the wages observed by Eckstein and Wolpin
relate to the first accepted full time job after leaving school and since wages tend to
increase over the life cycle, it is also possible that the difference in wage measures account
for some of the difference in the estimated return to graduating from college.
13
All of these estimates are biased upward to the extent that education is correlated with unmeasured
characteristics such as ability.
14
Following Eckstein and Wolpin (1995), the estimates are calculated assuming that jobs last forever (i.e.
wage and hours remain constant forever), and assuming that it takes six quarters to complete high school, eight
quarters to complete some college and another eight quarters to graduate from college. Direct costs of schooling
are ignored. Under these assumptions, the annual return to the next level of education are exp(4b3/6) 1,
exp(4(b4 b3)/8) 1 and exp(4(b5 b4)/8) 1, respectively.
108
Almost half the women in the sample have no young children, no wage-earning
husband in the household, and did not receive benefits in the previous year. This is a very
diverse group, slightly younger and slightly more likely to have dropped out of high
school or college, but equally likely to have completed college, than the population as a
whole. For these women, the estimated intercept of the instantaneous utility function is
smaller for full time (g20 = 16.14) than for part time jobs (g1 = 0), so at very low wages
she prefers part time over full time jobs. However, since the marginal instantaneous utility
of the wage is higher for full time (c2 = 4.09) than for part time jobs (c1 = 1) the ranking is
reversed for all sufficiently large wage rates. This is consistent with the common finding
that female labor supply is relatively elastic. Of course, the results are not directly
comparable since the labor supply literature assumes that workers can choose their
working hours freely at a given wage rate.
Fig. 2 shows the estimated utility function for these women, with Uj(w) = U(w,hj). The
solid horizontal line represents the utility when unemployed for a woman who did not
receive benefits. Her utility when unemployed (net of search costs) is 3.76, so for wages
lower than US$3.76 she prefers not to work. For wages between US$3.76 and US$5.22
she prefers a part time job over a full time job. At any wage higher than US$5.22, a full
time job is preferred. Receipt of unemployment benefits increases the utility when
unemployed to 4.90, represented by the dashed line in Fig. 2. This almost eliminates
the range of wages where part time employment is preferred.
In general, an increase in working hours has two effects on utility: a negative direct
effect, since the marginal utility of work is negative, and a positive indirect effect, since
more working hours implies higher earnings, and higher earnings implies higher
consumption, and the marginal utility of consumption is positive. In the present context,
this decomposition is less useful, because it is difficult to measure the marginal utility of
work when hours are discrete. However, the vertical distance between the curves U2 and
Fig. 2. No husband, no children.
109
U1 in Fig. 2 represents the net effect of increasing working hours from part time to full
time. The estimates imply that the negative direct effect dominates the positive indirect for
wages smaller than US$5.22, while the positive dominates the negative for wages larger
than US$5.22.
The presence of young children or a husband earning a moderate hourly wage (less than
US$15) increase the utility when unemployed by 0.15 and 0.12 and the utility of a full
time job by 0.14 and 0.53, respectively. The implications are small reductions in the range
of wages where part time employment is preferred. For example, young children reduce
the range from [3.76, 5.22] to [3.91, 5.18]. However, these coefficients (a1, a2, g21 and g22)
are relatively small and not statistically significant according to a joint likelihood ratio test
( p-value 0.613).
The presence of a husband earning a high hourly wage (more than US$15 per hour) has
substantial effect, however. Fig. 3 shows the utility function for a woman with a husband
earning more than US$15 per hour, but no children. Her utility when unemployed goes up
by 1.63 and her utility of full time employment falls by 7.38. As a consequence, she
prefers unemployment over employment for all wages less than 5.39, part time employment for wages between 5.39 and 7.61, and full time employment for all wages larger than
7.61. The effect of receiving unemployment benefits (dashed horizontal line) is to narrow
the range where part time employment is preferred, from [5.39, 7.61] to [6.53, 7.61].
The estimated values of k and j are 0.04 and 0, respectively, both of which seem low
(the restriction j = 0 is imposed in Table 1, but the likelihood function is in fact maximized
at this value). Recall that j = k1/(q + d) and k=(k0 k1)/(q + d). Unless the time preference
and the job termination rate are very large, the estimates imply that employed workers
have zero probability of receiving a job offer and that there is little difference between the
job offer arrival rates for unemployed and employed workers. However, as mentioned
earlier, while k and j are theoretically identified by nonlinearities in the reservation utility
Fig. 3. Husband earning US$15 or more.
110
Fig. 4. Part time jobs.
function, practical estimation can be difficult, and a strong positive correlation between the
estimates is to be expected. Reestimation of the model with j fixed at other values
confirmed this. It also showed that correlation between k and j on the one hand, and the
remaining parameters in the model on the other, is extremely low and that the effect on the
conditional reservation wages is negligible. The conclusion is therefore that the estimates k
and j are unreliable, but that this has little effect on the remaining parameters. Not
surprisingly perhaps, it appears that duration data (in the absence of data on job offers) are
needed to get reliable estimates of k and j.
Figs. 4 and 5 show the sample15 together with the estimated mean log wage offer
functions lj and reservation wage functions Wj, as a function of the index xo Vb. Since Wj is
a function of xu Va and xe Vg2 as well as of xo Vb it is not possible to plot the entire Wj-surface.
Therefore, reservation wages functions are shown in the figures for the same four cases
represented in Figs. 2 and 3. The lowest lines represent a woman with no husband and no
young children who did not receive benefits. The three lines above represent women who
either received unemployment benefits or have a husband earning more than US$15 per
hour or both. The effect of benefit receipt on part time reservation wages is quite substantial,
while the effect on full time reservation wages is negligible. This is because the marginal
utility of wages, cj, is much higher for full time than for part time jobs. The effect of a
husband earning more than US$15 per hour is large for both part time and full time jobs.
The lowest estimated conditional reservation wage for the women in the sample is
US$3.76 for part time and US$4.76 for full time jobs. By way of comparison, the legal
minimum wage in March 1990 was US$3.35, but a new minimum of US$3.80 took effect
on April 1, 1990. The largest estimated conditional reservation wages are US$7.46 for part
15
One observation with a wage of about US$55 is omitted in Fig. 5. The observation is included in the
estimation.
111
Fig. 5. Full time jobs.
time and US$7.57 for full time jobs. The part time reservation wage is lower than the full
time for women whose index xo Vb is small, while the reverse is the case for women whose
index is large. The difference between the full time and part time reservation wages for the
women in the sample ranges from US$ 1.03 to US$1.67, with an average of US$0.77.
Relative to the part time reservation wage, the difference ranges from 16% to 31%, with
an average of 19%.
These results suggest that women are not indifferent to working part time or full time.
Depending on their characteristics and on the offered wages, some women prefer part time
over full time while others prefer full time over part time. As mentioned earlier, if workers
do not care about hours (g20 = 0, g2 = 0 and c2 = 1), then job search reduces to wage search.
The likelihood ratio test statistic for this hypothesis is 78.44, which is statistically
significant at almost any level (there are five degrees of freedom and the p-value is
0.000). A comparison of the estimated reservation wages in model I and in the
corresponding wage search model shows that the reservation wages are generally lower
in the wage search model. As a percentage of the reservation wages in the wage search
model, the part time reservation wages in model I are 1.5% higher, ranging from 9% to
79% among the women in the sample, and the full time reservation wages are 20% higher,
ranging from 3% to 58%. This confirms the claim made in the introduction that reservation
wages tend to be underestimated when nonwage job characteristics are ignored.
The estimated parameters relating to the measurement error model are as expected. The
standard deviation of the measurement errors, s, is of similar magnitude to the standard
deviation of the wage offers, rj; this suggests that there is as much noise as information in
data, in accordance with validation studies. The parameter g is near zero and d is small,
implying near-symmetric and leptokurtic measurement errors in wages, also in accordance
with validation studies.
Virtually all structural studies of job (or wage) search assume that measurement errors
in wages are lognormally distributed, and it is therefore of considerable interest to compare
112
the flexible leptokurtic model and the standard lognormal model. Results for the lognormal
model ( g = 0 and d = l) are reported in column II in Table 1. The first thing to notice is
that the lognormal model is strongly rejected against the more flexible leptokurtic model.
The likelihood ratio statistic is 32.99 with a p-value of 0.000 (2 df ). On the other hand,
while there are some differences, most of the parameter estimates are fairly similar. The
large differences in g2j and c2 do not imply large difference in the conditional reservation
wages, because the ratios g2j/c2 are similar. Measurement errors and robustness are further
discussed in the next subsection.
Finally, to get an idea of how well the benchmark model fits the data, the estimated
model was simulated to generate a wage distribution which can be compared to the
empirical wage distribution. In these simulations, the characteristics of the 730 females
were taken as given. A sample of observed wages was constructed by drawing an
acceptable hours wage pair and a random wage measurement error from the appropriate
distributions for each person in the sample. Five thousand such samples were drawn, and
the resulting density is shown in Fig. 6, along with a histogram of the empirical wage
distribution.16 The value of the corresponding v2 statistic is 185.92, which according to a
v2 distribution with 34 df (64 categories and 29 estimated parameters) has a p-value of
0.000. The model is thus formally rejected. However, as can be seen from Fig. 6, the main
reason for the rejection is that the model does not pick up the spikes in the empirical wage
distribution at whole dollar amounts (especially at US$4, US$5, US$9 and US$10 per
hour). Otherwise, the model seems to fit the empirical distribution very well. The
simulated mean and standard deviation (with observations over US$25 censored), 6.84
and 3.67, are virtually identical to their empirical counterparts, 6.85 and 3.66 (the
simulated frequencies of observed part and full time jobs also match the empirical
frequencies, 36.8% and 63.2%). Since modeling spikes is not a priority in this paper,
the formal rejection of the model is not a cause for much concern.
4.2. Measurement errors and robustness
The main conclusion so far is that the difference between full time and part time
conditional reservation wages is significant. For the women in the sample, the difference
ranges from 16% to 31%, depending on her characteristics, with an average of 19%. As
argued earlier, estimates of reservation wages are sensitive to measurement error. The
purpose of this section is to investigate how robust these findings are to changes in the
measurement error assumptions. The strategy is to compare a variety of models for which
the implied moments and correlations of the measurement errors are similar to those found
by Rodgers et al. (1993) for the PSID validation study.
16
The histogram is constructed using 61 intervals of US$0.25 from US$0.875 to US$16.125, one lower
interval [0, 0.875] and two upper intervals [16.125, 20] and [20, 25]. Three observations larger than 25 were
censored. Note that with a sample of 730, the expected number of observations is less than 5 in cells from 0 to
2.875 and from 10.875 to 16.275. If cell boundaries are chosen such that the expected number of observations in
each cell is 10, the v2 statistic is 698.40 with 44 df and a p-value of 0.000. Again, the main reason for rejection is
spikes at isolated values, most notably in the cells containing US$4.00 and US$5.00 per hour.
113
Fig. 6. Goodness-of-fit.
Rodgers et al. consider several definitions of the hourly wage: an annual average, the
average wage in previous pay period, and the usual hourly wage. Their findings can be
summarized as follows. The measurement errors in log wages have approximately zero
mean; depending on the wage concept the skewness and kurtosis coefficients range from
1.59 to 0.64 and 5.66 to 9.05, respectively. In addition, the correlation between the
measurement errors and the true levels ranges from 0.19 to 0.07 and the correlation
between the observed and the true wages ranges from 0.24 to 0.61. The wages explained in
this paper are so-called usual hourly wages, and the skewness and kurtosis coefficients and
the correlations for usual hourly wages are 0.65, 5.66, 0.19 and 0.24, respectively.
The correlation between the true and the observed usual wages is very low. However, the
usual wage rate is not a well defined concept, and thus the true usual wage in the
validation study is unlikely to be measured without error.
These numbers are merely indicative of the possible range of the moments. The PSID
validation sample is not representative of the population of working women in the US. In
fact, almost all of the employees of the company in the validation study were male and
results by Bound and Krueger (1991) using CPS data suggest that reporting errors are
smaller for women than for men. Furthermore, the workers included in the validation study
were all paid by the hour and the wage rate varied with the particular task being
performed. If hourly wages and working hours fluctuate less for the women in the CPS
sample, they may be able to provide more precise information. If so, measurement errors
will also be smaller in the CPS than in the validation sample. On the other hand, the fact
that the validation data contain few or no coding errors pulls in the opposite direction.
Recall that the parameters of the measurement error model are s, g, d, cw and cc. By
fixing s, g, d or cw and reestimating the model, it is possible to generate distributions of
measurement errors in wages which cover the range found by Rodgers et al. (1993). In
addition, the effect of classification errors in job type can be investigated by varying cc.
114
Selected estimation results are presented in Table 3, where each column represents a
different model (that is, a different set of assumptions). Models I and II are the benchmark
model and the lognormal model from Table 1. Models III VII show the effect of
increasing the variance, skewness and kurtosis parameters in the wage measurement error
distribution. Models VIII XI investigate the effect of correlation between the wage
measurement error and accepted wages. Model XII shows the effect of increasing the
probability of misclassifying a job. The first five rows in Table 3 show the values of the
measurement error parameters for that particular model (some fixed, some estimated), the
next four, the implied moments and correlations, and the following nine rows show
summary statistics for the sample distribution of part time and full time reservation
wages.17 Finally, the last row shows the value of the log-likelihood function.
Consider first the benchmark model I, where cw = 0 and cc = 0. The implied correlation
between true and observed wages in the benchmark model I is 0.73, which is high relative
to the finding by Rodgers et al. (1993). The skewness coefficient is also slightly higher
than expected, but the kurtosis coefficient and the correlation between accepted wages and
measurement error are well within Rodgers et al.s ranges. As mentioned earlier, the
average part time reservation wages is US$4.33 and the average difference between full
time and part time reservation wages is 77 US cents, or 19%.
Turning now to the other models presented in Table 3, notice that the moments and
correlations of the measurement errors cover virtually the entire ranges given by Rodgers
et al. (1993). The only exception is the persistent high correlation between the true and the
observed log wages. A possible explanation is that the women in the CPS sample are better
at reporting their wages than the men in the validation study. Table 3 also shows that the
estimated reservation wages do vary with the measurement error assumptions. The average
part time conditional reservation wage ranges from US$3.74 to US$4.57 and the standard
deviation from 0.61 to 0.79. The benchmark model is in the middle, with values US$4.33
and 0.72, respectively. The average differences between full time and part time reservation
wages ranges from 72 to 86 US cents and the standard deviation from 0.40 to 0.61. Again,
the benchmark model is in the middle, with values 77 US cents and 0.46. In percentage
terms, the average difference between full time and part time reservation wages ranges
from 18% to 25% and the standard deviation from 0.09 to 0.15. The values for the
benchmark model are 19% and 0.11. The overall lowest estimate of the individual
difference between the conditional reservation wages for full and part time jobs is
US$ 2.40 or 33% and the largest is US$1.86 or 36%.
The conclusion that women care about hours therefore seems quite robust. The size of
the differences in part and full time reservation wages vary somewhat with the
assumptions about the measurement errors, but the general pattern is the same in all the
estimated models: some womens part time reservation wages are significantly higher than
17
The moments reported by Rodgers et al. (1993) are aggregate moments for the PSID validation sample.
Equivalent aggregate moments for the present sample, as implied by the estimated models, are computed the
following way: first the conditional moments given x and h are computed for each observation in the sample, then
the aggregate moments are computed by summing over all observations. It is implicitly assumed that the sample
distribution of x and h equals the population distribution. Formulae for the conditional moments given x and h as
well as for the unconditional moments are given in Appendix C.
Table 3
Estimated reservation wages
I
II
III
IV
VI
VII
VIII
IX
XI
XII
s
0.32
0.29
0.40
0.25
0.32
0.23
0.21
0.32
0.33
0.31
0.25
0.32
g
0.38
0.00
0.39
1.00
0.30
1.00
2.00
0.38
0.39
0.37
2.00
0.39
d
1.52
l
1.18
2.73
1.30
2.00
2.00
1.55
1.58
1.49
3.96
1.53
cw
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.10
0.20
0.10
0.20
0.00
cc
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.05
Skewness (log ew)
0.75
0.00
1.70
0.44
0.96
0.87
1.39
0.72
0.68
0.77
0.36
0.75
7.56
3.00
19.40
3.93
11.54
5.59
7.25
7.20
6.79
7.85
3.42
7.47
Kurtosis (log ew)
Cor(log wa, log ew)
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.03
0.07
0.03
0.19
0.00
Cor(log wa, log w)
0.73
0.78
0.62
0.84
0.73
0.87
0.89
0.72
0.70
0.73
0.83
0.72
E(W1)
4.33
4.25
4.57
3.99
4.25
3.86
3.74
4.25
4.17
4.41
3.67
4.34
0.72
0.79
0.76
0.75
0.70
0.70
0.66
0.68
0.66
0.76
0.61
0.73
SD(W1)
MIN(W1)
3.76
3.60
3.97
3.38
3.71
3.30
3.23
3.72
3.69
3.79
3.22
3.77
MAX(W1)
7.46
8.57
8.30
8.10
7.19
7.50
6.90
7.09
6.76
8.12
6.12
7.38
E(W2 W1)
0.77
0.72
0.83
0.74
0.77
0.74
0.75
0.81
0.86
0.73
0.84
0.85
0.46
0.61
0.40
0.60
0.46
0.56
0.52
0.45
0.45
0.47
0.51
0.52
SD(W2 W1)
MIN(W2 W1)
1.03
2.40
0.83
2.36
0.91
1.89
1.39
0.75
0.43
1.27
0.84
1.06
MAX(W2 W1)
1.67
1.76
1.71
1.65
1.65
1.54
1.41
1.69
1.71
1.66
1.56
1.86
0.19
0.19
0.19
0.21
0.19
0.21
0.22
0.20
0.22
0.18
0.25
0.21
E((W2 W1) / W1)
SD((W2 W1) / W1)
0.11
0.15
0.09
0.15
0.11
0.15
0.15
0.11
0.11
0.11
0.15
0.13
MIN((W2 W1) / W1)
0.16
0.31
0.12
0.33
0.15
0.29
0.24
0.13
0.08
0.19
0.16
0.17
MAX((W2 W1) / W1)
0.31
0.35
0.30
0.35
0.31
0.36
0.36
0.32
0.33
0.30
0.36
0.35
LOG L
2030
2047
2036
2043
2031
2044
2046
2031
2032
2030
2047
2031
Values for s, g, d, cw and cc in roman font indicate fixed parameters, while values in italics indicate maximum likelihood estimates.
115
116
their full time, while for others, the relationship is reverse. On average, the full time
reservation wages are 19% higher than the part time. The benchmark model is in the
middle of the spectrum and fits the data reasonably well. Until more precise evidence on
the distribution of measurement errors become available, it may therefore well be the
preferred model.
5. Concluding remarks
This paper has estimated a model of job search for a sample of women who were
unemployed in 1989 and who were working as of March 1990. It appears that this is the
first paper to study the reservation wages for women using a structural search framework.
It also appears to be the first paper to incorporate an empirically appropriate, rather than a
convenient model of measurement errors.
The main finding of this paper is that the difference between full time and part time
conditional reservation wages is significant. The hypothesis of constant conditional
reservation wages is strongly rejected by a statistical test. Moreover, the conclusions are
reasonably robust to changes in the assumptions about the distribution of the measurement
errors.
Acknowledgements
I thank Martin Appel, Denise Doiron, Catherine de Fontenay, Joel Horowitz, Forrest
Nelson, George Neumann, Gene Savin, Allan Wurtz and referees for helpful comments.
Appendix A. The data

The data is a subset of the Current Population Survey (CPS): Annual Demographic
File, 1990 (i.e. the March 1990 CPS). Only rotation groups 4 and 8 were asked about their
current wage and working hours. Out of the 16225 women in these rotation groups, 731
experienced a spell of unemployment in 1989 and were currently working as of March
1990. Of the 731 observations, the one with the lowest hourly wage (US$1.30) was
dropped.
Table 4
Means and standard deviations
Variable
Wage
Log wage
Hours
Age
Age2/1000
Part time
Full time
Total
Mean
SD
Mean
SD
Mean
SD
5.5
1.6
20.9
30.8
1.1
2.6
0.4
7.2
13.4
1.0
7.7
1.9
40.4
34.4
1.3
4.5
0.5
4.2
11.5
0.9
6.9
1.8
33.2
33.1
1.2
4.1
0.5
10.9
12.3
1.0
117
In terminology of the CPS March 1990 Technical Documentation Data Dictionary, the
variables used in the analysis are constructed as follows. Weeks unemployed is LWEEKS,
and a person experienced a spell of unemployment in 1989 if LWEEKS > 0. Hours is usual
weekly hours worked, A-USLHRS, and a person was working as of March 1990 if AUSLHRS > 0. The hours categories are 1 34 hours and 35 or more hours per week. The
wage rate is usual weekly earnings before deductions, A-GRSWK, divided by usual hours
worked, A-USLHRS. A-GRSWK includes overtime pay, commissions, tips etc. One
observation of A-GRSWK is topcoded at US$1923; the second largest value is US$1200.
Age is A-AGE. The education categories are based on highest grade attended, A-HGA,
and whether or not the grade was completed, A-HGC. The highest grade completed is
defined as A-HGA if the grade was completed and A-HGA minus 1 if not. People whose
highest grade completed is between 1 and 11 years are categorized as having less than
high school education, 12 is high school education, 13 15 is more than high school but
not a college degree and 16 years or more is a college degree. The central city dummy
variable is 1 if the person lives in a central city statistical area, HCCC-R = 1, and 0 else.
The region dummies are 1 for the Northeast, 11 V HG-ST60 V 23, 2 for the Midwest,
31 V HG-ST60 V 47, 3 for the South, 41 V HG-ST60 V 74, and 4 for the West, 81 V HGST60 V 95. The union dummy is 1 if the person is a union member, A-UNMEM = 1, or if
she is covered by a union contract, A-UNCOV = 1. The children dummy variable is 1 if
there are own children under 6 in the family, FOWNU6 >1, and 0 else. The husbands wage
rate, if any, is defined similarly to the womans, and the husbands wage group is 0 if the
woman is not married or if no wage is reported for the husband, 1 if the husbands wage is
between US$0 and US$15 and 2 if it is above US$15 a week. The dummy for receipt of
unemployment benefits is 1 if UC-YN = 1 and 0 otherwise. Summary statistics of the data
are given in (Tables 4 and 5).
Table 5
Number of observations
Variable
Part time 1 34 hour
Full time 35 99 hour
Total
High school drop-out

High school
Some college
College
Not central city
Central city
Northeast
Midwest
South
West
Not union covered
Union covered
No children under age 6
Children under age 6
No wage-earning husband
Husbands wage > 0
Husbands wage > 15
Number of observations
65
123
56
25
225
44
63
81
64
61
246
23
229
40
196
52
21
269
84
205
93
79
347
114
102
87
168
104
409
52
379
82
299
128
34
461
149
328
149
104
572
158
165
168
232
165
655
75
608
122
495
180
55
730
118
Appendix B. Density of observed jobs

Let / denote the standard normal density function. The assumptions of Section 3 imply
that the density of mj is (for v > 0)

log v 1
fmj v /
,
16
rj
vrj
and the density of is (for e > 0)
2
31
8 0
s
2
>
>
log k
d
>
> /@ g dlog4 loge k
15A
>
>
>
l
l
l
>
>
<
s

f e
loge k 2
>
e
1
>
>
>
l
>
>
>
> loge 1
>
:/
s
es
if d < l
17
if d l,
where l and k are functions of the unknown parameters d, g, and s given after Eq. (11).
Recall that (wo,ho), (wa,ha) and (w,h) denote offered, accepted, and observed jobs and
ew the measurement error in observed wages. Since mj is independent of ha, the conditional
density of the true accepted wage wa given x = xi and ha = hj is the density of offered wages
truncated at the conditional reservation wage Wij,
fwa w j x xi ,h hj
8
>
>
>
>
>
>
>
>
> 1w z Wij
>
<
f mj
1 Fmj
>
>
>
!
>
>
>
>
w
>
>
>
: 1w z 0fmj l
ij
w
lij
Wij
lij
if Wij > 0
18
if Wij V0:
Eqs. (16) and (18) imply that18

8
log Wij log lij
>
>
r
/
>
j
>
rj
>
< log l

ij
a
a
log Wij log lij
Elog w j x xi ,h hj
1U
>
>
rj
>
>
>
:
log lij
if Wij > 0
if Wij V 0,
19
18
See Johnson et al. (1994).
119
where U is the standard normal distribution function. This gives a closed form expression for sij = exp(E[log wajx = xi, ha = hj]), which appears in the likelihood function
(15).
An observation of (w,h) presupposes a job offer (wo,ho), which is acceptable, that is,
an offer for which wo z W(ho). Let Ai denote the event wo z W(ho) for a worker with
characteristics x = xi. The conditional density of (w,h) at (wi,hi) given x = xi is the
derivative with respect to wi of Pr(w V wi,h = hijx = xi, Ai). For simplicity, the conditioning on x = xi is suppressed in the notation in the remainder of this section. Since
ho is discrete and since w is conditionally independent of h given x and ho, it follows
that
w i ,h h i j Ai
PrwV
2
X
w i j h h,ho hj , Ai
Prh h i ,ho hj j Ai PrwV
j1
2
X
w i j, ho hj , Ai
Prh h i ,ho hj j Ai PrwV
j1
2
X
w i , Ai j ho hj
Prh h i j ho hj , Ai Prho hj PrwV
:
PrAi
j1
20
The last line follows from properties of conditional probability.

Since observing a job presupposes an acceptable job offer, the assumption that the
probability of a classification error in hours is a constant parameter, cc, implies
ij
Prh h i j ho hj , Ai Prh h i j ha hj c1I
1 cc Iij ,
c
21
where Iij = 1 if hi = hj and Iij = 0 otherwise.

Since mj and are independent of x and ho and of each other,
w 1cw
l1c
mj
ij
w i , Ai j ho hj Pr
PrwV
Vw i ,lij mj zWij
scijw
max 0, l ij
Pr V
ij
max0,Wij
w i scijw
w 1cw
l1c
v
ij
!
fmj vdv
!

w i scijw 1
v
Pr V 1c
fm
dv,
v w lij j lij
where the last line follows after a change of variables.
22
120
Substituting Eqs. (21) and (22) into Eq. (20) and differentiating with respect to wi gives
the density of (w,h) at (wi,hi),
f w i ,h i
!
cw
Z
1I
2
X
scijw
w i sij
pj cc ij 1 cc Iij l
v
f 1c
fm
dv,
1 Qi ri
v w v1cw lij j lij
max0,Wij
j1
23
where pj = Pr(ho = hj) and 1 Qi(ri) = Pr(Ai) are defined in Eqs. (12) and (13).
Appendix C. Measurement error moments and correlations

Define log D = log wa E(log wajx,ha), where E(log wajx,ha) is given in Eq. (9). From
Eq. (10) and the assumptions that log has mean zero and is conditionally independent of
log wa given (x,ha), the first four moments of the measurement errors in log wages are
Elog ew 0,
24
V log ew V log c2w V log D,
25

E log ew 3 E log 3 c3w E log D3 ,
26

E log ew 4 E log 4 c4w E log D4 6c2w V log V log D:
27
The correlations are

cw V log D
Corlog wa ,log ew pp ,
V log wa V log ew
28
V log wa cw V log D
pp :
Corlog wa ,log w
V log wa V log w
29
The remainder of this section provides expressions for the terms on the right-hand sides.
The moments of the distribution of (log k)/l as defined in Eq. (11) are provided
by Johnson et al. (1994, p. 35). Define x = exp(d 2) and X = g/d. If d is finite, then
E(log ) = 0 and
V log s2 ,
30

1 1=2
x x 12 xx 2sinh3X 3sinhX,
E log 3 l 3
4

1
E log 4 l 4 x 12 x2 x4 2w3 3x2 3cosh4X
8

4x2 x 2cosh2X 32x 1 :
121
31
32
If d = l, then log is normally distributed, so E(log ) = 0 and

V log s2 ,
33

E log 3 0,
34

E log 4 3s4 :
35
If Wij V 0, then there is no truncation and the conditional moments of log D given x = xi
and ha = hj equal the conditional moments of log wo, that is,

E log D2 j x xi ,ha hj r2j ,
36

E log D3 j x xi ,ha hj 0,
37

E log D4 j x xi ,ha hj 3r4j :
38
If Wij > 0, then the conditional distribution of log D given x = xi and ha = hj is a truncated
normal. The higher order moments of that can be found in Sugiura and Gomi (1985), and
they are

E log D2 j x xi ,ha hj r2j kij zij zij 1 ,
39

E log D3 j x xi ,ha hj r3j 2z3ij 3kij z2ij kij2 1zij ,
40

E log D4 j x xi ,ha hj r4j 3z4ij 6kij z3ij 22kij2 1z2ij

kij3 3kij zij 3 ,
41
where kij=[log Wij log lij]/rj and zij = /(kij)/[1 /(kij)].
122
To obtain the unconditional moments of log D, notice that

E log Dk j x xi ,h h i
J
X

E log Dk j x xi ,ha hj Pr ha hj j x xi ,h h i ,
42
j1
where

Pr ha hj j x xi ,h h i ~Pr ha hj ,h h i j x xi

Pr h h i j x xi ,ha hj Pr ha hj j x xi

Pr h h i j x xi ,ha hj Pr ho hj ,Ai j x xi

Pr h h i j x xi ,ha hj Pr Ai j x xi ,ho hj Pr ho hj j x xi

ij
1 cc Iij 1 Qi ri pj :
43
c1I
c
n
X
Now estimate E[(log D)k] by the sample average n1
Elog Dk j x xi ,h h i :
i1
Finally, the variance of log w is
V log wa V log ew 2Covlog wa ,log ew ,
V log w
44
and the variance of log wa is

V log wa E E log D2 j x,ha V Elog wa j x,ha ,
45
where the quantities on the right-hand side in Eq. (45) are estimated by the appropriate
sample averages.
References
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Bound, J., Brown, C., Duncan, G.J., Rodgers, W.L., 1990. Measurement error in cross-sectional and longitudinal
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Bound, J., Brown, C., Duncan, G.J., Rodgers, W.L., 1994. Evidence on the validity of cross-sectional and
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Economics 12 (4), 618 638.
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York.
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Labour Economics 9 (2002) 93 123

Reservation wages and working hours for

Tel.: +61-2-6125-3369; fax: +61-2-6125-0182.

T. Grgens / Labour Economics 9 (2002) 93123

See the survey by Devine and Kiefer (1991).

T. Grgens / Labour Economics 9 (2002) 93123

T. Grgens / Labour Economics 9 (2002) 93123

reservation wages are somewhat sensitive to the specification of the distribution of

2. A job search model

T. Grgens / Labour Economics 9 (2002) 93123

T. Grgens / Labour Economics 9 (2002) 93123

2.3. Wage search

where the function U 1, defined by U(U 1(u,h),h) = u, represents an indifference curve;

3. Parameterization and measurement error

T. Grgens / Labour Economics 9 (2002) 93123

Fig. 1. Marginal distribution of hours.

T. Grgens / Labour Economics 9 (2002) 93123

3.2. Worker heterogeneity

T. Grgens / Labour Economics 9 (2002) 93123

T. Grgens / Labour Economics 9 (2002) 93123

T. Grgens / Labour Economics 9 (2002) 93123

Prho hj j x xi PrU wo ,hj Vu j x xi ,ho hj

See Johnson et al. (1994).

T. Grgens / Labour Economics 9 (2002) 93123

ri gj0 xei Vgj

is the conditional reservation wage given job type h = hj.

T. Grgens / Labour Economics 9 (2002) 93123

T. Grgens / Labour Economics 9 (2002) 93123

T. Grgens / Labour Economics 9 (2002) 93123

Some high school to high school graduate

T. Grgens / Labour Economics 9 (2002) 93123

Fig. 2. No husband, no children.

T. Grgens / Labour Economics 9 (2002) 93123

Fig. 3. Husband earning US$15 or more.

T. Grgens / Labour Economics 9 (2002) 93123

Fig. 4. Part time jobs.

T. Grgens / Labour Economics 9 (2002) 93123

Fig. 5. Full time jobs.

T. Grgens / Labour Economics 9 (2002) 93123

T. Grgens / Labour Economics 9 (2002) 93123

T. Grgens / Labour Economics 9 (2002) 93123

T. Grgens / Labour Economics 9 (2002) 93123

T. Grgens / Labour Economics 9 (2002) 93123

Appendix A. The data

T. Grgens / Labour Economics 9 (2002) 93123

Part time 1 34 hour

Full time 35 99 hour

High school drop-out

T. Grgens / Labour Economics 9 (2002) 93123

Appendix B. Density of observed jobs

Eqs. (16) and (18) imply that18

See Johnson et al. (1994).

T. Grgens / Labour Economics 9 (2002) 93123

The last line follows from properties of conditional probability.

where Iij = 1 if hi = hj and Iij = 0 otherwise.

where the last line follows after a change of variables.

T. Grgens / Labour Economics 9 (2002) 93123

Appendix C. Measurement error moments and correlations

V log ew V log c2w V log D,

The correlations are

T. Grgens / Labour Economics 9 (2002) 93123

If d = l, then log is normally distributed, so E(log ) = 0 and

where kij=[log Wij log lij]/rj and zij = /(kij)/[1 /(kij)].