Question

graphically or otherwise, explain the phenomenon that the reservation wages of unemployed workers increase when unemployment benefits are introduced.

Any format will be fine.

Answer 1

Reservation wage is the lowest wage, upon that workers get ready to work. When unemployment benefits are introduced, then workers get the unemployment benefit when they are unemployed. In this scenario, workers remain to be unemployed, unless they get the job with wage rate that is paying higher wages than the unemployment benefits. It means that reservation wage is increased. It is termed as a phenomenon of increase in reservation wage with introduction of unemployment benefits.

For example, if a worker has reservation wage of $400 per week and gets unemployed now. If he or she gets unemployment benefits of $500 per week, then the workers only joins a new job when wage rate is atleast $500 or more per week. Then, it can be observed that reservation wage level has increased from $400 to $500, due to unemployment benefits.