Labour Economics | Terms

Reservation Wages

The reservation wage is the lowest wage rate at which a worker would be willing to accept a particular type of job. This wage is a theoretical representation of the hourly rate at which an individual values their own leisure time.  A job offer involving the same type of work and the same working conditions, but at a lower wage rate, would be rejected by the worker. In this case, based on the reservation wage theory, the individual would be better off not working as they value their leisure at a higher rate than the wage they would be receiving for working.

Subsistence level/ Subsistence wages

A standard of living (or wage) that provides only the bare necessities of life

Types of Unemployment:

State of the Economy

1. Demand deficient unemployment: Demand deficit unemployment is the biggest cause of unemployment that typically happens during a recession. When companies experience a reduction in the demand for their products or services, they respond by cutting back on their production, making it necessary to reduce their workforce within the organization. In effect, workers are laid off.
2. Underemployment/Disguised unemployment: The situation of underemployment or disguised unemployment is a situation where people are apparently working but all of them are made to work less than their potential is called disguised unemployment. In this situation, the person considers himself employed but is actually not working and utilising his skills in the job.
3. Frictional unemployment:  Frictional unemployment refers to those workers who are in between jobs. An example is a worker who recently quit or was fired and is looking for a job in an economy that is not experiencing a recession. It is not an unhealthy thing because it is usually caused by workers trying to find a job that is most suitable for their skills.
4. Voluntary unemployment: Voluntary unemployment happens when a worker decides to leave a job because it is no longer financially compelling. An example is a worker whose take-home pay is less than his or her cost of living.

Education & Skills variation

1. Open unemployment: Open unemployment is the situation when a person is willing to work, is educated but is unable to get a job and work.
2. Structural unemployment: Structural unemployment happens when the skills set of a worker does not match the skills demanded by the jobs available, or alternatively when workers are available but are unable to reach the geographical location of the jobs.