NY Fed Uncovers Weird Labor Market: Reservation Wages Jump Almost $5,000

Mutual Funds

The Federal Reserve Bank of New York released some fascinating statistics on how workers view their economic standing. The NY Fed’s Labor Market Survey finds people looking for work are more confident they will get a job offer in the next four months than they were a year ago.

Reservation Wages—A Revealing Human Attitude

More good news is that workers are holding out for better wages. Reservation wages have increased from $64,000 to almost $69,000 between last July and July 2021.

What is a reservation wage? Everyone has one. A reservation wage is the lowest wage you would be willing to accept to take a new job. If your reservation wage is high, your prospective new employer will have to sweeten the deal or your current employer will have to improve pay, hours, or working conditions to keep you.

The good news for older workers is that the reservation wage for people over 45 increased the most, from $60,168 in July 2020 to $66,645 in July 2021.

Bad News For Workers Who Think They Can Work Longer

One piece of bad news in the Fed report Tuesday is that the expectation one could work into later ages has continued to fall. In July 2014, 57% of people thought they could work beyond age 62 and 37% thought they could work beyond 67. By July 2021, only 50% of people thought they could work beyond age 62 and only 32% thought they could work beyond age 67.

Why is this bad news? It could mean that people are realizing the labor market is unfriendly to older people either because their ability to work at the jobs available has fallen or they perceive widespread and persistent age discrimination (see research from Texas A&M professor Joanna Lahey for work on the latter).

Bad News For Wage Equity

And the evidence pointing to more inequity just piles on.

People whose household income is below $60,000 reported their reservation wage has fallen $1,000 compared to a year ago to $42,000 in July 2021. And, back in March 2014, their reservation wage was $38,000. That means the reservation wage for the bottom half of the income distribution has barely changed at all. In contrast, people whose real household income is over $60,000 increased their reservation wage considerably from $67,000 dollars in 2014, to over $85,000 in July 2021. These two facts together – those on the bottom have falling reservation wages and those on the top have increasing reservation wages –means workers at the bottom half of the income distribution will get even less.

The Fed today has offered up even more evidence the wage inequity trends documented by the Economic Policy Institute (among others) will likely continue. The labor market is good for some and bad for many.

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