Higher Wage Expectations Can Bring Higher Wages
According to HSE researchers, the higher a job applicant's wage expectations, the more likely they are to earn a higher wage in their next job.
STUDY'S AUTHORS:
When applying for a job, it makes sense to claim a slightly higher wage than that paid to those already employed. This study demonstrates that overestimating by 1% the minimum wage that a person would accept (also called a reservation wage) is associated with a 0.25% increase in the actual wage.
Indeed, high-performing applicants with a realistic idea of their prospects can find employment faster by claiming a higher wage, according to Kapelyushnikov and Lukyanova's paper"Paradoxes of reservation wage setting in the Russian labour market."
Their study is the first attempt at analysing reservation wages in Russia using panel data from the Russian Longitudinal Monitoring Survey (RLMS) for 2006–2014. The authors examined the wage expectations of 11,894 unemployed Russians aged sixteen and older, half of whom were women, one-third were living in rural areas, 50% had completed secondary school and 15% held university degrees. One quarter of the respondents had no prior work experience, and half of them had quit their previous job voluntarily. Only one in ten was registered with the public employment service and receiving unemployment benefits.
Raising the Bar
Generally, one's reservation wage depends on personal characteristics — such as the wage in their last job and how long they have been unemployed — and on the local market situation.
According to the study's authors, the following types of applicants are likely to claim higher wages:
- men (their wage expectations are about 40% higher than those of women);
- applicants who are married and have children;
- applicants with vocational training; and
- pplicants from well-to-do families whose financial security allows them to spend more time looking for the right job.
Students and pensioners often claim 10% below-market wages.
First-time applicants tend to be over-optimistic, while people who were fired from their last job usually claim 6% to 8% lower wages compared to those who quit voluntarily.
In rural areas, wages tend to be one-third lower than in cities.
In addition to this, changes in the local labour markets can affect wages: according to the study, a 1% increase in regional average wages can bring about a 1% increase in reservation wages, and the same association is observed with a decrease in the regional unemployment rate.
‘A close correspondence between reservation wages and macroeconomic indicators is a typically Russian feature. In many other countries, this type of relationship is weak or non-existent,’ the authors note.
Knowing How Much One Is Worth
In Russia, people seeking employment tend to set reservation wages higher than the market average and how much they earned in their last job. While the same can be observed in some other countries, in Russia the difference is particularly notable, according to the study's authors. No data is available yet for the recent years, but before the 2008-2009 crisis, applicants were likely to set reservation wages at almost twice their actual wage in the last job, and in the post-crisis period they claimed 1.5 times their last wage.
According to the researchers, this may be explained by a few factors:
- job-seekers’ limited or distorted information about the situation on the labour market;
- overestimation of their value to employers and their own abilities and qualifications; or
- absence of a particular strategy or idea of the minimum wage they would accept.
It is also true that job applicants in Russia are not likely to insist on their initial expectations for too long, but would eventually agree to a much lower wage once they come into contact with reality. On average, 54% of respondents agreed to make a downward adjustment of their expected wage after a year.
The authors also found that the chances of successful employment depend on the level of education and tend to increase with age. Applicants most likely to get a good employment offer include men, people actively seeking a job and those prepared to take up occasional part-time work.
The longer a person remains unemployed, the lower are their chances of finding a job — for reasons such as "gradual depreciation of their human capital" and "low performance keeping them out of employment," according to the authors.
Optimism Benefits the Market
The study has produced some paradoxical findings: on one hand, Russians' wage expectations can be too high and apparently detached from reality, but on the other hand, most applicants set their reservation wages in an economically rational way, taking into account their real prospects in the labour market.
For someone who knows how much they are worth and acts consistently, this can bring positive results. Yet the majority of the unemployed tend to be over-optimistic and set wage expectations too high at the beginning of their job search, but eventually agree to a much lower offer.
This, according to the study's authors, can be a good thing as it increases labour market flexibility and prevents excessive long-term unemployment.