Reservation Wages: Explaining Some Puzzling Regional Patterns

We use the Italian Labour Force Survey and the European Household Panel Survey to analyse the distribution of the reservation wages reported by job-seekers. In Italy, reservation wages appear to be higher in the South-the low-income and high-unemployment area of the country-than in the North and Centre. A similar, rather counterintuitive, pattern can also be found in Finland, France, and Spain. First, we show that the way in which these data are commonly collected generates doubleselection bias. Second, we show that this bias has a strong effect on the estimation of the geographical pattern of reservation wages in many countries. The size of this bias is substantial in Italy. When controlling for it, reservation wages are at least 10 per cent higher in the North and Centre than in the South.