Compensation Glossary

Reservation Wage

People make decisions, not by evaluating all alternatives but by developing a model in their head of an acceptable solution. Doing this creates a situation in which economists state that wages are “noncompensatory.” This means that there is some wage below which job seekers will NOT accept a particular job offer. This is the reservation wage. Other factors will not substitute for this amount. This wage may or may not be related to the going wage.