Reservation Wages: Your Community may be Competitive after all

Abstract

Wage rates, while not necessarily a critical factor in terms of overall production costs, are perceived as critical. Firms judge the relative appropriateness of specific locations on the basis of what they know about the wage rates. The usual source is published rates currently earned by employed workers. But these rates may not be a very useful tool. They do not reveal anything about other costs such as turnover, absenteeism, work stoppages, fringe benefits, and the like that influence labor cost per unit of output. Nor do they indicate how much a worker produces to justify that wage rate. Despite these failings, published wage rates are used, and they tend to put many communities at a disadvantage. Yet when unemployed workers are asked, particularly in a surplus labor market, it appears that skilled, experienced workers will work for considerably less than the published wages. What this implies is that communities with surplus labor, such as many northern industrial areas, are likely to be much more competitive with regard to wage rates than is commonly believed. Economic development can occur because of this, and it can be targeted to take advantage of the skills and experience that are available at very competitive wage rates.