Strategic Unemployment

The empirical literature on happiness finds that employment significantly contributes to well-being. We propose a dynamic model that explains why individuals may nonetheless be reluctant to pick up low-paid work. Accepting low-paid work will put them in an adverse position in future wage bargaining, as employers could infer the individual's low reservation wage from his working history. Employers will exploit their knowledge by offering low wages to this individual in the future. Therefore, employees with low reservation wage strategically opt into unemployment to signal a high reservation wage.