Higher wage dispersion may induce unemployed workers to search longer for a job by increasing their reservation wages. This paper investigates the implications of this mechanism in a job search model featuring a finite work life, showing that a mean-preserving spread of the wage offer distribution could lead to a larger increase in reservation wages of younger than older workers because the longer the future working lifetime the expected return to current search increases. Using the German Socio-Economic Panel for the period 1992-2018, we provide robust evidence supporting this prediction. We group workers by gender, age, education, and region, and find that an increase in within-group market wage dispersion has a significant positive effect on reservation wages and unemployment durations for young job seekers in their 20s, while this effect decreases and becomes insignificant as their age increases.
Keywords: wage inequality; job search; reservation wages; youth unemployment