Working Paper: CEPR ID: DP18005
Authors: Almut Balleer; Georg Duerncker; Susanne Forstner; Johannes Goensch
Abstract: We measure individual bias in labor market expectations in German survey data and find that workers on average significantly overestimate their individual probabilities to separate from their job when employed as well to find a job when unemployed. These biases vary significantly between population groups. Most notably, East Germans are significantly more pessimistic than West Germans. We find a significantly negative relationship between the pessimistic bias in job separation expectations and wages, and a significantly positive relationship between optimistic bias in job finding expectations and reservation incomes. We interpret and quantify the effects of (such) expectation biases on the labor market equilibrium in a search and matching model of the labor market. Removing the biases could substantially increase wages and expected lifetime income in East Germany. The bias difference in labor market expectations explains part of the East-West German wage gap.
Keywords: Labor Market; Risk; Biased Beliefs; Wages; Reservation Wages
JEL Codes: E24; J31; D84
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| removal of biases (C90) | wages (J31) |
| removal of biases (C90) | expected lifetime income (J17) |
| East German biases aligned with West German biases (F55) | East-West wage gap (J31) |
| pessimistic bias in job separation expectations (J63) | wages (J31) |
| optimistic bias in job finding expectations (J68) | reservation incomes (Q26) |