Working Paper: NBER ID: w0440
Authors: Jonathan S. Leonard
Abstract: Using a new set of directly observed wage expectations among firms, this paper finds that in general firms' forecasts fail the unbiasedness and efficiency requirements of weak-form rational expectations. These market participants consistently underestimate the wages they actually end up paying, and their expectations do not efficiently utilize the information in past realizations. The mean absolute forecast error of two percent compares with an error of only five percent if static expectations were held. The major source of wage fore-cast error seems to be errors in predicting demand, rather than in predicting supply or the general price level. Wage forecast errors are positively correlated across fields with distinct supply patterns, and are positively correlated with quantity forecast error. The properties of stochastically weighted expectations and the effectiveness of the wage and price controls of the early 1970's are also discussed.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| wage forecast errors (J31) | underlying factors influencing them (D91) |
| wage forecast errors (J31) | demand predictions (C53) |
| errors in predicting demand (E47) | wage forecast discrepancies (J31) |
| forecast errors (C53) | demand predictions (C53) |
| firms' inaccuracies (D21) | inability to predict market demand accurately (D84) |
| wage forecast errors (J31) | actual wages paid (J31) |
| static expectations (C62) | wage forecast errors (J31) |
| wage forecast errors (J31) | unbiasedness requirement (C46) |