Research
Working Papers
Wage Bargaining and Labor Market Policy with Biased Expectations (with Almut Balleer, Georg Duernecker, and Susanne Forstner) (October 2023)
CEPR Discussion Paper 18019
Recent research documents mounting evidence for sizable and persistent biases in individual labor market expectations. This paper incorporates subjective expectations into a general equilibrium labor market model and analytically studies the implications of biased expectations for wage bargaining, vacancy creation, worker flows and labor market policies. Importantly, we find that under the widely used period-by-period Nash bargaining protocol, the model generates a counterfactual relationship between workers’ job separation expectations and wages. Instead, a wage setting process with less frequent wage renegotiations is found to be empirically consistent. Moreover, we show that the presence of biased beliefs can qualitatively alter the equilibrium effects of labor market policies.Biased expectations and labor market outcomes: Evidence from German survey data and implications for the East-West wage gap (with Almut Balleer, Georg Duernecker, and Susanne Forstner) (March 2023)
CEPR Discussion Paper 18005
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 elationship 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.The Effects of Biased Labor Market Expectations on Consumption, Wealth Inequality, and Welfare (with Almut Balleer, Georg Duernecker, and Susanne Forstner) (June 2024)
American Economic Journal: Macroeconomics, Conditionally accepted
Idiosyncratic labor market risk is a prevalent phenomenon with important implications for individual choices. In labor market research it is commonly assumed that agents have rational expectations and therefore correctly assess the risk they face in the labor market. We analyze survey data for the U.S. and document a substantial optimistic bias of households in their subjective expectations about future labor market transitions. Furthermore, we investigate the heterogeneity in the bias across different demographic groups and we find that low-skilled individuals tend to be strongly over-optimistic about their labor market prospects, whereas high-skilled individuals have rather precise beliefs. In the context of a quantitative heterogeneous agents life cycle model we show that the optimistic bias has a sizable negative effect on the life cycle allocation of income, consumption and wealth and implies a substantial loss in individual welfare compared to the allocation under full information. Moreover, we establish that the heterogeneity in the bias leads to pronounced differences in the accumulation of assets across individuals, and is thereby a quantitatively important driver of inequality in wealth.
Publications
Worker Mobility and UI Extensions (with Andreas Gulyas and Ioannis Kospentaris), European Economic Review, 2024
We develop an equilibrium search model with a labor force participation decision, job-to-job transitions, and endogenous separations. The calibrated model perfectly matches the observed labor market flows in US data. We use the model to simulate the effects of an extension of unemployment insurance benefits to 99 weeks. The reform leads to a decrease in employment, an increase in the labor force participation and unemployment rate, while it leaves labor productivity roughly constant. Using a model-based decomposition, as well as comparisons with alternative simplified models, we show that modeling workers’ participation decisions, job-to-job transitions, and endogenous separations together is crucial for a complete and accurate analysis of UI reforms.