The Accuracy of Job Seekers' Wage Expectations

Abstract

Job seekers' misperceptions about the labor market can distort their decision-making and increase the risk of long-term unemployment. Our study establishes objective benchmarks for the subjective wage expectations of unemployed workers. This enables us to provide novel insights into the accuracy of job seekers' wage expectations. First, especially workers with low objective earnings potential tend to display excessively optimistic beliefs about their future wages and anchor their wage expectations too strongly to their pre-unemployment wages. Second, among long-term unemployed workers, overoptimism remains persistent throughout the unemployment spell. Third, higher extrinsic incentives to search more intensively lead job seekers to hold more optimistic wage expectations, yet this does not translate into higher realized wages for them. Lastly, we document a connection between overoptimistic wage expectations and job seekers' tendency to overestimate their reemployment chances. We discuss the role of information frictions and motivated beliefs as potential sources of job seekers' optimism and the heterogeneity in their beliefs