Biased expectations and labor market outcomes: Evidence from German survey data and implications for the East-West wage gap

Almut Balleer, Georg Duernecker, Susanne Forstner and Johannes Goensch

No 1062, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

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 difference in biases in labor market expectations explains part of the East-West German wage gap.

Keywords: Labor market risk; biased beliefs; wages; reservation wages (search for similar items in EconPapers)
JEL-codes: D84 E24 J31 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-lma
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Related works:
Working Paper: Biased Expectations and Labor Market Outcomes: Evidence from German Survey Data and Implications for the East-West Wage Gap (2023)
Working Paper: Biased expectations and labor market outcomes: Evidence from German survey data and implications for the East-West wage gap (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:282989

DOI: 10.4419/96973232

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