Wage bargaining and labor market policy with biased expectations

Almut Balleer, Georg Duernecker, Susanne Forstner and Johannes Goensch

No 1069, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: 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 the specific assumption about the frequency of wage bargaining crucially shapes the propagation mechanism through which expectation biases affect bargained wages and equilibrium outcomes. Moreover, we show that the presence of biased beliefs can qualitatively alter the equilibrium effects of labor market policies. Lastly, when allowing for biased firms' beliefs, we establish that only the difference between firms' and workers' biases matters for the bargained wage but not the size of biases.

Keywords: Subjective expectations; labor markets; search and matching; bargaining; policy (search for similar items in EconPapers)
JEL-codes: D84 E24 J64 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-dge, nep-gth and nep-lab
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https://www.econstor.eu/bitstream/10419/287765/1/1884511414.pdf (application/pdf)

Related works:
Working Paper: Wage Bargaining and Labor Market Policy with Biased Expectations (2023)
Working Paper: Wage Bargaining and Labor Market Policy with Biased Expectations (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:287765

DOI: 10.4419/96973241

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