The Effects of Biased Labor Market Expectations on Consumption, Wealth Inequality, and Welfare

Almut Balleer, Georg Duernecker, Susanne Forstner and Johannes Goensch

American Economic Journal: Macroeconomics, 2026, vol. 18, issue 1, 297-335

Abstract: We analyze US survey data and document a substantial optimistic bias of households in their expectations about future labor market transitions. We find that low-skilled individuals tend to be strongly overoptimistic, whereas high-skilled individuals have rather precise beliefs. Using a heterogeneous agents life cycle model, we show that the optimistic bias has a quantitatively sizable negative effect on income, consumption, and wealth, implying a substantial loss in individual welfare compared to the full information case. Moreover, the skill gradient in the bias leads to pronounced differences in asset accumulation across individuals, making it a quantitatively important driver of wealth inequality.

JEL-codes: D15 D31 D83 D84 E21 G51 J24 (search for similar items in EconPapers)
Date: 2026
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.aeaweb.org/doi/10.1257/mac.20220128 (application/pdf)
https://doi.org/10.3886/E206842V1 (text/html)
https://www.aeaweb.org/articles/materials/24380 (application/pdf)
https://www.aeaweb.org/articles/materials/24381 (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
Working Paper: The Effects of Biased Labor Market Expectations on Consumption, Wealth Inequality, and Welfare (2021)
Working Paper: The Effects of Biased Labor Market Expectations on Consumption, Wealth Inequality, and Welfare (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aejmac:v:18:y:2026:i:1:p:297-335

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

DOI: 10.1257/mac.20220128

Access Statistics for this article

American Economic Journal: Macroeconomics is currently edited by Simon Gilchrist

More articles in American Economic Journal: Macroeconomics from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().