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Wage Expectations in the Labor Market: Survey Evidence on Rationality

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Jonathan S. Leonard

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Abstract

Using a new set of directly observed wage expectations among firms, this paper finds that in general firms' forecasts fail the unbiasedness and efficiency requirements of weak-form rational expectations. These market participants consistently underestimate the wages they actually end up paying, and their expectations do not efficiently utilize the information in past realizations. The mean absolute forecast error of two percent compares with an error of only five percent if static expectations were held. The major source of wage fore-cast error seems to be errors in predicting demand, rather than in predicting supply or the general price level. Wage forecast errors are positively correlated across fields with distinct supply patterns, and are positively correlated with quantity forecast error. The properties of stochastically weighted expectations and the effectiveness of the wage and price controls of the early 1970's are also discussed.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0440.

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Date of creation: Feb 1980
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Handle: RePEc:nbr:nberwo:0440

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Barro, Robert J, 1978. "Unanticipated Money, Output, and the Price Level in the United States," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 549-80, August. [Downloadable!] (restricted)
  2. Stephen J. Turnovsky & Michael L. Wachter, 1971. "A test of the "expectations hypothesis" using directly observed wage and price expectations," Staff Studies 63, Board of Governors of the Federal Reserve System (U.S.).
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  3. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January. [Downloadable!] (restricted)
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  1. Daniel R. Feenberg & William Gentry & David Gilroy & Harvey S. Rosen, 1989. "Testing the Rationality of State Revenue Forecasts," NBER Working Papers 2628, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Giorgio Brunello & Claudio Lucifora & Rudolf Winter-Ebmer, 2001. "The wage expectations of European college students," Economics working papers 2001-08, Department of Economics, Johannes Kepler University Linz, Austria. [Downloadable!]
    Other versions:
  3. Julian R. Betts, 1993. "What Do Students Know About Wages? Survey Evidence on Mechanisms of Occupational Choice," University of California at San Diego, Economics Working Paper Series 93-45, Department of Economics, UC San Diego. [Downloadable!]
  4. Hugo Benítez-Silva & Debra S. Dwyer, 2003. "What to Expect when you are Expecting Rationality: Testing Rational Expectations using Micro Data," Working Papers wp037, University of Michigan, Michigan Retirement Research Center. [Downloadable!]
  5. Julian R. Betts, 1995. "What do Students know about Wages? Evidence from a Survey of Undergraduates," University of California at San Diego, Economics Working Paper Series 95-07, Department of Economics, UC San Diego. [Downloadable!]
  6. Boum-Jong Choe, 1990. "Rational expectations and commodity price forecasts," Policy Research Working Paper Series 435, The World Bank. [Downloadable!]
  7. Felderer, Bernhard & Drost, André, 2000. "Cyclical Occupational Choice in a Model with Rational Wage Expectations and Perfect Occupational Mobility," Economics Series 81, Institute for Advanced Studies. [Downloadable!]
  8. Theresa Lant & Zur Shapira, 2009. "Managerial Reasoning about Aspirations and Expectations," Discussion Paper Series dp498, Center for Rationality and Interactive Decision Theory, Hebrew University, Jerusalem. [Downloadable!]
  9. Das, M. & Dominitz, J. & Soest, A. van, 1997. "Comparing predictions and outcomes : theory and application to income changes," Discussion Paper 45, Tilburg University, Center for Economic Research. [Downloadable!]
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