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

Author

Listed:
  • Almut Balleer
  • Georg Duernecker
  • Susanne Forstner
  • Johannes Goensch

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.

Suggested Citation

  • Almut Balleer & Georg Duernecker & Susanne Forstner & Johannes Goensch, 2026. "The Effects of Biased Labor Market Expectations on Consumption, Wealth Inequality, and Welfare," American Economic Journal: Macroeconomics, American Economic Association, vol. 18(1), pages 297-335, January.
    • Handle: RePEc:aea:aejmac:v:18:y:2026:i:1:p:297-335
    DOI: 10.1257/mac.20220128
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    More about this item

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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