Do Firms Know What Workers Want?

Labor supply depends on wages and amenities, and standard models implicitly assume that firms hold accurate beliefs about workers’ amenity valuations. In a survey with firms and workers in Germany, we measure workers’ valuations of amenities and firms’ beliefs about workers’ valuations. We find that firms systematically underestimate workers’ valuations of all amenities. These misperceptions are driven by interpersonal projection: managers project their own preferences—they value amenities less—onto workers. Through the lens of a simple model of imperfect competition, we show that firm misperceptions result in (i) labor shortages and (ii) excess labor costs for biased firms, and increase the market power of unbiased firms. Empirical tests confirm these predictions: a simple calibration suggests that non-providing firms could reduce their labor costs by 5% by providing amenities.