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Biased expectations and labor market outcomes: Evidence from German survey data and implications for the East-West wage gap

Author

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

Abstract

We measure individual bias in labor market expectations in German survey data and find that workers on average significantly overestimate their individual probabilities to separate from their job when employed as well to find a job when unemployed. These biases vary significantly between population groups. Most notably, East Germans are significantly more pessimistic than West Germans. We find a significantly negative relationship between the pessimistic bias in job separation expectations and wages, and a significantly positive relationship between optimistic bias in job finding expectations and reservation incomes. We interpret and quantify the effects of (such) expectation biases on the labor market equilibrium in a search and matching model of the labor market. Removing the biases could substantially increase wages and expected lifetime income in East Germany. The bias difference in labor market expectations explains part of the East-West German wage gap.

Suggested Citation

  • Balleer, Almut & Duernecker, Georg & Forstner, Susanne & Goensch, Johannes, 2023. "Biased expectations and labor market outcomes: Evidence from German survey data and implications for the East-West wage gap," CEPR Discussion Papers 18005, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18005
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    2. Almut Balleer & Georg Duernecker & Susanne Forstner & Johannes Goensch, 2023. "Wie verzerrte Arbeitsmarkterwartungen die Lohnlücke zwischen Ost­ und Westdeutschland beeinflussen," ifo Dresden berichtet, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 30(03), pages 17-22, June.
    3. Marianna Kudlyak & Brandon E. Miskanic, 2024. "Consumer and Firm Perceptions of the Aggregate Labor Market Conditions," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2024(28), pages 1-20, August.
    4. Barigozzi, Francesca & Domínguez, José J. & Montinari, Natalia, 2024. "Entering a gender-neutral workplace? College students’ expectations and the impact of information provision," Journal of Economic Psychology, Elsevier, vol. 105(C).
    5. Ida Maria Hartmann, 2025. "Subjective Unemployment Expectations and Precautionary Behavior in the Shadow of Peer Job Loss," CEBI working paper series 25-08, University of Copenhagen. Department of Economics. The Center for Economic Behavior and Inequality (CEBI).
    6. Hartmann, Ida Maria & Leth-Petersen, Søren, 2024. "Subjective unemployment expectations and (self-)insurance," Labour Economics, Elsevier, vol. 90(C).
    7. Balleer, Almut & Duernecker, Georg & Forstner, Susanne & Goensch, Johannes, 2023. "Wage Bargaining and Labor Market Policy with Biased Expectations," CEPR Discussion Papers 18019, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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