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Wage Expectations in the Labor Market: Survey Evidence on Rationality

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  • Jonathan S. Leonard

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.

Suggested Citation

  • Jonathan S. Leonard, 1980. "Wage Expectations in the Labor Market: Survey Evidence on Rationality," NBER Working Papers 0440, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0440
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    1. Turnovsky, Stephen J & Wachter, Michael L, 1972. "A Test of the "Expectations Hypothesis" Using Directly Observed Wage and Price Expectations," The Review of Economics and Statistics, MIT Press, vol. 54(1), pages 47-54, February.
    2. 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 549-580, August.
    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.
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    Cited by:

    1. Gunderson, Morley & Krashinsky, Harry, 2009. "Do Education Decisions Respond to Returns by Field of Study?," CLSSRN working papers clsrn_admin-2009-62, Vancouver School of Economics, revised 28 Nov 2009.
    2. Feenberg, Daniel R, et al, 1989. "Testing the Rationality of State Revenue Forecasts," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 300-308, May.
    3. Brunello, Giorgio & Lucifora, Claudio & Winter-Ebmer, Rudolf, 2001. "The Wage Expectations of European College Students," CEPR Discussion Papers 2817, C.E.P.R. Discussion Papers.
    4. Boum-Jong Choe, 1990. "Rational expectations and commodity price forecasts," Policy Research Working Paper Series 435, The World Bank.
    5. Silva Lopes, Artur, 1994. "A "hipótese das expectativas racionais": teoria e realidade (uma visita guiada à literatura até 1992)
      [The "rational expectations hypothesis": theory and reality (a guided tour
      ," MPRA Paper 9699, University Library of Munich, Germany, revised 23 Jul 2008.
    6. 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.
    7. Theresa Lant & Zur Shapira, 2009. "Managerial Reasoning about Aspirations and Expectations," Discussion Paper Series dp498, The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem.
    8. Ludwig, Jens, 1999. "Information and inner city educational attainment," Economics of Education Review, Elsevier, vol. 18(1), pages 17-30, February.
    9. Das, J.W.M. & Dominitz, J. & van Soest, A.H.O., 1997. "Comparing Predictions and Outcomes : Theory and Application to Income Changes," Discussion Paper 1997-45, Tilburg University, Center for Economic Research.
    10. Daniil Sandler & Anastasia Sushchenko Anastasia Dmitrievna, 2016. "Economic Motivations for Master’s Students’ Choice of Educational, Scientific and Professional Trajectories," Economy of region, Centre for Economic Security, Institute of Economics of Ural Branch of Russian Academy of Sciences, vol. 1(2), pages 547-559.
    11. Lant, Theresa & Shapira, Zur, 2008. "Managerial reasoning about aspirations and expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 66(1), pages 60-73, April.
    12. 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.
    13. Giorgio Brunello & Claudio Lucifora & Rudolf Winter-Ebmer, 2004. "The Wage Expectations of European Business and Economics Students," Journal of Human Resources, University of Wisconsin Press, vol. 39(4).
    14. Muzafar Shah Habibullah, 2005. "Do Bankers Make Rational Economic Forecasts?," The IUP Journal of Bank Management, IUP Publications, vol. 0(4), pages 7-15, November.

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