Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/271980 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10336
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
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.
Subjects: 
labor market risk
biased beliefs
wages
reservation wages
JEL: 
E24
J31
D84
Document Type: 
Working Paper
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