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  5. Imperfect Information and Learning in Labor Markets
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Imperfect Information and Learning in Labor Markets

Paper Session

Saturday, Jan. 4, 2025 2:30 PM - 4:30 PM (PST)

Hilton San Francisco Union Square, Continental Ballroom 3
Hosted By: American Economic Association
  • Chair: Steven Davis, Stanford University

Reservation Wages Revisited: Empirics with the Canonical Model

Steven Davis
,
Stanford University
Pawel Krolikowski
,
Federal Reserve Bank of Cleveland

Abstract

We study reservation wages using innovative longitudinal data on unemployment insurance (UI) recipients, guided by canonical search models. Individual-level expectations about the path of own reservation wages are, on average, consistent with realized reservation wage paths. This first result validates a basic premise in many models of job search by the unemployed. Second, we find that individual-level reservation wages fall faster when unemployment benefit durations are shorter, confirming a basic implication of search models. Third, reservation wages elicited early in unemployment spells are more powerful predictors of re-employment wages than are wages on the previous job, confirming the information value of survey-elicited reservation wages. Fourth, unemployed job seekers set their initial reservation wages too high and reduce them too slowly relative to calibrated versions of Mortensen's (1977) canonical model.

Understanding Expectations in Job Search: Subjective Duration Dependence, Aggregate Labor Market Shocks and Overreaction

Qiwei He
,
University of Edinburgh
Philipp Kircher
,
Cornell University and Université catholique de Louvain

Abstract

Unemployed job seekers might worry about their chances of finding a job, especially if they remain unemployed for longer or labor market conditions turn out different than expected. We find, based on multiple survey samples, that job seekers anticipate a significant decline in their job-finding probability with an additional month of unemployment. However, they adjust their job-finding probabilities upward (downward) when the aggregate unemployment rate is unexpectedly low (high). Evaluated with a quantitative job search model, subjective job-finding probabilities substantially overreact to aggregate conditions - consistent with Diagnostic Expectations. These beliefs have the potential to offset a substantial part of the negative consequences of moral hazard in job search.

The Accuracy of Job Seekers’ Wage Expectations

Marco Caliendo
,
University of Potsdam
Robert Mahlstedt
,
University of Copenhagen
Aiko Schmeißer
,
University of Potsdam
Sophie Wagner
,
University of Potsdam

Abstract

Job seekers’ misperceptions about the labor market can distort their decision-making and increase the risk of long-term unemployment. Our study establishes objective benchmarks for the subjective wage expectations of unemployed workers. This enables us to provide novel insights into the accuracy of job seekers’ wage expectations. First, especially workers with low objective earnings potential tend to display excessively optimistic beliefs about their future wages and anchor their wage expectations too strongly to their pre-unemployment wages. Second, among long-term unemployed workers, overoptimism remains persistent throughout the unemployment spell. Third, higher extrinsic incentives to search more intensively lead job seekers to hold more optimistic wage expectations, yet this does not translate into higher realized wages for them. Lastly, we document a connection between overoptimistic wage expectations and job seekers’ tendency to overestimate their reemployment chances. We discuss the role of information frictions and motivated beliefs as potential sources of job seekers’ optimism and the heterogeneity in their beliefs.

Learning About Labour Markets

Jake Bradley
,
University of Nottingham
Lukas Mann
,
Princeton University

Abstract

We study a general equilibrium model of the labor market in which agents slowly learn about their suitability for jobs. Our model reproduces desirable features of the data, many of which standard models fail to replicate. We explore how, in such an environment, asymmetric information can lead to substantial misallocation. We calibrate our model to US data and quantify the welfare loss arising from misallocation due to informational frictions. The tractability of the model allows us to explore the responsiveness of wages and employment to an aggregate shock. We find that wage rigidity arises endogenously because of protracted learning, and in line with the data, the model is able to generate a larger and more persistent employment response.

Discussant(s)
Andreas Mueller
,
University of Texas-Austin
Ioana Marinescu
,
University of Pennsylvania
Victor Hernandez Martinez
,
Federal Reserve Bank of Cleveland
Marianna Kudlyak
,
Federal Reserve Bank of San Francisco
JEL Classifications
  • D8 - Information, Knowledge, and Uncertainty
  • J6 - Mobility, Unemployment, Vacancies, and Immigrant Workers