The Accuracy of Job Seekers' Wage Expectations

TL;DR

This paper investigates how accurately job seekers estimate their future wages, revealing overoptimism especially among those with low earnings potential and influenced by incentives and beliefs.

Contribution

It provides new insights into the accuracy of wage expectations and the role of information frictions and motivated beliefs in shaping overoptimism.

Findings

Job seekers with low earnings potential are overly optimistic.

Increased search incentives amplify wage optimism.

Overoptimistic expectations lead to overestimating reemployment chances.

Abstract

We study the accuracy of job seekers' wage expectations by comparing subjective beliefs to objective benchmarks using linked administrative and survey data. Our findings show that especially job seekers with low objective earnings potential and those predicted to face a penalty compared to their pre-unemployment wage display overly optimistic wage expectations. Moreover, wage optimism is amplified by increased job search incentives and job seekers with overoptimistic wage expectations tend to overestimate their reemployment chances. We discuss the labor market implications of wage optimism, as well as the role of information frictions and motivated beliefs as sources of overoptimism.