How does misperception of labor market risk affect labor market outcomes?

Abstract

We investigate individual misperception about labor market risk in German survey data and find that workers overestimate their individual job loss and job finding. We then address how misperception relates to individual labor market outcomes, specifically wages. We find a significant negative relationship between job loss misperception and actual wages which is in line with predictions from a DMP model with Nash bargained wages. Job finding misperception positively and significantly relates to reservation wages. Substantial heterogeneity in misperception may explain part of the wage differences across demographic groups or submarkets and is therefore important for effective labor market policy.

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