Wage Bargaining and Labor Market Policy with Biased Expectations

Balleer, Almut; Duernecker, Georg; Forstner, SusanneORCID: https://orcid.org/0000-0002-5411-4068 and Goensch, Johannes (2023) Wage Bargaining and Labor Market Policy with Biased Expectations. CEPR Press Discussion Paper 18019, 56 p.


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Recent research documents mounting evidence for sizable and persistent biases in individual labor market expectations. This paper incorporates subjective expectations into a general equilibrium labor market model and studies the implications of biased expectations for wage bargaining, vacancy creation, worker flows and labor market policies. Importantly, we find that under the widely used period-by-period Nash bargaining protocol, the model generates a counterfactual relationship between workers' job separation expectations and wages. Instead, a wage setting process with less frequent wage renegotiations is found to be empirically consistent. Moreover, we show that the presence of biased beliefs can qualitatively alter the equilibrium effects of labor market policies. Lastly, when allowing for biased firms' beliefs, we establish that only the difference between firms' and workers' biases matters for the bargained wage but not the size of biases.

Item Type: Discussion/ Working Paper (Unspecified)
Keywords: Subjective expectations, Labor markets, Search and matching, Bargaining, Policy.
Funders: Austrian National Bank
Classification Codes (e.g. JEL): E24, J64, D84
Research Units: Current Research Groups > European Governance, Public Finance and Labor Markets
Date Deposited: 27 Mar 2023 10:08
Last Modified: 18 Dec 2023 10:23
URI: https://irihs.ihs.ac.at/id/eprint/6513

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