Essays on expectations and beliefs in labor markets

Abstract

This dissertation studies how expectations and beliefs shape labor market behavior and the labor market outcomes that result from this behavior. It focuses on three specific behavioral margins: wage-setting decisions by firms, job application decisions of job seekers, and on-the-job search and job-to-job transition behavior of workers. Across the three chapters, the dissertation combines theoretical models with empirical or experimental analyses that assess central predictions of the models. Chapter 1 studies the pass-through from expected inflation into wage growth in the presence of downward nominal wage rigidity. The chapter develops a model in which firms set wages under uncertainty about future inflation and face constraints on nominal wage cuts. The model shows that downward nominal wage rigidity and inflation uncertainty can reduce the pass-through from expected inflation into wage growth below the level predicted by benchmark wage-setting models. Using survey data from German firms, the chapter provides evidence consistent with the central predictions of the model: the pass-through from expected inflation into expected wage growth is low, decreases with uncertainty about future inflation, and tends to increase with expected long-run inflation. Chapter 2 studies the role of overconfidence in the gender application gap. The chapter develops a model in which job seekers face vacancies that differ in the wages they offer. Overconfidence affects application decisions because it changes perceived hiring chances. The model predicts that gender differences in overconfidence can contribute to gender differences in applications to high-wage vacancies through a direct and an indirect channel. A laboratory experiment provides evidence consistent with the direct mechanism. Chapter 3 studies how present bias affects on-the-job search, job offer acceptance behavior, and wage outcomes. The chapter develops a model in which workers can search for better jobs while employed but face immediate search costs. Present-biased workers search less than time-consistent workers because they overweight current search costs relative to future wage gains. The model also shows that awareness of future present bias affects job offer acceptance behavior. Sophisticated present-biased workers may demand larger wage increases to switch jobs, while naive present-biased workers may accept relatively low offers because they overestimate future search. Descriptive survey evidence is consistent with the predicted differences in acceptance behavior across types.