American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
The Effects of Biased Labor Market Expectations on Consumption, Wealth Inequality, and Welfare
American Economic Journal: Macroeconomics
(pp. 297–335)
Abstract
We analyze US survey data and document a substantial optimistic bias of households in their expectations about future labor market transitions. We find that low-skilled individuals tend to be strongly overoptimistic, whereas high-skilled individuals have rather precise beliefs. Using a heterogeneous agents life cycle model, we show that the optimistic bias has a quantitatively sizable negative effect on income, consumption, and wealth, implying a substantial loss in individual welfare compared to the full information case. Moreover, the skill gradient in the bias leads to pronounced differences in asset accumulation across individuals, making it a quantitatively important driver of wealth inequality.Citation
Balleer, Almut, Georg Duernecker, Susanne Forstner, and Johannes Goensch. 2026. "The Effects of Biased Labor Market Expectations on Consumption, Wealth Inequality, and Welfare." American Economic Journal: Macroeconomics 18 (1): 297–335. DOI: 10.1257/mac.20220128Additional Materials
JEL Classification
- D15 Intertemporal Household Choice; Life Cycle Models and Saving
- D31 Personal Income, Wealth, and Their Distributions
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- D84 Expectations; Speculations
- E21 Macroeconomics: Consumption; Saving; Wealth
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- J24 Human Capital; Skills; Occupational Choice; Labor Productivity