Discussion Paper Details

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Title: Worker Beliefs About Outside Options

Author(s): Simon Jäger, Christopher Roth, Nina Roussille and Benjamin Schoefer

Publication Date: January 2022


Programme Area(s): Labour Economics, Macroeconomics and Growth, Organizational Economics and Public Economics

Abstract: Workers wrongly anchor their beliefs about outside options on their current wage. In particular, low-paid workers underestimate wages elsewhere. We document this anchoring bias by eliciting workers' beliefs in a representative survey in Germany and comparing them to measures of actual outside options in linked administrative labor market data. In an equilibrium model, such anchoring can give rise to monopsony and labor market segmentation. In line with the model, misperceptions are particularly pronounced among workers in low-wage firms. If workers had correct beliefs, at least 10% of jobs, concentrated in low-wage firms, would not be viable at current wages.

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Bibliographic Reference

Jäger, S, Roth, C, Roussille, N and Schoefer, B. 2022. 'Worker Beliefs About Outside Options'. London, Centre for Economic Policy Research.