Labor Market Search With Imperfect Information and Learning

Abstract

We investigate the role of information frictions in the US labor market using a new nationally representative panel dataset on individuals' labor market expectations and realizations. We find that expectations about future job offers are, on average, highly predictive of actual outcomes. Despite their predictive power, however, deviations of ex post realizations from ex ante expectations are often sizable. The panel aspect of the data allows us to study how individuals update their labor market expectations in response to such shocks. We find a strong response: an individual who receives a job offer one dollar above her expectation subsequently adjusts her expectations upward by $0.47. The updating patterns we document are, on the whole, inconsistent with Bayesian updating. We embed the empirical evidence on expectations and learning into a model of search on-and off-the job with learning, and show that it is far better able to fit the data on reservation wages relative to a model that assumes complete information. The estimated model indicates that workers would have lower employment transition responses to changes in the value of unemployment through higher unemployment benefits than in a complete information model, suggesting that assuming workers have complete information can bias estimates of the predictions of government interventions. We use the framework to gauge the welfare costs of information frictions which arise because individuals make uninformed job acceptance decisions and find that the costs due to information frictions are sizable, but are largely mitigated by the presence of learning.

Job Seekers' Perceptions and Employment Prospects: Heterogeneity, Duration Dependence and Bias

“…Second, our analysis of the biases in beliefs relates to a strand in the behavioral labor economics literature trying to understand the role of information frictions and behavioral biases in the job search process. The new survey evidence confirms the optimistic bias in job seekers' beliefs (Spinnewijn [2015], Arni [2017], Conlon et al [2018]) and the persistence in beliefs seems consistent with the lack of updating of reservation wages over the unemployment spell (Krueger and Mueller [2016], Drahs et al [2018]). 5…”

Expectations with Endogenous Information Acquisition: An Experimental Investigation

“…Figure 2.b and 2.c thus break down the information choices by respondents' numeracy and education, respectively, and show that individuals with more education or with higher numeracy were substantially more likely to choose the "best" information: college graduates chose the expert forecast 50% of the time, compared with non-graduates who chose it 40% of the time (p-value<0.01). 24 They are also substantially less likely to choose not to see any information, or choose the past ten-year home price change, the least informative signal. Table 2 further explores the heterogeneity and reports bivariate relationships between the choice of information and various individual-and location-specific characteristics.…”

“…The median respondent spent 2.17 minutes choosing between the information sources (and reading the associated instructions), with the 10th percentile at 1.23 minutes and 90th percentile at 4.85 minutes 24. Similarly, Burke and Manz (2014) find that respondents with higher levels of economic literacy choose more relevant information when forming inflation forecasts 25.…”

Wages and the Value of Nonemployment

“…66 Wages are subsequently insulated from the nonemployment value. Beaudry et al (2012), Caldwell and Danieli (2018), Caldwell and Harmon (2018), and Conlon et al (2018), provide evidence in support of the idea that job opportunities at other employers raise earnings, in line with this channel. This view may reconcile a zero or small effect of nonemployment outside options on wages, while not implying full bargaining power.…”