Why Poor Workers Vastly Overestimate Their Job Prospects—And Pay the Price
A new analysis of US household surveys reveals that low-skilled workers are dangerously optimistic about future employment, while college-educated workers have realistic expectations. This bias pushes struggling workers to save less and spend more, widening wealth inequality significantly and reducing their lifetime welfare by measurable amounts.
Originaltitel: The Effects of Biased Labor Market Expectations on Consumption, Wealth Inequality, and Welfare
<p>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. (JEL D15, D31, D83, D84, E21, G51, J24)</p>