Abstract
Abstract We analyze the impact of misperceptions of the unemployment rate on individual wages, using the European Social Survey. We follow a threefold strategy to tackle potential endogeneity problems, as the model includes the following: controls for worker’s ability, the regional unemployment rate, and country fixed effects. We estimate interval regression models. When subjective perceptions overstate the country unemployment rate, a one percentage point gap between the perceived and the actual rates reduces wages by 0.4 to 0.7 %. We discuss a potential mechanism. A pessimistic view of the labor market leads to concern over own employment prospects, lowering perceived bargaining power and reservation wages.
Highlights
The social sciences share an interest in the study of the accuracy of individuals’ perceptions of issues such as the state of the economy or the prevalence of minority groups in the population
We find that each percentage point misperception of the unemployment rate is associated with a wage decline of 0.7 %—a misperception of the labor market situation by 10 p.p. would result in a wage penalty of 7 %, which is a noteworthy impact, in particular if one keeps in mind that the average misperception is 13 p.p
6 Conclusions We contribute to the empirical literature on the impact of misperceptions, by showing that they affect an individual’s actual labor market outcomes
Summary
The social sciences share an interest in the study of the accuracy of individuals’ perceptions of issues such as the state of the economy or the prevalence of minority groups in the population. If individual- or country-level unobserved factors that influence wage setting are correlated with the degree of labor market knowledge imperfections, our initial estimates will be biased Such will be the case if, for example, individuals perceive the unemployment rate by looking at individuals in their circle, namely their region or education level. We find that respondents who are not in paid employment (in particular students) and households whose main income source is self-employment are less likely to report their income.3 This type of concern over non-response, together with the aims of our analysis of the labor market, determined the constraints to be imposed on the analysis sample. -20 0 20 40 60 -20 0 20 40 60 -20 0 20 40 60 -20 0 20 40 60 gap between perceived and actual unemployment rate (p.p.)
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