Worker Beliefs About Outside Options
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.
We thank Isabel di Tella, Raymond Han, Christian Höhne, Sarthak Joshi, Nelson Mesker, Shakked Noy, Tommy O’Donnell, and Dalton Zhang for excellent research assistance. We thank the German Institute for Economic Research (DIW Berlin), the German Socio-Economic Panel, and in particular Bettina Zweck and David Richter, for implementing our survey module as part of the Innovation Sample. We are very grateful to the SOEP-IAB-IZA consortium, in particular Thomas Dohmen, Stefan Liebig, and Dana Müller, as well as Manfred Antoni and Simon Trenkle, for enabling analyses of merged survey and administrative data (SOEP-ADIAB). We thank Daron Acemoglu, Arindrajit Dube, Lawrence Katz, Alan Manning and Johannes Spinnewijn for useful comments. We thank audiences at the Bank of Portugal, IWH Halle, IZA/CREST Conference, the MIT Behavioral Lunch, MIT Labor Lunch, MIT Organizational Seminar, NBER Summer Institute Labor Studies, the St Louis Fed/WUSLT Empirical Microeconomics Workshop, LSE, MPI Bonn, St Andrews, UCL, University of Bonn, Venice, and University of Zürich for useful comments. Jäger and Schoefer are grateful to the Sloan Foundation’s Working Longer Program for support. Jäger gratefully acknowledges funding from the Stiftung Grundeinkommen. Roth: Funded by the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) under Germany’s Excellence Strategy – EXC 2126/1-390838866. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.