The Effects of Biased Labor Market Expectations on Consumption, Wealth Inequality, and Welfare
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.
Balleer, A., G. Duernecker, S. Forstner and J. Goensch (2026), The Effects of Biased Labor Market Expectations on Consumption, Wealth Inequality, and Welfare. American Economic Journal: Macroeconomics, 18, 1, 297–335
DOI: 10.1257/mac.20220128