Cardoso, Ana Rute Loviglio, Annalisa Piemontese, Lavinia
Year of Publication:
[Journal:] IZA Journal of Labor Policy [ISSN:] 2193-9004 [Volume:] 5 [Year:] 2016 [Issue:] 13 [Pages:] 1-22
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.