Worker overconfidence and unemployment duration

The current (well, some say it is over now) recession is different from others because it has unusually long unemployment durations, among other things. This can be explained by a really poor labor market. But there could also be other reasons.

René Böheim, Gerard Thomas Horvath and Rudolf Winter-Ebner explore using Austrian data the components of a wage: one part comes from firm fixed-effects and the other from worker fixed-effects. In other words, the wage depends on the productivity of the firm and of the worker. They find then that those workers who had larger firm fixed-effects later end up having longer unemployment durations. This means that they misinterpreted their high wage as their own doing, and became overconfident and set a reservation wage that is too high.

In the current US context, it is clear that real wages need(ed) to decrease to clear the labor market. But many of those who were laid off may not have been understanding this and have (had) too high reservation wages, and thus have been at least initially rejecting some job offers, thus prolonging the duration of their unemployment. I have no hard evidence for this conjecture, may be someone has for or against it.

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