Abstract:
We analyze how biased beliefs about future wages affect individual decisions in a dynamic setting. Specifically, we quantify the effects of biased expectations regarding wage growth and human capital accumulation in part-time and full-time employment on female labor market outcomes. Based on customized elicitation of expectation data, we document that both full-time employees and part-time employees have expectations about wage growth in part-time employment that are severely upward biased: employees do not realize that wage growth occurs almost exclusively in full time. Empirically, wage growth rates in part-time work are close to zero, as we show both with reduced form estimations using a control function approach and a structural life-cycle model. We leverage the structural life cycle model to quantify how biased beliefs drive labor supply choices and wage profiles over the life cycle and to conduct policy simulations. Their results show that biased beliefs considerably increase part-time employment and induce flatter long-run wage profiles. We find the strongest effects for women with college education, which is consistent with the large difference between expected and realized wage profiles for this group.
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