Labor Market Search with Imperfect Information and Learning

67 Pages Posted: 17 Sep 2018

See all articles by John J. Conlon

John J. Conlon

Harvard University

Laura Pilossoph

Federal Reserve Banks - Federal Reserve Bank of New York; University of Chicago - Department of Economics

Matthew Wiswall

University of Wisconsin - Madison - Department of Economics; National Bureau of Economic Research (NBER)

Basit Zafar

Arizona State University (ASU) - Department of Economics

Date Written: September 2018

Abstract

We investigate the role of information frictions in the US labor market using a new nationally representative panel dataset on individuals' labor market expectations and realizations. We find that expectations about future job offers are, on average, highly predictive of actual outcomes. Despite their predictive power, however, deviations of ex post realizations from ex ante expectations are often sizable. The panel aspect of the data allows us to study how individuals update their labor market expectations in response to such shocks. We find a strong response: an individual who receives a job offer one dollar above her expectation subsequently adjusts her expectations upward by $0.47. The updating patterns we document are, on the whole, inconsistent with Bayesian updating. We embed the empirical evidence on expectations and learning into a model of search on- and off- the job with learning, and show that it is far better able to fit the data on reservation wages relative to a model that assumes complete information. The estimated model indicates that workers would have lower employment transition responses to changes in the value of unemployment through higher unemployment benefits than in a complete information model, suggesting that assuming workers have complete information can bias estimates of the predictions of government interventions. We use the framework to gauge the welfare costs of information frictions which arise because individuals make uninformed job acceptance decisions and find that the costs due to information frictions are sizable, but are largely mitigated by the presence of learning.

Suggested Citation

Conlon, John J. and Pilossoph, Laura and Wiswall, Matthew and Zafar, Basit, Labor Market Search with Imperfect Information and Learning (September 2018). NBER Working Paper No. w24988, Available at SSRN: https://ssrn.com/abstract=3246785

John J. Conlon (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Laura Pilossoph

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

Matthew Wiswall

University of Wisconsin - Madison - Department of Economics ( email )

William H. Sewell Social Science Building
1180 Observatory Drive
Madison, WI 53706-1393
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Basit Zafar

Arizona State University (ASU) - Department of Economics ( email )

AZ
United States

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