Worker Beliefs about Rents and Outside Options

  • Date: Nov 3, 2021
  • Time: 04:00 PM (Local Time Germany)
  • Speaker: Christopher Roth, University of Cologne/MPI
  • Location: MPI

We measure workers’ beliefs about rents and outside options in a representative sample of German workers, and compare these beliefs with proxies for actual outside options. While subjective worker rents are large—14% of salary on average—they do not stem from workers’ subjective wage premia at their current firm, but are entirely derived from non-wage amenities. When comparing workers’ subjective outside options against objective measures of pay premia from matched employer-employee data, we find that many workers mistakenly believe their current wage is representative of the external labor market—objectively low-paid (high-paid) workers are overpessimistic (overoptimistic) about their outside options. If workers had correct beliefs about outside options, 13% of jobs would not be viable at current wages, concentrated in the low-wage segment of the labor market. Finally, we show that in an equilibrium model, misinformation about outside options gives employers monopsony power.

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