The role of wage expectations in the labor market

The role of wage expectations in the labor market

Series: Working Papers. 2507.

Author: Marta García Rodríguez.

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Abstract

High volatility in the U.S. labor market, coupled with a low correlation between labor market variables and productivity, presents a challenge for traditional search and matching models. This paper develops a search and matching model with internally rational agents who hold subjective wage expectations. This approach significantly improves alignment with U.S. labor market data, outperforming the standard rational expectations model. The model’s wage expectations are consistent with data from European Commission professional forecasters, adding a dynamic source that enhances the model’s fit to labor market moments.

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