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The role of wage expectations in the labor market

Author

Listed:
  • Marta García Rodríguez

    (BANCO DE ESPAÑA)

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.

Suggested Citation

  • Marta García Rodríguez, 2025. "The role of wage expectations in the labor market," Working Papers 2507, Banco de España.
    • Handle: RePEc:bde:wpaper:2507
    DOI: https://doi.org/10.53479/38937
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    More about this item

    Keywords

    internal rationality; wage expectations; labor markets; subjective expectations; belief shock;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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