How Much Can I Make? Insights on Belief Updating in the Labor Market (with Kenneth Chan)

We use a nationally representative survey, the labor supplement of the Survey of Consumer Expectations, to study how people update their wage expectations over time. Using a recently developed excess belief movement test for the martingale property (Augenblick and Rabin, 2021), we find strong evidence of non-Bayesian learning at the aggregate level. Among survey respondents who responded at least twice to the survey, we find an average movement in beliefs that is roughly 513% of the reduction in their beliefs’ uncertainty, 413% more than the Bayesian benchmark. This result is consistent with base rate neglect and overreaction to signals, and we found suggestive evidence that people exhibit base rate neglect. Our simulation shows that this result is unlikely to be explained solely by measurement error. We also found patterns of asymmetric updating, where individuals update their beliefs more when they receive good wage offers relative to bad wage offers.

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