Four Essays in Unemployment, Wage Dynamics and Subjective Expectations.

Abstract

This dissertation contains four essays on unemployment differences between skill groups, on the effect of non-employment on wages and measurement error, and on subjective expectations of Americans about mortality and the stock market.

Chapter 1 tests how much of the unemployment rate differences between education groups can be explained by occupational differences in labor adjustment costs. The educational gap in unemployment is substantial. Recent empirical studies found that the largest component of labor adjustment costs are adaptation costs: newly hired workers need a few month get up to speed and reach full productivity. The chapter evaluates the effect of adaptation costs on unemployment using a calibrated search and matching model.

Chapter 2 tests how short periods of non-employment affect survey reports of annual earnings. Non-employment has strong and non-standard effects on response error in earnings. Persons tend to report the permanent component of their earnings accurately, but transitory shocks are underreported. Transitory shocks due to career interruptions are very large, taking up several month of lost earnings, on average, and people only report 60-85% percent of these earnings losses. The resulting measurement error is non-standard: it has a positive mean, it is right-skewed, and the bias correlates with predictors of turnover.

Chapter 3 proposes and tests a model, the modal response hypothesis, to explain patterns in mortality expectations of Americans. The model is a mathematical expression of the idea that survey responses of 0%, 50%, or 100% to probability questions indicate a high level of uncertainty about the relevant probability. The chapter shows that subjective survival expectations in 2002 line up very well with realized mortality of the HRS respondents between 2002 and 2010 and our model performs better than typically used models in the literature of subjective probabilities.

Chapter 4 analyzes the impact of the stock market crash of 2008 on households' expectations about the returns on the stock market index: the population average of expectations, the average uncertainty, and the cross-sectional heterogeneity in expectations from March 2008 to February 2009.