https://macropaperwarehouse.com/authors/marta-garcia-rodriguez/Marta García-RodríguezHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/the-role-of-wage-expectations-in-the-labor-market/https://macropaperwarehouse.com/papers/the-role-of-wage-expectations-in-the-labor-market/<p>This paper develops a Mortensen-Pissarides (DMP) search and matching model with internally rational (IR) agents who hold subjective beliefs about wages rather than perfect knowledge of the Nash bargaining outcome. The standard DMP model struggles with two empirical regularities: high volatility of U.S. labor market variables relative to productivity, and a near-zero correlation between labor market tightness and productivity post-1989. The IR model significantly improves alignment with U.S. labor market data relative to the standard rational expectations benchmark, by generating a self-referential belief mechanism: shifts in beliefs about the future returns to labor affect current wages, which agents use to update beliefs. Wage expectations in the model are consistent with European Commission professional forecasters data, and an econometric test rejects the rational expectations null hypothesis for survey real wage expectations.</p>