A study involving MIT scholars has uncovered that a significant number of employees underestimate the wages offered by other companies, often believing their peers in similar roles elsewhere earn less. As the research suggests, this misconception leads to financial disadvantages for workers. Simon Jäger, an MIT economist and one of the study’s co-authors, highlights how employees base their expectations for alternative employment opportunities on their current salaries, which distorts their perception of the market.

The research presents a startling gap between reality and expectation: workers who could gain a 10% salary increase by moving firms anticipate only a 1% rise. This discrepancy results in them accepting lower earnings than they could achieve. The study also reveals that individuals working in lower-wage positions are particularly prone to underestimating pay scales at other organisations. Interestingly, when provided with accurate information about industry-wide salary structures, these workers are more inclined to consider leaving their current jobs, indicating a significant impact of information on employment decisions.

This misalignment between worker perceptions and actual wage data calls into question the assumptions underlying economists’ models of job search behaviour, which typically presume that workers possess accurate knowledge of salary levels in their field. Using data from Germany, the findings suggest that these insights extend beyond national borders, offering a broader commentary on the global labour market dynamics.

Nina Roussille, another MIT economist involved in the study, elaborates on the implications of these findings. She explains that workers’ ignorance of better-paying opportunities keeps them in lower-wage roles, reducing the pressure on their employers to offer competitive salaries. This dynamic, in turn, perpetuates wage stagnation within specific segments of the job market.

The study, titled “Worker Beliefs about Outside Options,” and published in the Quarterly Journal of Economics, is a collaborative effort by Jäger, Christopher Roth from the University of Cologne, Roussille, and Benjamin Schoefer from the University of California, Berkeley. It bridges the gap between assumed knowledge and actual understanding among workers regarding wage information.

The researchers employed a multifaceted methodology, incorporating a survey into the German Socio-Economic Panel and linking responses with salary data from the German government’s Institute for Employment Research. This approach enabled them to measure the discrepancy between perceived and actual wages across industries. They found that most survey participants positioned their salaries within the middle percentile, underestimating their potential earnings elsewhere.

Further, an online experiment with over 2,000 participants revealed that correcting misconceptions about wages significantly influenced workers’ intentions to seek new job opportunities. Specifically, a ten-percentage-point correction in wage expectations resulted in a 2.6-percentage-point increase in the likelihood of an employee considering a job change.

The researchers argue that their findings have implications beyond the German market, suggesting that wage misperceptions could have even more significant consequences in countries with greater wage inequality, such as the United States. They also note that the COVID-19 pandemic, which saw many workers moving to higher-paying jobs, supports the theory that previous underestimations of wage potential had kept employees in lower-paying positions.

This research challenges long-standing economic theories that assume workers accurately understand wage landscapes, urging a reevaluation of these models in light of new empirical evidence. The academic community’s favourable response indicates a readiness to refine economic models to more closely mirror real-world conditions. Moving forward, the authors aim to explore employer perspectives on wage knowledge, examining whether firms are aware of and potentially exploit workers’ wage misperceptions.

More information: Simon Jäger et al, Worker Beliefs About Outside Options, The Quarterly Journal of Economics. DOI: 10.1093/qje/qjae001

Journal information: The Quarterly Journal of Economics Provided by Massachusetts Institute of Technology