Research indicates that employees often underestimate the dynamics of wage markets.

A study co-authored by MIT scholars reveals that many employees mistakenly believe that their counterparts at other firms earn less in salary than they actually do, which ultimately results in financial losses for them. MIT economist Simon Jäger, one of the co-authors, notes that workers tend to base their perceptions of outside job options on their current wage, leading to a significant discrepancy between expected and actual wage increases when switching firms. The study also highlights that workers in lower-paying firms are particularly prone to underestimating wages elsewhere, and providing correct salary information increases the likelihood of them intending to leave their current jobs. This research challenges conventional economic models that assume workers have accurate salary information about their industries and suggests that misperceptions about outside options have substantial implications for wages. The study, conducted using data from Germany, may have relevance beyond its context, potentially applying to other countries as well. To conduct the study, the researchers integrated a survey module into the German Socio-Economic Panel and linked the findings to actual job and salary data collected from the German government’s Institute for Employment Research. Additionally, an online experiment with participants provided correct salary information about other companies, revealing a correlation between updated beliefs and intentions to seek new job opportunities. The researchers believe their findings could inform further exploration of industry-wide wage knowledge among employers. Funding for the research was provided by various organizations, including the Sloan Foundation’s Working Longer Program and the Deutsche Forschungsgemeinschaft.