Dual-Sided Over-Optimism in Labor Market Fundamentals
Observational StudyReview
Labor market models typically assume market participants possess accurate knowledge about aggregate skill and wage distributions, suffering only from asymmetric information about specific individuals. In fast-growing urban economies, both employers and jobseekers hold severe structural misperceptions about population-level skill and employment realities.
Picture this
Think of a two-sided market as a high school dance where boys expect all girls to be professional dancers, while girls expect all boys to give out tickets to a VIP lounge. Because neither side has seen the actual crowd before, both set unrealistic entry standards; when the dance starts, boys refuse to dance with regular dancers and girls reject normal invitations, leaving most people standing on the sidelines until they observe the actual room.
What the evidence says
75% of firm managers overestimate the cognitive ability of tertiary-educated applicants (perceiving a tertiary Raven score premium $>4\times$ the actual difference of 5.3 vs 5.0 questions); 55% of high-school jobseekers expect permanent employment within 1 year compared to 5.8% actual observed employment.
- Who was studied
- N = 779 young jobseekers (aged 18–29 with high school or tertiary education) and N = 395 formal firm managers in Addis Ababa, Ethiopia in a 2019 follow-up study.
- How
- Incentivized belief-elicitation survey comparing participant expectations against true sample benchmark distributions (Raven's Progressive Matrices test scores, wage data, and employment rates).
What to do
Administer incentivized two-sided belief elicitation surveys using standardized objective tests (such as Raven's Matrices) alongside true population benchmarks to identify structural expectational gaps between employers and jobseekers.
From the source
"Overall, almost 75% of firms overestimate the ability of tertiary-educated jobseekers and about 90% of them overestimate the ability premium associated with tertiary education."
Matching_Firms_and_Young_Jobseekers_through_a_Job_Fair_A_Field_Experiment.pdf