  Job seekers' misperceptions about the labor market can distort their
decision-making and increase the risk of long-term unemployment. Our study
establishes objective benchmarks for the subjective wage expectations of
unemployed workers. This enables us to provide novel insights into the accuracy
of job seekers' wage expectations. First, especially workers with low objective
earnings potential tend to display excessively optimistic beliefs about their
future wages and anchor their wage expectations too strongly to their
pre-unemployment wages. Second, among long-term unemployed workers,
overoptimism remains persistent throughout the unemployment spell. Third,
higher extrinsic incentives to search more intensively lead job seekers to hold
more optimistic wage expectations, yet this does not translate into higher
realized wages for them. Lastly, we document a connection between
overoptimistic wage expectations and job seekers' tendency to overestimate
their reemployment chances. We discuss the role of information frictions and
motivated beliefs as potential sources of job seekers' optimism and the
heterogeneity in their beliefs.
