Decomposing wages into worker and firm wage components, we find that firm-fixed components are sizeable parts of workers'
wages. If workers can only imperfectly observe the extent of firm-fixed components in their wages, they might be misled about
the overall wage distribution. Such misperceptions may lead to unjustified high reservation wages, resulting in overly long
unemployment durations. We examine the influence of previous wages on unemployment durations for workers after exogenous lay-offs
and, using Austrian administrative data, we find that younger workers are, in fact, unemployed longer if they profited from
high firm-fixed components in the past. We interpret our findings as evidence for overconfidence generated by imperfectly
observed productivity.
Keywords:Unemployment; Job search; Overconfidence
Research group:Labour Economics, Income and Social Security