Students' Wage Expectations in Germany - New Evidence considering Tax Adjusted Estimates

This paper uses a rich dataset derived from a three-year survey to gain insights about the informational background of University applicants. We analyze the extent to which students expectations of their starting and future salary depend on different characteristics. More precisely, the paper investigates whether students with different backgrounds tend towards making larger or smaller errors when estimating salaries. The results point out that students salary estimates are heterogeneous and that this variation is correlated with individual traits and chosen subjects. Overall, students substantially underestimate actual starting salaries by about 20 percent. However, a prime finding of this paper is that estimation errors are highly attributable to students misconception of the German progressive income tax system. Correcting for the erroneous gross-net conversion, we find applicants to have a quite correct idea about what salaries to expect in the future. Overall, applicants adjusted expectations are in line with labor market outcomes. However, expectations remain strongly correlated with personal traits.