This paper investigates how heterogeneous and potentially biased beliefs about the state of the economy shape wage dynamics, labor market flows, and aggregate responses to shocks. Survey evidence shows that agents form dispersed and backward-looking expectations about macroeconomic conditions. Motivated by these findings, I develop a search-and-matching model in which workers and firms update their beliefs about the aggregate productivity through adaptive learning. While firms share a common belief, workers hold heterogeneous beliefs. The model incorporates staggered wage renegotiation for job stayers and two-sided lack of commitment, where wage rigidity endogenously triggers quits and layoffs. I discipline the model using data from the Michigan Survey of Consumers and the Survey of Professional Forecasters, calibrating it to match key empirical moments. The framework shows that belief-driven frictions amplify labor market volatility and generates greater persistence relative to a full-information benchmark. It also replicates the cyclical composition shifts of unemployment. An extension incorporating persistent belief biases further accounts for the heterogeneous employment transition patterns documented in the data.

This paper proposes a unified analysis incorporating both consumer preferences and production technology to explain the secular rise of wage inequality in the United States. Utilizing household consumption data along with detailed industry employment data, I document that higher income households spend more on skill-intensive goods and services as a fraction of their total consumption. This fact implies that economic growth will result in greater demand for skilled labor. The paper then develops a multi-industry general equilibrium model featuring non-homothetic demand, industry-specific production technology and capital-skill complementarity. Based on the findings, I estimate that capital equipment substitutes for unskilled labor while complementing skilled labor. I quantitatively evaluate the sources driving the rise in the skill wage premium from 1982 to 2019. The results indicate that, while capital accumulation is the primary driver of the skill premium increase, the income-driven consumption channel operating through skill-neutral productivity growth contributes 4.9% to 5.5% to the overall rise in the skill premium.