This paper examines how biases and dispersion in household and firm beliefs affect aggregate labor market outcomes, including wages, job creation, and worker flow dynamics. I develop a search-and-matching model in which workers and firms update their beliefs about aggregate productivity through adaptive learning. Workers hold heterogeneous, potentially biased beliefs that shape individual decisions such as wage bargaining and quitting. Firms, in turn, base their vacancy posting decisions on both their own beliefs and the observed distribution of worker beliefs. The model also features wage-rigidity-induced job separations to study the dynamics of endogenous quits and layoffs. The model is disciplined using data from the Michigan Survey of Consumers and the Survey of Professional Forecasters, and is calibrated to match key empirical moments. I find that belief-driven frictions amplify cyclical fluctuations in labor market variables relative to a full-information benchmark. In particular, the model doubles the volatility in unemployment rate and increases the volatility in job-finding rates by six times. In addition, the model generates more persistent unemployment dynamics, with the unemployment rate rising more gradually and peaking later than predicted by standard models.

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.