Knowledge that Transforms

Aggregate fluctuations in employment and unemployment are often explained within a market-clearing framework as intertemporal substitution in labor supply. Under this hypothesis, leisure in the current period is supposed to be highly substitutable with leisure (and goods) in other periods. Consequently, labor supply responds to perceived temporary changes in the real wage although it may be inelastic with respect to permanent changes in the real wage. A very important and influential empirical study of intertemporal substitution was presented by Robert Lucas and Leonard Rapping (1969, L-R). Lucas and Rapping estimated a simultaneous equations model of the aggregate labor market under an adaptive expectations forecasting scheme and found strong support for the intertemporal substitution hypothesis. Although the adaptive expectations assumption is now rarely used in such models, the intertemporal substitution hypothesis has become quite prominent in equilibrium business cycle theories where it is used to explain how fluctuations in aggregate demand can result in real changes in output, employment and unemployment.' Besides the L-R study, relatively few attempts have been made to verify the intertemporal substitution hypothesis, and most have failed to find the kind of intertemporal substitution elasticity estimated by Lucas and Rapping.2 In addition, the L-R results have never been tested, although Joseph Altonji made some minor data corrections, extended the time period, and reproduced them.3 This paper helps to reconcile the L-R results with later findings and also provides a convincing illustration of the importance and usefulness of specification testing. Here the L-R estimates are reproduced and the model is subjected to the kind of overidentification tests now widely used in econometric analysis. The restrictions on the model are easily rejected. This standard specification testing leads to very different conclusions about the empirical importance of the intertemporal substitution hypothesis than those suggested by Lucas and Rapping.

The elementary course in economic statistics must devote more time to statistics than to economics. Students who major in economics will take at least six courses in economics, but the course in economic statistics may be their only course in statistics. Nevertheless, the basic purposes of economics should be kept in mind in shaping the course. Although the statistical methods used in applied economics deal with measurable variables, it is my view that the ultimate purpose of economics as an applied social science is the improvement of human welfare, which is intrinsically an unmeasurable concept. Our recognition of the unattainable ideal does not stop us from obtaining less than ideal measurements that are nevertheless useful. The two basic problems in this task of economic measurement are (a) to define and measure the correct outcomes, and (b) to measure their determinants so that we can predict and, ideally, influence the outcomes. The contribution that the science of statistics can make to these tasks is fundamentally that of the art and craft of using observed sample data to make inferences about unknown population parameters in economics. Inferential statistics is fundamental. Descriptive statistics, which is the art and craft of organizing and summarizing sample data, is useful and necessary for learning inferential statistics, but it is not fundamental in its own terms. Turning to the structure of the course in economic statistics, let us apply a principle of economics to its teaching by specifying the constraints under which we seek to optimize our goals. Four major constraints face the teacher of elementary economic statistics: 1) the limited time in a one-semester course; 2) the typically large size and heterogeneity of the class; 3) the limited economic and, especially, mathematical background of most of the students; and 4) the limited skills of the teacher. A word about constraint 4, which implicitly qualifies much of what follows. Instructors of economic statistics have varying talents for and preferences about the course, and it is appropriate to play to one's strengths. If someone is a whiz at teaching probability, this topic by this instructor may captivate students and inspire them toward an understanding of inferential statistics. Another instructor may be skillful in using examples from such economic topics as income distribution or macroeconomics to illustrate how economists use sample evidence to estimate and test interesting relationships between outcome variables and their determinants. We each have our own styles of teaching, and my suggestions for content and methods should be viewed as subservient to any particular instructor's tastes and skills. With that qualification, I turn next to the content of the course.

This paper generalizes the Global Correspondence Principle by extending, in two major ways, Paul Samuelson's 1971 analysis of the exchange rate response to an international purchasing-power transfer. We analyze the price effect of a shift in any parameter, not necessarily a transfer. We then explore the resulting adjustments in any nonprice variable such as welfare. As our analysis shows, the direction of these adjustments depends neither on whether they are small or large nor on whether equilibrium is locally stable or unstable.

As we approach 1987, the Gordian knot of the international debt problem seems to be tightening again. Rescheduling agreements and requests for new money by several important countries are on the agenda. It will take farsighted and strategic thinking on behalf of all participants to overcome the mounting problems confronting us. Nevertheless, I firmly believe that the problems will continue to be manageable if all participants focus on their long-term interest in coming to a satisfactory solution. It is within that general framework that I would like to approach the topic of this paper. The role of the banks in the debt crisis cannot be seen in isolation. Important interdependences must be considered, including the responsibilities of the debtor countries, the industrialized countries, and the international agencies.

This note challenges the proposition David Lam made in his attempt to examine the relationship between population growth and the distribution of income. In the first 2 sections of his paper in which no income mobility was allowed Lam successfully analyzed the effects of adding to the economy a group of immigrants (with income distribution different from the original residents) on 2 inequality measures. In the 3rd section Lam made the strong proposition that claims in effect in order to determine whether an increase in the ith-income groups fertility would increase or reduce the steady-state proportion of the ith-income group all the information needed is the ith row of the mobility matrix. A counterexample is presented here along with a correction for the error that is made in the derivation of Lams proposition.

Historically, poverty rates for minority individuals and families have been substantially higher than poverty rates for nonminorities. Moreover, after several decades of decline, poverty rates have been increasing for the last decade for both minority and nonminority individuals. The traditional gap between minority and nonminority poverty rates arises primarily within the working class and is largely attributable to differences in minority and nonminority labor market earnings. It also seems clear that much of the recent increase in poverty among the working class is a direct result of increasing employment problems and declining real wage rates. Minority individuals, especially minority males, have been particularly hard hit by these recent labor market trends. Explanations of poverty and racial differentials in poverty rates among the working class derived from conventional economic theory have correctly emphasized limited earnings in the labor market as the primary determinant of individual poverty and differences in group poverty rates. However, it is the contention of this paper that the conventional explanation of how labor markets generate poverty and poverty rate differentials among the working class is seriously limited and flawed, and thus provides a poor basis for generating good antipoverty policy advice. I propose an alternative view of how labor markets work to generate poverty that provides a richer basis for generating good policy advice. I. Conventional Explanations for Working Class Poverty