Knowledge that Transforms

This paper examines the effect of earnings taxes on wage variability over time. We estimate a "hedonic wage locus," which indicates how the market allows individuals to substitute the mean level of the wage for its variability across jobs. Information from this locus is used to estimate the parameters of individuals' indifference curves between the mean and temporal variation of hourly wages. On the basis of these utility-function parameters, we predict that lowering the rate of taxation on earnings would on average lead workers to choose jobs with slightly lower pretax mean wages and with less pretax wage variation.

Recent developments in the theory of strategic bargaining demonstrate how informational asymmetries can lead to prolonged and costly bargaining. These models can be applied to contract negotiations, yielding an economic theory of strikes. To date, however, few empirical tests of these models have been carried out. In this paper, a set of predictions concerning the incidence and unconditional duration of strikes is derived from a simple bargaining model in which the union is uncertain about the firm's future profitability. These predictions are then tested on a micro data set of major U.S. contract negotiations that took place from 1973 to 1977.

This paper is concerned with situations where firms not only recognize the dependence of quality on price (of productivity on wages, of default probability on the interest rate charged), but also attempt to use what control they have over price (wages, interest rates) to increase their profits. The recognition of this possibility has important implications for economic theory, which have recently been explored in a large number of papers in several disparate fields. The objective of this paper is to survey these papers and to draw out the central themes of this literature. This paper is divided into four parts, In Part I, we discuss the most important implications of the dependence of quality on price for competitive equilibrium theory--the repeal of the law of supply and demand (Part I.1), the repeal of the law of the single price (Part I.2), the existence of discriminatory equilibria (Part I.3), the comparative static consequences (Part I.4), and the inefficiency of market equilibria (Part I.5). Part II discusses alternative explanations for the dependence of quality on price in labor, capital, and product markets.

This paper examines the magnitude of changes in relative wages across industries between 1860 and 1983 and analyzes the macroeconomic determinants of such changes at different intervals during this period. The variance across industries in wage growth was at least four times larger before 1948 than afterward. Except for smaller year-to-year variability in output growth across industries after 1948, the macroeconomic factors examined cannot account for this increased rigidity of relative wages. Increases in average establishment size and improved communication of wage trends are probably partially responsible for the observed increase in relative wage rigidity. No single macroeconomic model was consistent with the year-to-year fluctuations in relative wage rigidity in every historical period examined.

Using data on male heads of households from the Michigan Panel Study of Income Dynamics, this paper finds that although short tenure workers accounted for a disproportionate share of total unemployment, during the early seventies, cyclical fluctuations in joblessness were concentrated among persons currently holding or recently having held longer-lasting employment. Greater unemployment durations were a more important source of rising joblessness than increased separation probabilities and cyclical changes in both variables were larger for recent leavers of medium or long tenure employment than for persons with similar seniority in their current job.

The asymmetric information characterizing markets for professional services has been used to justify tying requirements and other restrictions on the business practices of professionals. In this paper the prices and quality effects of state restrictions that prohibit the fitting of contact lenses by independent opticians and thereby tie the sale of contact lenses to the services of ophthalmologists and optometrists are estimated. The results suggest that prices are significantly higher in markets with tying requirements, controlling for differences in quality and variations in other state commercial practice restrictions. The tying requirements and the commercial practice restrictions, however, appear to have statistically insignificant effects on quality.

Until recently, estimates of demand functions for public goods were obtained (either with aggregate or micro survey data) using single equation estimation techniques. However, demand estimates may be biased when in dividuals' choices of communities are dependent upon the quantity and quality of public good provided. This paper spells out the nature of this bias (called Tiebout bias) and suggests an improved maximum-likelihood estimation technique. The technique is applied to a data set involving local public education in Michigan. Copyright 1987 by MIT Press.

Increasing returns to scale (RTS) is frequently pos- tulated as affecting productivity in surface coal mining. How- ever, it is not clear whether increased capital intensity or increased output is the relevant phenomenon. A ray-homo- thetic production function that incorporates the capital-labor mix and fixed site geology into the scale elasticity is presented and estimated with a micro (mine level) dataset. The results indicate that higher capital intensity contributes to higher RTS for some types of capital equipment, but not all. On the average increasing RTS was found, with few mines approach- ing optimal scale. T HE literature of coal mining productivity contains many references to returns to scale as a factor in strip mining productivity.' However, different analysts use different definitions of scale,' and consequently their results are mixed. Some analysts associate returns to scale with larger pieces of capital equipment; 2 others use the more traditional economic notion of output volume and the scale elasticity;3 others simply relate output volume to labor productivity.4 It may be true that developments in large pieces of earth-moving equipment have been implemented at surface mines with large output volume, but this does not necessarily imply increasing returns to this par- ticular capital input. This confusion in the mining literature in the use of the term scale, coupled with the more general observation that large firms (not just large mines) rarely have the same capital-labor mix as their smaller counterparts, leads to a hypothesis that a different capital-labor mix yields different economies of scale. The application of ray-homothetic production functions leads to an easily testable hypothesis on the impact of input mix to economies of scale. Additionally, these functions are more general than their homothetic namesakes. Fare (1975) has shown that they do not generate linear expansion paths. convex isoquants, or exhibit strong dispos- ability of inputs. The properties of convexity and strong disposability are necessary for a dual, cost function analysis of the production structure. If the true underlying production function is ray- homothetic, the dual approach is inappropriate, therefore these functions are a desirable tool for productivity analysis in general and in particular when input mix is believed to be an important

The volatility of interest rates and the deregulation of the mortgage lending sector have meant that many homeowners also own mortgages at terms more favorable than current interest rates. This paper presents a model of residential mobility decisions and an empirical analysis that evaluates the importance of the ownership of these mortgages upon the mobility of homeowners. The results, based upon proportional and nonproportional hazard models, indicate that these effects are quite large. The empirical analysis distinguishes between different regulatory regimes that govern the assumption of existing mortgages, and indicates the implications of these findings for the pricing and valuation of mortgage-backed securities. Copyright 1987 by MIT Press.

In this paper we consider the basic self-selection model for the effects of education, training, unions, and other activities on wages. We show that past models have ignored 'heterogeneity of rewards' to the activity--i.e., differences across individuals in the rate of return to the activity--as a source of selection bias. We model such heterogeneity, show how its presence can be tested, and draw out its implications for the wage and welfare gains to the activity. An empirical application provides strong support for such heterogeneity.