Knowledge that Transforms

The first part of this paper considers the interaction between productive and nonproductive savings in a growing economy. It employs an overlapping generations model with capital accumulation and various types of rents, and gives necessary and sufficient conditions for the existence of an aggregate bubble. The second part is a series of thoughts on the definition, nature, and consequences of asset bubbles. First, it derives some implications of bubbles for tests of asset pricing. Second, it demonstrates the specificity of money as

This paper describes the equilibrium wage distribution and unemployment rate when firms recruit (search for) employees. A model in which firms' inability to distinguish workers who refuse job offers increases their expected recruiting costs, is contrasted with one in which indistinguishable low-productivity workers decrease firms' expected gains from hiring. In both, work force heterogeneity enhances search uncertainty, firms recruit less intensively than otherwise, and so the equilibrium unemployment rate rises. Heterogeneity reflects searchers' incomplete knowledge of desirable trading partners' locations and will likely be a confounding influence and source of unemployment in large economies with imperfectly observable sector-specific shocks.

The formation of implicit contracts in labor markets with heterogeneous employees is studied. If layoffs occur, the firm finds it optimal to offer differing contracts to differing employees, with employees who place a higher priority on leisure accepting contracts with higher layoff probabilities. The firm can do so without violating the constraint that employees voluntarily sort themselves into these contracts. Under plausible assumptions, the contracts match the empirical observation that relatively low wage rates and high unemployment probabilities tend to be correlated. Finally, an average or composite wage rate varies over states of nature, calling into question the ability of implicit contracts models to account for the constant, representative wage rate often found in macroeconomic models.

An unsettled issue in the literature relating to the relative wage effect of unions is the appropriate treatment of union status in a wage determination model. In the context of a three-equation model determining union membership and union- and nonunion-sector wage rates, this paper presents an instrumental variables (IV) procedure for estimating the parameters of the wage equations and a test of the exogeneity of union status using the Hausman specification test. An advantage of our IV procedure in comparison to the widely used inverse Mill's ratio procedure is that our procedure is a distribution-free estimator, whereas the inverse Mill's ratio estimator hinges in the assumption that the error term of the choice equation is normally distributed. Using data for a sample of middle-aged white workers, we estimate the parameters of the union and nonunion wage equations with both procedures. On the key question of the endogeneity of union status, the Hausman test decisively rejects the null hypothesis of exogeneity. The inverse Mill's ratio procedure, in contrast, provides coefficient estimates on the selectivity terms that fail to indicate evidence of sample selectivity in either sector.

This paper examines real wage measures that include leisure and nonlabor income in consumption decisions with respect to the advantages and disadvantages of partial versus complete welfare orderings and of utility-based versus utility-free wage indices. In addition, we argue that the usefulness of a real wage measure beyond welfare comparison has been ignored. To test the robustness of utility-based indices, these real wage measures are calculated for two different utility-function specifications, the indirect addilog system and the linear expenditure system. Further comparisons are made against index bounds that are independent of the functional form for preferences.