Knowledge that Transforms

This paper reports findings from an experiment that implements a search-theoretic model of money as a medium of exchange. The question examined is whether subjects learn to adopt the same commodities as media of exchange that the model predicts will be used in equilibrium. We report that subjects have a strong tendency to play “fundamental” rather than “speculative” strategies even in environments where speculative strategies yield higher payoffs. We examine some possible motivations for subjects' behavior and conclude that subjects are mainly motivated by past payoff experience as opposed to the marketability considerations that the theory emphasizes.

It is now 25 years since the growth rate of labor productivity and of multi-factor productivity (MFP) decelerated sharply both in the United States and in most other industrialized nations. This ‘‘productivity slowdown’’ has eluded many attempts to provide single-cause explanations. Slow productivity growth in the past 25 years echoes slow productivity growth in the late 19th century. Perhaps both were normal, and what needs to be explained is not the post-1972 slowdown, but rather the post1913 ‘‘speedup’’ that ushered in the glorious 60 years between World War I and the early 1970’s in which U.S. productivity growth was much faster than before or after. This paper makes a sharp distinction between MFP growth calculated from inputs that combine simple measures of labor hours and the capital stock and growth based on measures that adjust for the changing composition of labor and capital. The first step toward an understanding of long-term trends is to compare like with like, splicing MFP data based on unadjusted inputs prior to 1950 with post1950 data based also on unadjusted inputs, as contrasted to the composition-adjusted inputs that are now desirably incorporated into our official MFP measures. The MFP record prior to 1929 still rests largely on the monumental work of John Kendrick (1961) which, however, is based almost entirely on input quantities that lack any adjustment for changes in composition. Edward Denison ( 1962, 1985 ) and Zvi Griliches (1960) pioneered the development of composition adjustments for labor input. Dale Jorgenson and Zvi Griliches (1967) introduced a framework that treats the problem of composition adjustment in both labor and

This is a perfect time to discuss inequality. After a period of three decades when wage inequality among men in the United States grew to approximate pre-World War II levels, measured inequality apparently has stabilized and may, in fact, be decreasing (Claudia Goldin and Robert A. Margo, 1992). It is, therefore, a time to assess the changes, to compare the gains and losses. I choose this topic, not to offend, but because I believe inequality is an economic good that has received too much bad press. I also think you will agree that it is a good, which like any other, can be scarce or overly abundant. I am neither trying to praise nor defend poverty, and I hope it is understood that the link between wages and income is not especially close, particularly at lower incomes where nonemployment dominates. Wages play many roles in our economy; along with time worked, they determine labor income, but they also signal relative scarcity and abundance, and with malleable skills, wages provide incentives to render the services that are most highly valued. Further, we all buy and sell labor either directly or indirectly as labor is embodied in products. To reverse of the themes of Milton Friedman's introductory theory class, one man's can be another's meat. Together with rising relative wages, the post-1950 increase in the job-market employment of women is of our major accomplishments, but it is an accomplishment that has been fueled in part by the low wages earned by those the Census classifies as private household workers, childcare workers, workers in laundries and cleaning establishments, food service workers, etc. As the population ages, the prospect of increasing dependence on personal assistance looms. For the most part, personal assistants and aides earn low wages, wages that extend the services we can afford. Friedman's actual observation is, however, that one man's meat is not necessarily another's poison (Friedman, 1976). The relatively high wages earned by physicians, scientists, and university professors have attracted many immigrants to the United States. Would we be better off if they had not immigrated? We could in fact reduce wage inequality by simply proscribing immigration, because the wage distribution of immigrants is U-shaped relative to that of natives (see J. P. Smith and B. Edmonston, 1997 p. 180 [table 5.4] ). My guess is that most economists, faced with such an option, would respond by directing attention to the services immigrants provide. My objective is to examine the recent period of increasing wage inequality with an eye toward the positive. I describe some of the changes that have occurred, speculate about the causes, and wrap up with illustrations of consequences. I contend that growing inequality has created opportunities that have been exploited by many and that the gains are not restricted to the traditional elite. Moreover, when we have adopted policies to mitigate the downside of increasing inequality, which is falling real wages in the lower parts of the distribution, a surprising number of individuals have also capitalized on those opportunities in ways that are not productive. Before turning to the data, I want to make a few general observations. * Department of Economics, Texas A&M University, College Station, TX 77843-4228. I am indebted to Martin Gritsch for assistance in extracting the data and to Barbara Charlton for secretarial support. I am also indebted to participants in the UCLA/RAND Labor Workshop and especially to Janet Currie and James P. Smith for comments and suggestions on an earlier draft. I have drawn heavily on my previous work, much of it in collaboration with Kevin M. Murphy.

U.S. macroeconomic evidence shows a negative relation between the rate of change of wages and unemployment. In contrast, most theories of wage determination imply a negative relation between the level of wages and unemployment. In this paper, we ask whether one can reconcile the empirical evidence with theoretical wage relations. We reach three main conclusions. First, we derive the condition under which the two can indeed be reconciled. We show the constraints that such a condition imposes on the determinants of workers' reservation wages as well as the relative importance of workers' outside options as opposed to match specific productivity in wage determination. Second, in the light of this condition, we reinterpret the presence of an error correction term in macroeconomic wage relations for most European economies but not in the United States. Third, we show that whether this condition holds or not has important implications for the effects of a number of variables -- from real interest rates to oil prices to payroll taxes -- on the natural rate of unemployment.(This abstract was borrowed from another version of this item.)

This article presents an empirical study of market power in the British electricity industry. Estimates of price-cost markups are derived using direct measures of marginal cost and several approaches that do not rely on cost data. Since two suppliers facing inelastic demand dominate the industry, most oligopoly models predict prices substantially above marginal costs. All estimates indicate that prices, while higher than marginal costs, are not nearly as high as most theoretical models predict. Regulatory constraints, the threat of entry, and financial contracts between the suppliers and their customers are considered as possible explanations for the observed price levels.

The following question is approached theoretically and empirically: Why do immigrants invest more in human capital than the native-born, and how do investment patterns vary by type of immigrant? It is found that greater immigrant human capital investment is due to the lower opportunity costs of investment by immigrants lacking US-specific skills and the role of untransferred human capital as a factor of production for destination-country skills, as well as the higher return to investment spending from the complementarity of foreign and US human capital. This theoretical insight is supported by direct evidence of human capital investment and by empirical analyses.

We are in the midst of a structural boom the force of which has not been seen in this country since the 1920’s. After the U.S. unemployment rate hit 6 percent in late 1994, following its two-year recovery, many experts assumed that unemployment had regained its naturalrate path. The natural unemployment rate in the second half of the 1980’s had been put at around 6.5 percent in several estimates, and if the trend reduction in the natural rate brought about by the continuing relative decline of high-school dropouts in the labor force and those whose education stopped at the diploma is placed at 0.07 per annum, it would have declined on that account to around 6 percent by 1995 (Phelps and Gylfi Zoega, 1997). Furthermore, we saw in 1995 the end of

Productivity Differences across Employers: The Roles of Employer Size, Age, and Human Capital by John C. Haltiwanger, Julia I. Lane and James Spletzer. Published in volume 89, issue 2, pages 94-98 of American Economic Review, May 1999

I estimate a decomposition of productivity and hours into technology and non-technology components. Two results stand out: (a) the estimated conditional correlations of hours and productivity are negative for technology shocks, positive for nontechnology shocks; (b) hours show a persistent decline in response to a positive technology shock. Most of the results hold for a variety of model specifications, and for the majority of G7 countries. The picture that emerges is hard to reconcile with a conventional real-business-cycle interpretation of business cycles, but is shown to be consistent with a simple model with monopolistic competition and sticky prices.