Knowledge that Transforms

This paper assesses the contribution of federal antidiscrimination policy to the dramatic improvement of black economic status in manufacturing that occurred in South Carolina in the mid 1960's. Using a unique data source on wages and employment by race and sex in South Carolina we evaluate competing explanations. Human capital stories, supply shift stories and tight labor market stories do not account for the black breakthrough. Our study documents a significant contribution of federal antidiscrimination programs.

The Slutsky equation can be constructed as a parallelogram (a diamond), the area of which is proportional to the elasticity of substitution. This construction permits to show immediately that demand functions become concave on an interval if the elasticity of substitution increases sufficiently. Also, the diamond sheds light on the fact that the production level increases with the elasticity of substitution. As an application, the author shows that the elasticity of substitution has a direct bearing not only on the rate of growth of an economy, but also on the very existence of sustained growth.

The author critically examines Gary Beckers attempt to integrate the theory of income distribution (intragenerational differences) with the theory of mobility (intergenerational differences) in an economic model of the He assesses Beckers claims of distinctiveness integration explanatory power and surprise and [arrives] at a rather skeptical view of the contribution that the core of microeconomics has made to this study of the family. A reply by Becker is included (pp. 514-8). (EXCERPT)

Recently, Toyota sought a plant location in the United States. The $800-million plant will employ 3000 workers, and numerous states offered Toyota generous investment incentives, hoping this would induce Toyota to select their state. The Commonwealth of Kentucky won this competition, but the price was high: the present value of the payments exceeds $125 million. The payment of investment incentives for the Toyota plant is not unique. In 1976 Pennsylvania paid $75 million to attract a Volkswagen plan,; Nissan, Honda, and Mazda received generous investment incentives when locating plants in the United States. And this bidding is not limited to states. To attract the headquarters of the Presbyterian Church (USA), with its 1300 jobs and $38 million annual payroll, civic leaders in Louisville, Kentucky, offered the church a warehouse and $6.2 million for renovation of the structure, bidding the church away from Kansas City, Missouri.' In this paper, we contend that this competition may result from the average cost pricing of publicly provided goods and services.2 When the marginal cost of providing a firm and its workers with public services is less than the tax revenue they generate, a government may offer the firm subsidies that reduce the distortions the average cost pricing of the public service creates. Thus, this competition for industry is not a zero-sum game where the subsidies are only transfers from the government to the firm. Rather, these subsidies may facilitate the efficient location of industry.

Financial factors have been assigned strategic importance in economic development. But very different factors have been isolated in the respective experiences: in Asia unrepressed financial markets in mobilizing saving and allocating investment have been given prominence. In Latin America the central question is the role of inflationary finance, the scope for deficits to enhance growth and, increasingly, the feedback from high and unstable inflation to poor economic performance. This paper reviews and contrasts the two approaches and concludes that the strong claims for the benefits of financial liberalization are not supported by evidence. Financial factors are important, but probably only when financial instability becomes a dominant force. The scope for inflationary finance is small and the risks are larger than commonly accepted. When hyperinflation takes over and foreign exchange crises disrupt the price system, and shorten the economic horizon to a week or a month, normal economic development is suspended. Moreover, difficult to reverse capital flight puts savings outside the home economy. Attention should focus on these extreme cases and explore deeper the thresholds at which financial factors become dominant and the channels through which this occurs. Superior growth performance, in this perspective, may be more a reflection of adaptability than financial deepening.

This paper examines the problem faced by the Federal Reserve in announcing its private information about its future policies. Because it would like to manipulate expectations and pursue a time-inconsistent policy, the Fed cannot reveal its policy objectives precisely and credibly. It can, however, communicate some information about its goals through the cheap talk mechanism of Vincent Crawford and Joel Sobel: making announcements that are imprecise, and only giving ranges within which these goals may lie.

Empirical results in this paper indicate that firm-specific wage growth occurs almost exclusively during periods of on-the-job training. This finding suggests that within-firm wage growth is mainly determined by contemporaneous productivity growth. The results provide no evidence that contractual considerations are an important source of firm-specific wage growth.

Under the traditional interpretation of macroeconomic fluctuations, aggregate demand shocks move output and prices in the same direction, while aggregate supply shocks move output and prices in opposite directions. This paper examines the joint behavior of U.S. output, unemployment, prices, wages, and nominal money and asks whether it is consistent with this interpretation. The answer is a qualified yes.

If one had to choose a single policy that best characterizes the postwar behavior of governments, it might well be their expansion of social insurance. Today's citizen of a typical developed country is insured through government programs against unemployment, disability, medical expenses, impoverishment in youth and middle age (through welfare systems), impoverishment in old age (through old-age pensions), loss of spousal support due to divorce (through Social Security dependent benefits), fluctuating earnings (through progressive tax systems), early death of a spouse (via survivor's insurance), and late death (via annuity insurance). The remarkable growth of social insurance has occurred against a backdrop of increased geographic mobility, dramatic changes in demographics, and, at least in the United States, a dissolution of the family. The extent to which social insurance has been the cause of family decline and demographic change or its result is one of many complex questions that economics or any other social science is unlikely to ever fully answer. Economic analysis, while not being able to discover the precise recipe leading to our social insurance institutions, has, at least, been able to taste many of the key ingredients. Economics has and can provide real insight into a) the need for social insurance programs, b) the appropriate size of such programs, and c) how social insurance programs affect the economy. This paper seeks to illustrate each of these three kinds of economic contributions to the evaluation and formation of social insurance policy. Section I (drawing on my 1987 article) presents an efficiency argument for compulsory saving through a progressive Social Security system. Section II (drawing on my paper with Avia Spivak and Laurence Summers, 1982, and on Alan Auerbach's and my 1987b paper) illustrates an analysis of the appropriate size of social insurance programs, examining in turn the questions of whether households save enough and buy enough life insurance or whether more government intervention in these matters is appropriate. Section III (drawing on my 1989 book) illustrates how social insurance programs can affect the economy by discussing potential savings effects of health insurance, particularly an asset-tested Medicaid scheme. Section IV concludes the paper with suggestions for future research and policy options. As indicated, the paper draws on my own and coauthored research, and it provides only limited references for no better reason than easing my task and saving space. In so doing I do not pretend to suggest that this is more than a very small subset of a huge volume of research sparked in the 1970s, in large part, by Martin Feldstein.