The question of how the funds required for the capital accumulation associated with industrialization are to be raised has a long history. Since the industrial sector is relatively small in the early stages of industrialization, there has been a presumption that funds must primarily come from the agricultural sector. A simple model of a closed socialist economy in which the instruments at the disposal of the government are the terms of trade and the industrial wage, sheds some light on these questions, particularly in the context of the Soviet industrialization debate. In an economy facing binding constraints in external trade, a lowering of the price of the rural good, which reduces the supply of rural surplus available to the urban sector, must be accompanied by a lowering of the urban wage to reduce the demand for the rural good, and hence to balance the supply and demand of the rural good. A virtue of developing a general theoretical framework is that it enables one to isolate those features of the economy which are critical for the issues at hand.
The authors consider how the organization of rural markets will affect capital accumul ation and long-run aggregate income in the development process. They show that in a simple, dual economy, overlapping-generations model, c apital accumulation and aggregate income will be lowest when both fac tor markets in the agricultural sector are fully competitive. Both ca pital and aggregate income will be higher when land is not traded but the labor market is competitive, and highest in the absence of compe titive markets in both factors in the agricultural sector, when incom e distribution favors rural workers over landlords.
Recent compositional changes in industrial and occupational structures have created technological displacement for many workers. Accompanying these institutional changes is increased foreign competition which has forced previously profitable firms to collapse. What happens to workers when competition and displacement create job loss? Many studies have found that with job termination, workers face long spells of unemployment and reentry into occupations with lower wages and fringe benefits; however, few studies have examined gender differences in the consequences of job termination. In fact, most research in this area has been case studies focusing solely on men. This study analyzes gender differences in employment and wages upon job termination. It answers the question, Do women fare better or worse than men upon job termination?
Sluggish wages and prices are generally the culprits in models of unemployment and business fluctuations. Price flexibility in standard fix-price models would restore the economy to full employment. This line of reasoning has often been at the heart of proposals to reform institutions in order to restore flexibility to wages and prices. There is, however, a strand of macroeconomic thought that questions the wisdom of too much price flexibility. John Maynard Keynes raised the issue in chapter 19 of the General Theory by noting that a deflation could raise real interest rates and thereby impede a return to full employment. In his 1975 paper Keynesian Models of Recession and James Tobin develops this point in a formal model. Low prices work to move the economy to full employment but falling prices, to the extent that they lead to expectations of deflation, raise the real interest rate (through the Mundell effect) and move the economy away from full employment. Instability is likely to occur if expectations of inflation adjust rapidly to actual inflation and the real interest rate effect is large. Our historical experience does include significant episodes where either reductions in inflation or actual deflation were accompanied by high real interest rates. Although other factors could be responsible, the experiences of the Great Depression, the Latin American countries in the late 1970's and the United States in the early 1980's all add surface plausibility to the real interest rate deflation link and thus to one aspect of the Keynes-Tobin story. Recently, Bradford De Long and Lawrence Summers (1984) have argued that the decrease in the variance of output following World War II can be largely attributable to the decrease in wage and price flexibility in the postwar era. The reason output fluctuations are smaller today is precisely because the Keynes-Tobin destabilizing mechanism is less operative today.' This paper examines whether increased price flexibility can be destabilizing in a version of John Taylor's contract model (1979, 1980) extended to include real interest rate effects. Taylor's model includes both backward and forward elements in wage-setting behavior and thus permits some rationality in the wage-setting process. We find that even with this limited degree of rationality, increased wage flexibility leads to a decrease in both the variance of output and the variance of prices. Nicholas Carlozzi and Taylor (1983) introduce the real rate of interest into a staggered contract framework and discuss in general terms and through simulations the effects that changing real rates may have on the system. They do not, however, study the effects of potential instability through increases in wage flexibility or provide any analytical results. They provide an extensive discussion of the implications of alternative policy rules on the stochastic behavior of the economy. We first add the real interest rate to the standard Taylor model and derive the solution and prove key analytical results. These results are further buttressed by simulations.
In his Nobel Lecture, Milton Friedman (1977) argued that the greater uncertainty associated with higher inflation leads to a misallocation of resources because of shorter duration of contracts and reduced efficiency of the price system. The result is reduced economic growth and, possibly, more unemployment (i.e., a positively sloped Phillips curve) over the fairly long term. In a subsequent article, Maurice Levi and John Makin (1980) found a significant negative impact of inflation uncertainty on employment growth. Evidence of a similar nature was reported by Yakov Amihud (1981), Makin (1982), and Ronald Ratti (1985), while Donald Mullineaux (1980) found a significant positive effect of inflation uncertainty on the rate of unemployment and a negative effect on industrial production. Given the substantial body of empirical literature linking higher inflation to greater inflation uncertainty, this provides support for Friedman's hypothesis.' Friedman also noted, however, that in the very long run, institutions should adapt to an inflationary economy in a way that offsets much of the real effect of higher inflation. An example of such adaptation is more widespread indexation of wages. Levi and Makin recognized the potential impact of indexing but did not attempt to estimate it: To the extent that inflation uncertainty persists and causes lower employment, our results tend to support the case for a wider use of indexing of nominal contracts, which should reduce the impact of uncertainty felt on the real (p. 1026). The purpose of this article is to estimate the impact of inflation uncertainty on employment, while also considering the second-round effects of labor market adjustments designed to reduce the risk associated with inflation uncertainty. Despite the limited scope of the data, an increase in the prevalence of wage indexation in major collective bargaining contracts is taken to indicate a general increase in the responsiveness of nominal wages to inflation surprises.2 In other words, as the percentage of contracts with indexation clauses increases, the degree to which already indexed wages adjust to price level changes is assumed to increase. Furthermore, the effect is assumed to extend beyond the sector of the labor market covered by major collective bargaining agreements to smaller union contracts and even to nonunionized labor. This article proceeds as follows. Section I discusses the measurement of inflation uncertainty and the level of wage indexation and estimates the impact of inflation uncertainty on indexation in the United States for the period 1961-83. Section II examines the impact of inflation uncertainty, indexation, and unanticipated inflation on employment. Section III presents the results of simulations designed to illustrate how increased wage indexation offsets at least part of the adverse *Department of Economics, University of Kentucky, Lexington, KY 40506. Helpful comments from R. W. Hafer, Ronald Ratti, Richard Sheehan, Daniel Thornton, two referees, and the participants in seminars at the Board of Governors of the Federal Reserve System, Claremont College, Georgia State University, and the University of Kentucky are gratefully acknowledged. This research was conducted at the Federal Reserve Bank of St. Louis with assistance from Jude Naes. The views expressed do not necessarily reflect those of the Federal Reserve Bank of St. Louis or the Federal Reserve System. 'My 1984 article provides a review of the literature linking higher inflation to greater inflation uncertainty. 2Formal indexing typically applies only to contracts in the unionized sector-less than 25 percent of the U.S. labor market. This measure should serve the purpose at hand, however, since the behavior of union wages influences the wages of other workers, and since adjustments to greater inflation uncertainty in the unionized sector can be expected to occur at roughly the same time as adjustments in other sectors of the labor market.
Many Keynesian macroeconomic models are based on the assumption that firms change prices at different times. This paper presents an explanation for this "staggered" price setting. The authors develop a model in which firms have imperfect knowledge of the current state of the economy and gain information by observing the prices set by others. This gives each firm an incentive to set its price shortly after other firms set theirs. Staggering can be the equilibrium outcome. In addition, the information gains can make staggering socially optimal even though it increases aggregate fluctuations.
In this paper we compare the implications of a symmetric information contracting model and a dynamic labor supply model for changes in individual earnings and hours over time. The critical distinction between these models is whether earnings represent optimal consumption or payment for current labor services. We develop a simple test between labor supply and contracting models based on the relative variability of earnings and hours with respect to changes in productivity. If earnings represent consumption then changes in productivity generate smaller changes in earnings than hours. The opposite is true in the labor supply model. We apply our test to longitudinal data on male household heads fran the Panel Study of Income Dynamics and the National Longitudinal Survey of Older Men, focusing on individuals who do not change employers during the survey period. Neither model fits the data well. In both surveys, however, the contrihition of changes in productivity to changes in earnings is greater than the contribution to changes in hours. The data are more consistent with a labor supply interpretation, although the estimated labor supply elasticities suggest that changes in hours occur at fixed wage rates.
Paul Davis and Gustav Papanek (1984) ranked major economics departments by citations; however, their approach was not novel. Dennis Gerretz and Richard McKenzie (1978) initiated the use of citations to rank economics departments. Though they ranked only southern economics departments for the years 1976 and 1977, GerritzMcKenzie used both total citations and mean citations as ranking criteria. As Davis-Papanek and Gerritz-McKenzie have shown, the citation-ranking approach eliminates many of the problems of ranking departments using journal articles and offers a qualitative as well as quantitative measure of faculty productivity. Both studies, however, ranked only Ph.D. granting institutions and ignored those economics departments which offer a master's degree as the highest degree awarded. Although many Ph.D.granting departments have master's programs, these institutions tend to concentrate on training future academicians and to treat the master's degree as a consolation prize for unsuccessful Ph.D. students. While non-Ph.D.-granting institutions may have different incentives, teaching loads, computer and library support, and quality and extent of graduate research assistantships, we use a citations-based criterion to demonstrate that these institutions should not be neglected as sources of economic research.' Column (1) of Table 1 shows the ranking of economics departments offering the master's degree as the highest degree based upon the average number of citations for the years 1977-1981 for department faculties denoted in the 1982 catalogs of their respective institutions (ties are ranked equally). Our procedure differs from Davis-Papanek in that they averaged citations from 1978 and 1981 only. Given the wide range of faculty size, column (2) denotes the mean citation per faculty member per year. As Davis-Papanek found for Ph.D.-granting institutions, the rankings do change significantly. Four of the top ten departments are replaced by smaller departments and there is considerable shuffling among the remaining top ten departments. Since Davis-Papanek included faculty members citing their own work, this may bias one of the major advantages of using citations instead of the number of major journal publications; that is, citations measure the quality of a person's research in stimulating further research by others. Column (3) ranks departments by citations per year adjusting for self-citations. In some cases this correction is important. For example, Auburn moves from 9th to 15th, Brigham Young from 5th to 13th, and West Texas State from 12th to 6th. In general, there is a high correlation between the two rankings (the Spearman rank correlation coefficient is .99). Another potential weakness of a citation index is the fact that one article cited ten times is weighted equally with ten articles cited once each. It would be an interesting exercise to examine how innovations in the literature (as measured by citations per article) compare between master's only institutions, and middleto lower-ranked Ph.D. programs. Because Davis-Papanek do not separate the number of articles cited from the number of citations, we are unable to make this comparison. For this reason, the number of articles is not reported in our tables. For master's only institutions, the * Blair and Wallace: Department of Economics, Clemson University, 222 Sirrin Hall, Clemson, SC 29631; Cottle: University of Mississippi. We thank an anonymous referee for helpful suggestions on a earlier draft. Any remaining errors are our own. 'Philip Graves et al. (1982) included master's only institutions in their publications-based rankings.