Knowledge that Transforms

Affirmative action remains controversial. The controversy extends from the original antidiscrimination legislation and its interpretation to estimates of affirmative action's effect on the labor market. This paper provides a progress report on our recent efforts at detecting the effects of affirmative action on minority wages and employment. Although we find a substantial increase in wages for black men and black women over our sample period, the timing of these wage changes is surprising. Most of the wage gains came prior to 1974, before the establishment of an effective monitoring structure for affirmative action. Indeed, when the powers of the EEOC and OFCC are greatest, the wage effects for young blacks are somewhat perverse. Using EEO-1 reports we find a major shift in black employment toward firms most vulnerable to the monitoring and potential sanctions of the affirmative action programs. As with wages, the shift in minority employment came prior to the expansion of the powers and budgets of the EEOC and OFCC. We are surprised by the timing of these changes and are concerned about the quality of the EEO-1 reports.

Strikes seem to be a Pareto-inefficient outcome of bargaining between a union and a firm; however, this paper shows that strikes can be the outcome of rational behavior by both agents. If the firm has more information than the union concerning the state of nature, the union can use strikes as a way of gaining information. The paper uses an asymmetric information model where the firm has information about the state (i.e., profitability) that the union does not know. The schedule of wage offers by the union then depends on the probability that a given state will occur.

It is a well-known fact that the extent of unionization is less in states with right-to-work (RTW) laws. A framework is developed for determining whether RTW laws actually cause a decrease in the extent of unionization or whether they simply mirror preexisting tastes of workers against unions. A set of empirical tests is proposed that can distinguish between these explanations based on differences between RTW and non-RTW states in the demand for union representation, the supply of union jobs relative to that demand, and the observed union/nonunion wage differential. These tests are implemented using disaggregated data from the Quality of Employment Survey and the Current Population Survey, and a pattern is found that is consistent with the hypothesis that RTW laws simply mirror preexisting preferences against union representation.

This paper examines the role of economic factors in determining retirement behavior using a unique new data archive on more than 8,700 workers covered by 10 different pension plans. We build on our earlier work by estimating several different retirement models including both linear and discrete choice formulations. This framework provides new insights into how and why retirement ages differ across firms. We conclude that older workers' income opportunities differ depending on their pension rules, which in turn have a powerful influence on their retirement patterns. In addition, the models indicate that older workers' tastes for income are not uniform, either across individuals or across firms. Finally, we show that retirement age differences are due in part to differences in worker preferences and in part to differences in income opportunities. There appears to be some evidence of worker sorting across pension plans.

Who should pay the resource costs of higher education? This paper investigates a simple model of the general equilibrium of the labor market with three skill levels. Those in the population with the lower level of intelligence and/or sophistication can only become low-skilled workers, but the brighter segment of the population can become either high- or medium-skilled workers. Given the tax structure, the welfare of each group is maximized by a unique subsidy rate on the cost of training high-skilled workers. Under several circumstances, the lower IQ group wants a higher subsidy rate than will the group that benefits directly from the training.

This paper demonstrates that if both firms and workers search the other side of the market for job matches the equilibrium rate of unemployment is likely to be too high. Both sides ignore a positive externality of their search: when they establish a job match they remove from the market a job searcher, so they save society his search costs. I show that there is no feasible wage rate that can internalize this externality under fairly weak restrictions on the technology of search.

In labor market equilibrium, sectoral differences in "natural" rates of unemployment generate a conformable distribution of wage differentials that compensate workers for bearing unemployment risk. This paper offers new empirical evidence on the determinants of this equilibrium. The analysis consists of two stages. First, I estimate a three-state model of employment and unemployment that identifies the determinants of individuals' rates of entering and leaving unemployment spells. Sectoral, demographic, and policy-induced differences in unemployment probabilities evolve naturally from this framework. Second, I estimate the impact of these differences on the distribution of wages. An important finding is the powerful impact of the unemployment insurance (UK) system both on unemployment and on equalizing wage differences. The evidence is strong that the availability of UK increases unemployment, while simultaneously reducing the magnitude of compensating wage differentials. Most of the effect of UK on unemployment is due to an increased probability of entering spells of unemployment, mainly temporary layoffs, though the duration of spells is also affected. Neglect of the role of UK as a substitute for wages partially accounts for the small compensating differentials estimated in previous research. In the absence of UK, each point of anticipated unemployment raises an individual's wage by about 2.5%.

In this paper the standard cross-sectional static model of labor supply is modified to make the wage endogenous, and a joint wage-hours model is estimated. The econometric technique addresses the non-linearity of the budget constraint by approximating the constraint by a series of discrete points. The results show that the budget constraint is indeed nonlinear, that hours affect the wage quadratically, that true wage elasticities are lower as a result, and that the model fits the hours distribution much better than the standard Tobit model.

Excessive layoffs in bad times and excessive quits in good times both stem from the same weakness in practical employment arrangements: the specific nature of worker-firm relations creates a situation of bilateral monopoly. Institutions which have arisen to avert the associated inefficiency cannot mimic the separation decisions of a perfect-information, first-best allocation rule. Simple employment rules based on predetermined or indexed wages are in many cases the most desirable among the class of feasible employment arrangements. More complicated contracts which seem to deal more effectively with turn-over issues either are infeasible because of informational requirements or create adverse incentives on some other dimension.

Contests are situations in which an individual's reward depends on his performance relative to others. Students are graded on a curve; the candidate with the most votes gets the political office; the underling who performs best is promoted to the executive position. Contests are useful in dealing with indivisible rewards, reducing monitoring costs, and minimizing risks from common uncertainties. They are employed to sort potential participants and, once they have entered, to induce appropriate effort from them. With monitoring precision and prize spreads as potential choice variables, optimal contest structures are derived for fair and unfair contests among equal and unequal participants. The converse problems of climbing-low-ability individuals enter the contest designed for high-ability candidates-and slumming are shown to be manageable.