Knowledge that Transforms

Edward Ray, in his comment on my 1976 paper, analyzes a slightly different model than the one I presented, and thus reaches different conclusions. His principal conclusions are that: (i) given wage rigidities, a wage subsidy to producers is needed, and this subsidy is equivalent to the optimal static subsidy that ensures full employment in each sector; and (ii) given the forced equilization of wages across sectors, a subsidy to workers is needed to encourage labor transfers between sectors. Thus, Ray finds that full employment is always desirable, whereas I find that some unemployment is (usually) present along the optimum path.

The achievement of full employment or, as it is sometimes presented, the minimization of unemployment has been a major goal of public policy since the economic cataclysm of the 1930's. This goal reflects the implicit belief among policymakers that achieving full employment is the appropriate concern of a manpower policy responsive to the needs of individuals and society. This perception, along with the labor force concepts used to measure progress toward the full-employment objective, has its origin in the surroundings of the depression era and the Keynesian revolution. The events of this period, marked by mass unemployment and related economic hardship, and their conception in economic theory continue to shape contemporary economic policies and labor force concepts. What proved to be an adequate measure for one set of perceived problems may prove to be inadequate for another, necessitating a change in concepts or methods of measurement. In particular, the relevance of depression era policies and labor force concepts to the present is a question of major importance. Current surroundings have changed, with the growth of income transfer programs and multiple earner families weakening the link between unemployment and economic hardship. As the surroundings have changed, so has economic theory. Led by the resurgence of neoclassical theory and the development of neo-Marxist theories of segmentation, the perception of unemployment and its causes has changed over time. This paper traces the evolution of economic theory and events, and their impact upon labor force concepts. The relationship of current concepts of employment and unemployment to Keynesian theory and events of the depression era is described and the implications of post-Keynesian theories for these concepts explored. The argument is advanced that current labor force concepts lag behind contemporary economic theories and events. Some directions for change are suggested.

Paul Samuelson and Subramanian Swamy in their survey of index-number theory in this Review emphasized that The fundamental point about an economic quantity index, which is too little stressed by writers, Leontief and Afriat being exceptions, is that it must itself be a cardinal indicator of ordinal (p. 568). In a later article in this Review John Pencavel has endeavored to compute real wage indices in this sense. He interprets each of his indices as an of the individual's welfare (p. 93). His two series of real wages are derived from an estimated indirect Stone-Geary utility function which incorporates nonlabor income of the wage earners and an endogenous work-leisure choice. In one series the increase in real wages over the period 1934-67 was substantially less than the index of money wages deflated by the Consumer Price Index or the Bureau of Labor Statistics series of real spendable weekly earnings of production workers, whereas in the second series the increase was substantially greater than in these other series over the same period. He has also constructed an index of real nonlabor income. My contention is that none of these indices is a true quantity index, but a genuine true quantity index can be obtained from the indirect utility function by using a slightly different definition of income. Moreover, this can be done for any regular utility function. For a family of functions which includes the Stone-Geary, this index is equal to an index of deflated incomes and is the canonical dual of the true price index. For any utility function one can obtain a quantity index of real income across incomeprice situations directly and simply by taking the ratio of the indirect utility function in period t to that at the situation in a base period 0. That is,

An analysis of the effectiveness of temporary tax changes requires both a theoretical framework and its careful empirical implementation. Reflex rejection of the usefulness of temporary taxes with a vague appeal to the permanent income hypothesis is as inappropriate as blind acceptance naively based on the high correlation between consumer expenditure and current disposable income. The remainder of this paper sketches a theoretical framework for analysis with an eye towards implementation, reviews the evidence for the United States, and provides a summary. The analysis concludes that temporary taxes are useful and effective stabilization instruments, though there is no reason to favor them over tax changes of an indefinite duration. Space limitations prevent discussion of taxes other than personal income taxes. Expenditure taxes, for which intertemporal substitution effects augment income effects on current expenditure, have a greater effect per dollar of deficit.