Knowledge that Transforms

This paper examines the effect of earnings taxes on wage variability over time. We estimate a "hedonic wage locus," which indicates how the market allows individuals to substitute the mean level of the wage for its variability across jobs. Information from this locus is used to estimate the parameters of individuals' indifference curves between the mean and temporal variation of hourly wages. On the basis of these utility-function parameters, we predict that lowering the rate of taxation on earnings would on average lead workers to choose jobs with slightly lower pretax mean wages and with less pretax wage variation.

A model of labor supply under uncertainty is developed, and comparative statics of current labor are carried out with respect to temporary and persistent wage change. This and a complementary analysis of measurement error suggest that individual wage growth leads to downward-biased estimates of intertemporal labor substitution. An alternative strategy, namely, the use of short-lived industry wage pulses in place of individual wage growth, is free of the above biases. Findings presented in the paper support this point of view. These results also suggest that intertemporal substitution has been undervalued as a source of cyclical changes in unemployment.

This paper examines the role of seniority in two interrelated phenomena-rising age-earnings profiles and the use of layoffs rather than wage adjustments during economic decline. The results suggest that rehiring based on a seniority-first criterion is not inconsistent with an approach that maximizes worker productivity within a heterogeneous labor force. Moreover, assessment of worker reliability based on the upward portion of the wage-productivity cum seniority locus is appropriate since it reduces subsequent turnover. Thus, an approach that combines human capital accumulation with Lazear-type deferred payments schemes explains much of long-term worker-firm attachment.

This paper attempts to reformulate in a general equilibrium framework Reder's model, which explains cyclical variations in wage differentials and their general tendencies to narrow. Specifically, I focus on the three aspects of his model: the microeconomic behavior of a firm under imperfect information about labor quality, the mechanism of the economy creating unemployment, and the interaction between wage differentials and unemployment. I also explore its implications for the macroeconomic issues on the characteristics of current unemployment and the question of why aggregate employment fluctuates.

This paper considers wage-hours contracts in the context of a jobsearch model. The response of a risk-averse worker to a wage translation of the offer distribution is examined. A robust example illustrates that some "natural" results need not hold.

We develop a simple behavioral model of intergenerational transfers, with individuals being subject to uncertainty about their children's incomes. Individuals differ with respect to innate ability and to wealth transfers they receive at birth. The distributions of total wealth, of total income, and of their components are uniquely determined from the equilibrium distribution of intergenerational transfers, for which existence and uniqueness are proven. For a particular utility function and provided that earned income follows a stable law, we show that so do all endogenous distributions. Intergenerational transfers are relatively more equally distributed than earnings, capital income, and lifetime wealth.

This paper examines the role of state dependence in explaining the retirement status of older men. Following from the work of Heckman and others, apparent and true state dependence are distinguished in a dynamic retirement model. Using a 2-year longitudinal sample of men aged 58-62 in 1969, apparent and true state dependence are controlled for through estimation of an error-components model and a retirement-transition model. The results indicate substantial evidence of state dependence.

In this paper, a firm maximizes profits over choices of wage schedules and hiring schedules in a model with (1) turnover costs, (2) a productivity function that depends on position and experience, and (3) employee utility functions that depend on monetary compensation and position. It is shown that firms may have reason to encourage employees to retire before their reservation wage is greater than their marginal product. However, if an alternative definition of marginal product is used, the usual relation holds.

I analyze job search models with random layoffs in which employment opportunities are characterized by a wage and some measure of risk. Intuition suggests that a worker ought to demand a higher wage if he is to accept a job with a higher layoff rate; but this is not true in several models analyzed in the literature. I demonstrate here that assumptions about what happens immediately after a layoff and after a quit are critical in determining the relation between reservation wages and risk. Making these assumptions explicit clarifies the reasons why different models imply quite different predictions.

This paper has two parts. The first part concentrates on modeling transitions out of unemployment using aggregated gross flow data. Models are estimated using monthly transition probabilities for March-April 1984. This analysis produces evidence consistent with negative duration dependence but sheds no light on the role of macroeconomic factors. The second part focuses on this issue. A time-series analysis of the proportion of long-term unemployment using data for four age and sex groups provides evidence that a proportionately greater increase in long-term unemployment in Australia in the 1970s has been associated with reduction in job availability and the effect of certain supply shocks.