Knowledge that Transforms

Interregional differences in average wages and earnings have been observed particularly in the North and South of the United States ever since the mid-1800s. That observation has motivated several empirical attempts to determine the source of those differentials, measured both in nominal and real terms, and to explain why they have been maintained over time. The general conclusion reached by the overwhelming majority of these studies is that the labor market has not eliminated these wage differentials even in the face of substantial interregional migration. This result has at least two alternative interpretations. First, it would appear to contradict the theory of compensating differences as applied to the labor market (Thaler and Rosen, 1975), which stresses that under the assumptions of perfect information, free geographic and intersectoral labor mobility, and homogeneous consumer tastes, the nominal wage rates of workers who have similar human capital characteristics, live and work in similar environments and experience similar living costs, are driven to equality. Second, this result may only reflect an aggregation error. In other words, there may be several types of labor that are each paid different equilibrium wage rates and comprise different percentages of the workforce in each region. Even if the real wage paid to each class of workers is interregionally invariant, a situation that instead would support the theory of compensating differences, failure to distinguish accurately between labor types could produce the illusion of a wage differential. This paper considers the two alternative interpretations given above as to why interregional wage differentials might exist. Hedonic real wage equations are estimated for four regions of the United States using observations on individual household heads drawn from the 1976 Panel Study in Income Dynamics (PSID). This sample is of interest because the 1976 PSID data contain unusually detailed measures of education, work experience and occupation, as well as information on workplace and job characteristics. Thus, a more complete specification of the wage equation is permitted and the possibility of aggregation error is reduced, particularly in comparison with other interregional wage differential studies. Several of these studies, for example, have been based on aggregate data from the Census of Manufactures (Fuchs and Perlman, 1960; Gallaway, 1963; Scully, 1969; and Coelho and Ghali, 1971) which provide no direct measurements on the human capital of workers. The remainder of the discussion is organized into three sections. Section II specifies the wage equation and describes the PSID data. Section III, then, reports empirical results which are consistent with the findings, based on aggregate data, of Bellante (1979) and Coelho and Ghali (1971) in that they support the theory of compensating differences. More specifically, for full-time workers, the rewards to attributes relevant in determining real wages apparently are interregionally invariant. However, because this result conflicts with most previous research on interregional wage differentials based on aggregate data and virtually all such research based on microdata (Welch, 1966; Hanoch, 1967; Hanushek, 1973, 1981; Hirsch, 1978; and Sahling and Smith, 1983), a number of empirical comparisons are made between the present study and the approaches taken by other investigators. Conclusions and implications are drawn out in section IV.

This paper reports on another attempt to statistically uncover evidence of embodied technological change as an explanation of changes in labor productivity in the United States. In this version of the test, an interregional cross-section, time-series sample of data was used. While the hypothesis has a lot of appeal, it has proven difficult to find manifestations of embodiment in econometric tests. This study has proven to be no exception. Despite the unique data set, results were again not supportive of the hypothesis. A possible limitation of this test is that the time period studied may have been too short. REFERENCES

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IN recent years number of economists have found, or taken for granted, substantial positive interest elasticity of private saving, and several have concluded that the taxation of property income has played major role in depressing and investment and therefore economic welfare.' Thus, probably the most quoted of these studies, by Michael Boskin (1978), finds that a variety of functional forms, estimation methods and definitions of the real-after-tax rate of return invariably lead to the conclusion of substantial positive interest elasticity of private saving (p. 3). As consequence he states, current tax treatment of income from capital significantly retards capital accumulation... Rough estimates of the lost welfare $50 billion per year... . The most recent of these studies, by Lawrence Summers (1981), uses the Boskin empirical results to check corresponding findings based on assumed values of the relevant parameters in life-cycle model of aggregate behavior. Summers raises the ante in his estimate of the welfare gain associated with the elimination of capital income taxation, claiming it would exceed $150 billion annually, and noting that this conclusion rests on high positive interest elasticity of (p. 533). Summers notes that his larger interest rate effect reflects his additional allowance for wealth changes. Since these findings on interest elasticity are inconsistent with earlier studies,2 and have received widespread attention by political activists, it is important to determine how much confidence can be placed in the underlying analysis. This paper will demonstrate that there is little scientific justification for the recent literature purporting to show strong positive interest elasticity of saving, so that government tax policies predicated on such behavior rest on dubious foundation. The evidence to be presented will indicate that at the present stage of knowledge, we have no sound basis for alleging either strong positive or negative after-tax rate of return effect on saving. The only prior published examination of these recent potentially important findings of strong positive interest elasticity of private has been brief reference to the Boskin results in paper by Howrey and Hymans (1978), which was largely devoted to an analysis of what the authors call personal cash or loanable funds rather than private saving. These authors report that the significance of Boskin's results is sensitive to estimation period, inclusion of lagged unemployment, and use of alternative interest rate variables. They do not report the results of the alternative estimations, however, nor do they present consistent instrumental variable estimations, despite the fact that the latter provide Boskin with what he considers to be his best results. In this paper in striking contrast to the Boskin analysis, we show that using the best available proxies for the relevant interest rate variables (real expected after-tax rates of return, estimated both on an ex ante and on an ex post basis), the estimated interest elasticity of household and private is generally found to be either statistically insignificant or significantly negative and only rarely significantly positive, with the result depending on the specific interest rate series, period and consumption function used. Nor is this finding altered when the single equation estimation of this or consumption function is replaced by an instrumental variable, consistent estimation. As result, there does not seem to be much basis to Boskin's or Summers' strong criticism of the earlier literature which generally concluded that there was Received for publication May 14, 1982. Revision accepted for publication November 23, 1982. *University of Pennsylvania. See Boskin (1978), Gylfason (1981) and Summers (1981). 2 See the consumption function in either the Wharton model (The Wharton Mark IV Quarterly Econometric Model, Philadelphia, 1977 and updates) or the MPS Model (The Quarterly Econometric Model, Board of Governors of the Federal Reserve System, 1978 and updates).

even if it does not eliminate them completely. The primary effect of using individual expectations data rather than cross-sectional averages as a regressor is to introduce additional measurement error. Finally, the distinction between expectations and full informational efficiency is more than a semantic one. The failure to make this distinction seems to be the cause of substantial confusion in the literature. The distinction has become increasingly important with the advent of expectations macroeconomic models (see Lucas, 1973; Barro, 1976) which are driven by imperfections and asymmetries of information, yet in which each economic agent is assumed to process rationally the information he possesses. In particular, empirical tests which depend upon full informational efficiency can provide little evidence on the validity of the rational expectations hypothesis as that term has come to be used in macroeconomics.

SUPPLY behavior in international trade has been notoriously difficult to capture empirically. Indeed, so few published supply studies exist that Stern, Francis, and Schumacher's (1976) bibliographical survey of price elasticities in international trade devotes over 350 pages to demand estimates but barely 10 pages to supply estimates. In recent years, only Goldstein and Khan (1978) and Dunlevy (1980), using simultaneous-equation estimation techniques, have reported estimates of supply behavior in international trade.' Exogenous shocks to demand and supply for traded goods in general influence both quantity and price. For supply estimates, it is unclear a priori whether the response is more appropriately specified with quantity or price as the dependent variable. However, if supplying firms in an uncertain world pursue pricing strategies based on past market performance (as in Zabel (1981)), the appropriate specification is a supply-price equation. In this case, prices respond to lagged quantities, which implies that the traditional supply-quantity specification (with present and past prices as explanatory variables) cannot capture the dynamic supply behavior. In this study, we explore the hypothesis that previous attempts to estimate supply behavior have generally failed not only because of the well-known problem of simultaneity bias, but also because quantity rather than price was specified as the dependent variable. Section II presents and discusses traditional supply-quantity equations based on quarterly data for aggregate exports and imports for the United Kingdom and the United States from 1947 to 1979. Section III briefly discusses the theoretical rationale of a supply-price specification and presents estimates of supply-price equations based on the same data. Section IV evaluates the empirical evidence to determine whether a supply-quantity or supply-price formulation is more appropriate, and compares estimates of long-run price elasticities of supply based on the two approaches. A final section summarizes the conclusions.

The article focuses on the relationships between the macroeconomic performance of political administration and their popularity or vote getting ability. All of the studies that has been performed to analyze the relationships agree that votes and popularity can be explained well by models which suppose that voters judge policy makers on the basis of retrospective evaluation of past macroeconomic outcomes. While conventional popularity functions assume that voters simply punish inflation and reward output or low unemployment, voters who understand the long and short run relationships noted above would evaluate policymakers differently. Inflation in a given period is largely determined by past expectations of inflation, which cannot easily be controlled by current policy choices. The results of a study done by the author, show that data on presidential popularity are consistent with the hypothesis that voters are concerned with the future consequences of current economic policy choices and are aware of the nature of constraints imposed by economic reality.