Knowledge that Transforms

OVER the past decade, the post-war United States position in favor of free trade has been strongly attacked by those who have invested in and are employed in industries facing significant competition from imports. Since factors of production are temporarily tied to a particular industry, all factors in contracting industries experience economic losses of a short-run nature. This paper considers to what extent these short-term losses alter the welfare evaluation of free trade policies. A second intent, based on the analytical framework developed to resolve the first point, is to determine when a tariff reduction may be preferable to tariff removal and how such tariff reductions may be effectively carried out over time. In the literature of trade policy, it has been shown that in a two-good general equilibrium model under the assumption that factors of production are immobile, the gains from free trade will be reduced but remain positive if no distortions exist (Haberler, 1950; Johnson, 1965). More recently, studies have focused on the short-run distributional effects of changing international prices. Capital has been postulated to be immobile between the two industries and relative factor prices perfectly flexible (Mayer, 1974; Mussa, 1974). In this paper the analysis is based upon the situation where factor-price rigidities exist in addition to factor immobility. Under these circumstances changes in international prices result in unemployment. The economy is moved inside its long-run production possibilities frontier, and any welfare assessment of a free trade policy must allow for the second-best effect of this factor-market distortion. Because the short-run effect may be negative, the question arises whether the long-run welfare gain for a small country offsets this loss.' This study treats imports and domestic competing goods as imperfect substitutes, and allows for the effects of short-run output price rigidities. Limitations of the analysis are that only unilateral tariff reductions are dealt with empirically, and terms-of-trade effects are ignored.2 The model is used to evaluate the welfare cost of current tariff barriers for five disaggregated industries: industrial chemicals, iron and steel, machine tools, electrical machinery, and motor vehicles. One issue that falls out of this approach is whether an intermediate position between free trade and the current level of restrictions is preferable, given the existence of factor-market distortions. It is shown empirically that complete tariff removal generally will not be optimal in terms of economic efficiency and that phased reductions of tariffs over time will be preferable to a single tariff cut. Section I is concerned with the determination of benefits and social costs from tariff removal. Since United States trade policy often is determined in the context of unilateral policy changes affecting a single disaggregated industry, the empirical calculations presented in

Albert A. Hirsch, Saul H. Hymans, Harold T. Shapiro, Econometric Review of Alternative Fiscal and Monetary Policies, 1971-75, The Review of Economics and Statistics, Vol. 60, No. 3 (Aug., 1978), pp. 334-345

Fertility differentials are analyzed by using two stage least squares and data from developing countries for the period 1968-70. Results confirmed that adult literacy rates levels of childrens education and female labor force participation rates were negatively related to fertility. However life expectancy at birth (up to approximately 50 years) was positively related to fertility and only thereafter were life expectancy at birth and fertility negatively related. Although a negative relationship was found between family planning programs and fertility this result must be interpreted cautiously because of the absence in most countries included in the sample of family planning programs in 1968. In general fertility was relatively insensitive to socioeconomic conditions during the early stages of economic development. Rising life expectancy at birth and falling female labor force participation tended to increase fertility thus partially offsetting the negative effect on fertility of increases in adult literacy rates and school enrollment rates and decreases in the importance of agricultural employment. Fertility only becomes sensitive to socieconomic conditions in the later stages of economic development. In reaching these results the author used an approximation of gross reproduction rate a fertility measure that is independent of population-age distribution and estimated relationships in the context of a simultaneous equations model thereby eliminating some of the simultaneous equations bias that is inherent in ordinary least squares estimates.

as regards the relative strengths of the coefficients of the exporting versus importing countries. The results of equation (2), while interesting, may be weak because of the crude nature of the restriction data and the possible inappropriate grouping of the restriction data according to mode of operation.7 Equation (1) is quite credible in the sense that a count of the existence of up to 12 possible restrictive practices could give an indication of a country's tendency to contract its traded goods sector by various policy measures. However, it is not surprising that an attempt to disaggregate this type of data into three separate variables in equation (2) was less successful. The regression results indicate that country practices restricting exchange rates, trade, and payments do affect trade flows among OECD countries. The fact that relatively significant results were obtained with very crude data suggests that bilateral trade flow models should include variables measuring these practices. Perhaps future reas regards the relative strengths of the coefficients of the exporting versus importing countries. The results searchers will attempt to create better quantitative measures of these types of restriction practices.

T HIS is a study of interrelated demand for capital and labor. In a purely static model capital and labor demand functions will usually contain common production function parameters and prices and thus may be viewed as a system of interrelated equations. There are two additional reasons why the interrelated characteristic may be important in a dynamic disequilibrium model. First, if one input is less than a desired or long-run equilibrium value, demand for other inputs may be dependent on the shortage of the first input. Second, the actual process of adjustment may influence demand for other inputs via costs of adjustment. In this article we develop and estimate parameters of labor and capital demand functions where both the deviation of capital from a target value (KK*) and costs of adjustment influence labor demand. Nadiri and Rosen (1969) is a well-known study of interrelated factor demand arising for the first reason noted above. They develop a multivariate flexible accelerator relationship

16-17 year olds, or both, we estimate that these differentials would increase total teenage employment. amount of the increase is largely conjectural, since error variances in estimated parameters are large. For example, we estimate a two-standard-deviation upper bound for increased teenage employment of roughly 5% for a differential of 1.60-1.28 extended to the 14-15 year-old group, and an upper bound increase of 10% if the same differential is extended to all those 14-17 years old. lower bound in each case is roughly zero, so that a reduction in total teenage employment seems unlikely. An important question of differentials is the effect on employment of those groups to whom the differential is not extended. For a differential extended to 14-15 year-old workers, we estimate virtually no effect on employment of those 16-19 years old. substitution effects are nullified by scale effects. For a more broadly based 1.601.28 differential extended to those 14-17, the range of uncertainty concerning employment of those 18-19 is large, encompassing reductions and increases of 5%. REFERENCES Allen, R.G.D., Mathematical Analysis for Economists (New York: St. Martins Press, 1938). Hashimoto, Masanori, and Jacob Mincer, Employment and Effects of unpublished manuscript, National Bureau of Economic Research, April 1970. Kosters, Marvin, and Finis Welch, The Effects of Wages on the Distribution of Changes in Aggregate Employment, American Economic Review 62 (June 1972), 323-332. Mincer, Jacob, Unemployment Effects of Journal of Political Economy 84, part 2 (Aug. 1976), 87-104. Parsons, Donald, The Cost of School Time, Foregone Earnings, and Human Capital Formulation, unpublished manuscript, Ohio State University, Feb. 1973. Siskind, Frederic B., Minimum Wage Legislation in the United States: Comment, Economic Inquiry 15 (Jan. 1977), 135-138. U.S. Department of Labor, Bureau of Labor Statistics, Youth and Wages, Bulletin 1657 (1970). Welch, Finis, Minimum Wage Legislation in the United States, Economic Inquiry 12 (Sept. 1974), 285-318. Minimum Wage Legislation in the United States: Reply, Economic Inquiry 15 (Jan. 1977), 139-142.

Income distribution is a topical issue in all countries regardless of their economic and social systems or levels of development. In recent years, relationship between income distribution and process of development has come under increasing scrutiny. Parallel to this development, increasing attention has been given by economists and statisticians to empirical analysis of distribution of income. The purpose of this paper is to examine causes of annual earnings differentials among male household heads outside agriculture in Turkey for 1968.1,2 The primary data source is a survey conducted by Department of Population Studies of Hacettepe University of Turkey in 1968.3 In most of studies that deal with causes of inequality, key explanatory variables have been education and experience (Becker and Chiswick, 1966; Mincer, 1974). Others have introduced geographic location, ability, occupation, and physical capital factors in addition to human capital factors (Fishlow, 1974; Griliches and Mason, 1972). As Richard D. Morgenstern notes, however, the notion that socio-economic background is important in determining an individual's income has been played down in literature concurrent with rise in popularity of human capital explanation of earnings differences.4 Only recently, socioeconomic background factors and intergenerational transfers of inequality have been gaining their deserved importance in income distribution literature.5 The second shortcoming of single equation models of income distribution has been their lack of attention to interactions between explanatory variables. Ribich and Murphy point out that while single equation models might suffice as a reasohable equation for predicting earnings, relative importance of independent variables would be obscured by statistical tests that focused on this equation alone.6 In this paper, distribution of earnings among male heads of households is examined within frameworks of recursive and simultaneous equation models. The models developed have three endogenous variables, namely, education, occupation and earnings. The exogenous variables include availability and quality of schooling, experience, geographical location and socio-economic background factors. The causal model of income determination employed in this study is given in figure 1.

In a recent issue of this REVIEW, a note by Peter Schmidt (1976) was published that commented on a paper by Dennis Aigner and myself (1968) that appeared in the American Economic Review. Schmidt's paper is interesting and stimulating, and contributes to the understanding of the problems of estimating production functions in some respects. However, some statements made in the article seem to be based on a misunderstanding of our original paper. Therefore, a response is in order to clarify some of the points discussed in his article.