Knowledge that Transforms

T HE micro-economic foundation for most analyses of price and wage decisions is based on the optimizing behavior of familiar objective functions; employers maximizing profit and workers optimizing utility. The functions typically contain variables that measure opportunity cost (the unemployment rate), real income, and price-deflated wages. But neither objective function contains any variable that measures the situation of other actors in the economic system. Behavior in the real world, however, frequently depends on relative wages, profit margins, and so forth. There is a body of literature on the relationship between relative wages and the macro-economic variables of inflation and unemployment. Wachter (1970), finds that low wage workers tend to get relatively larger wage increases in periods of low unemployment, and thus, the interindustry spread among manufacturing wage-rates diminishes with low unemployment and increases with inflation. Wachter deals with the influence of the macro-economic variables on the relative wage structure. number of studies (1962, 1967, 1968, 1969) have been directed to the effect of relative wages on the general wage or price level.1 It is the latter subject that is the primary focus of this paper. Our micro-economic hypothesis is that wage and price behavior is influenced by both general and relative factors. Therefore, we added a measure of the relative wage structure to the typical Phillips curve relationship. This formulation will reflect the idea that under a given set of overall demand conditions, an individual will attempt to obtain a larger wage increase if he feels relatively underpaid. Our second hypothesis is that rapid inflation is unanticipated and leads to the distortions in the relative wage structure. These two hypotheses lead to the following dynamics. given Phillips curve exists at any point in time. If the economy operates at a point of low unemployment and high inflation rates, then distortions are created which move the Phillips curve to the northeast, i.e., the tradeoff is worsened. If the economy operates at a point of high unemployment and low inflation rates then the distortions tend to diminish and the trade-off improves.2 Thus, while a Phillips curve exists, there is only one point on it (i.e., one unemployment and inflation rate) that is stable; moreover, the stable point is determined by the previous historical experience which has created the distortions in the economy. This series of stable points defines a long-run trade-off that is steeper than the shortrun curve but is still less steep than the vertical line hypothesized by the accelerationists. These dynamics suggest that the absence of unanticipated inflation in the early 1960's brought about the stable wage structure of the 1963-1965 period and, with it, the favorable trade-off. The unanticipated inflation of the late sixties, however, again distorted relative wages and produced the worsened trade-off of 1969-1971. The short-term relationships will then take the general form: DP = f (1/U, DST) T ( ) Received for publication May 12, 1972. Revision accepted for publication August 17, 1972. * This work was performed as part of the CED project entitled A Reconsideration of Policies for Economic Stabilization. The authors thank Frank Schiff for his suggestions in the initiation of this work and George Perry, Charles Schultze, Arthur Okun, William Branson, Gary Fromm and the referee for their comments on preliminary drafts. The errors and omissions remain the responsibility of the authors. The views expressed are our own and not necessarily those of the officers, trustees or other members of the Committee for Economic Development. ' See Eckstein and Wilson (1962), Perry (1967, 1968) and Throop (1968). 2 One of the factors that gives an inflationary bias to our economy is the asymmetrical nature of the distortion process; that is, larger than average wage increases cause the distortion and the return to the normal structure is also achieved by larger than average increases.

IN this paper is examined some of the determinants of earnings of males in a high powered occupation, chemical engineering. Models such as those developed here can be useful to researchers interested in earnings functions, the theory of occupational choice, economic growth and returns to investments in human capital. In addition, earnings models can be help'ful to individuals who must make promotion and salary decisions. The impact of education on earnings has received a great deal of attention in social, political and economic circles. Previous studies show that persons who obtain higher levels of education earn higher incomes. However, comparing average incomes of individuals who differ only in levels of educational attainment may overstate the influence of education since schooling and non-schooling factors other than the amount of formal schooling cause differences in individual incomes. Such factors include socio-economic background, demographic characteristics, innate ability and the quality of formal education. Emphasis in this study is on the quality of education and student ability. The author was able to find only two attempts at simultaneously estimating the impact of student ability and school quality on the earnings of persons in professional occupations.' This paper is viewed as an exploratory effort in this direction. The basic earnings functions to be estimated are described in section I. The data sources, key proxy variables in the regression analysis and the regression findings are discussed in section II. Section III is a summary of the main findings.

N. J. Ireland, G. Briscoe, D. J. Smyth, Specification Bias and Short-Run Returns to Labour: Some Evidence for the United Kingdom, The Review of Economics and Statistics, Vol. 55, No. 1 (Feb., 1973), pp. 23-27

David Stern, Effects of Alternative State Aid Formulas on the Distribution of Public School Expenditures in Massachusetts, The Review of Economics and Statistics, Vol. 55, No. 1 (Feb., 1973), pp. 91-97

They indicate that purchases of durable goods (DUR) are the third most volatile component behind inventory investment (INV I) and federal government expenditures (F GOV). The correlation coefficients between GNP and its components listed in the second row of table 1 show that durable goods purchases have the third hiighest covariance with GNP after inventory investment and nonresidential investment (NRI). Theoretically, these purchases represent either changes in the size of the household portfolio through changes in the flow of savings, or a reallocation of accumulated wealth among assets in response to changes in rates of return. Empirically, some effort has been given to examining the separate influences of rates of return and income. Hamburger (1967) found that interest rates, the price of durable goods relative to other prices faced by the consumer, and disposable personal income all have a significant impact on purchases of durable goods. portance of these variables as sources of fluctuation in purchases. Motley (1970) included a user cost of real assets variable in addition to the rate on savings deposits and expected income, and found in sharp contrast to Hamburger that none of them had a significant influence on the demand for the sum of durables and housing. The analysis of fluctuations in durable good purchases presented here differs from its prede-

OINCE 1970, Chinese sources have ended a decade of silence on quantitative developments in the economy by releasing statistical information which illuminates economic trends during the 1960's as well as after the Cultural Revolution (1966-1968). The purpose of this article is to combine this new material with previously available data to construct a series of industrial gross ou;tput value for most years of the period 1952-1971.' The years for which data gaps prevent us from offering output estimates include two periods of cyclical fluctuation: the Great Leap Forward and its aftermath (1958-1962), during which output spurted and then declined; and the Cultural Revolution, which saw a pause or temporary drop in industrial output. The principal result of this study is the annual output series for 1952-1971 shown in table 1. Our findings indicate that China has experienced substantial industrial growth during the past two decades, -and suggest an upward revision Of previous Western es!timates of her industrial progress, especially for the period since 1957.