Knowledge that Transforms

There are two competing explanations of why women workers earn less than men with equivalent education, work experience, and job tenure: the human capital explanation and the discrimination explanation. The human capital explanation argues that sex differences in human capital investment which arise from sex differences in expectations surrounding labor force participation account for the wage differential. Women workers are expected to invest less in jobspecific human capital than otherwise comparable men workers because women expect to spend less time on the job. Furthermore, even for men and women workers with equal ex post levels of job tenure and/or work experience, women have invested less in onthe-job training because their a priori expectations of job tenure and/or work experience were less than those of men who now have the same tenure and/or experience. Therefore, in this view, women workers earn less than comparable men because they have invested less in specific human capital. Women earn less because they are less productive; the sex-wage differential is economically efficient. The discrimination explanation argues that sex differences in labor market opportunities, that is, sex discrimination in the labor market, account for the sex-wage differential. In this view, women workers earn less than comparable men because they are the victims of sex discrimination in the labor market. Women do not earn less because they are less productive; the sex-wage differential is economically inefficient. While the economic implications of these two explanations of the sex-wage differential are enormously different, both explanations are consistent with empirical studies simply because both resort to nonmeasurables to explain the sex-wage differential: empirical studies cannot measure directly either discrimination or job-specific human capital. Therefore, the problem with these two competing explanations of the sex-wage differential is that neither has been empirically sorted from the other. Both explanations are consistent with data which show a wage differential by sex after controlling for education, work experience, and job tenure. Newly available data on displaced workers provide an opportunity to empirically disentangle these two competing explanations of the sex-wage differential. Displaced workers are workers who have lost their jobs either because their workplaces have closed or because they were permanently laid off due to slack demand for the outputs of their firms. Displaced workers represent a special case of worker mobility. Unlike voluntary job movers, that is, workers who have voluntarily quit their prior jobs, the job mobility of displaced workers is not the result of their own expectations that better jobs are available. A worker who voluntarily changes jobs does so because there is another job which offers higher wages (or other improvements in the conditions of employment). The worker moves precisely because his or her productivity (and wages) is higher on the subsequent job. The wage change is endogenous. Unlike workers who are fired or involuntarily laid off because their personal productivity is lower than that of other tDiscussants: Rebecca Blank, Princeton University; Elyce Rotella, Indiana University.

This paper developes a theory of the international trade pattern in risky assets by applying the law of comparative advantage to asset trade. According to this law there is a tendency for a country to import assets that have relatively high autarky prices. The Autarky price of an asset is high if the autarky real interest rate is low, or if the asset's autarky risk measure (the product of the risk premium and the asset price) is low. It is examined how autarky interest rates and risk measures are affected by international differences in (i) stochastic properties of output/endowments, (ii) the rate of time preference, (iii) the degree of risk aversion, and (iv) subjective beliefs, and how such differences predict overall capital account deficits or surpluses as well as the composition of the capital account into trade in arbitrary risky assets and the special cases of sure indexed bonds, stocks (claims to output), and Arrow-Debreu securities.

The essence of the regime of unmanaged floating that prevailed among the major currencies from March 1973 until the Plaza Agreement in 1985 was that the exchange rate was treated as a residual in the process of macroeconomic policy determination. Admittedly there were occasions-such as October 1976 in the case of the pound sterling and October 1978 in the cases of both the U.S. dollar and the Swiss franc-when particular countries became so concerned with a misalignment of their currency that they were forced to abandon benign (or malign) neglect, but such incidents were episodic. Views about a proper or desirable level of the exchange rate played no systematic role in policy formulation. Section I explains why I judge the performance of unmanaged floating to have been unsatisfactory. Section II lists the real social benefits that exchange rate flexibility can afford, which should be preserved by any reformed system. Section III describes the target zone proposal and explains why it would preserve the real benefits of flexibility while overcoming the weaknesses of unmanaged floating. Section IV sketches a possible set of comprehensive principles for policy coordination of which target zones would be one natural element.

In this Review (1983), Mark McBride reconsiders the Federal Trade Commission's (FTC) enforcement policy toward vertical mergers between cement and ready-mix concrete firms. In response to a significant increase in acquisitions of ready-mix concrete firms by cement manufacturers during the 1960's, the FTC undertook a series of legal actions to block or dissolve the mergers. The actions of the FTC constituted one of the most intensive efforts undertaken to date to challenge vertical mergers in a single industry.' McBride (p. 1012) notes that the actions of the FTC provoked considerable debate concerning the motivation for the mergers both in the industry and in academe. A significant number of articles were published advancing various reasons for the mergers. In addition to the FTC's main contention that the mergers were motivated by a desire for captive markets, it has been suggested that there were economies of integration or that the mergers were the outcome of an erroneous view of the potential benefits to foreclosure held by executives in the beleaguered cement industry.2 McBride's 1983 paper offers another explanation for the mergers. His argument is that vertical integration was undertaken to avoid rigid oligopolistic pricing in the cement industry.3 The empirical results presented by McBride suggest that vertical integration was a significant factor in the decline of cement prices in the 1960's. The purpose of this comment is to point out some of the problems with McBride's analysis. In particular, we show that the experimental design of his testing equation is faulty and does not offer a test of his hypothesis. As a result, McBride's analysis does not provide convincing evidence on whether cement firms vertically integrated to avoid rigid oligopolistic pricing, or if cement firms were merely reacting to prices that had already begun to decline. Our intent, however, is not to challenge McBride's contention that vertical integration can provide lower prices to consumers. Rather, we would argue that the evidence presented at the FTC hearings involving cement and ready-mix concrete firms as well as McBride's and others' analyses illustrate the problems in discerning the motives for mergers.4

It is by now well known that the sort of difference equations that characterize the equilibrium conditions of an infinite horizon competitive economy may have solutions in which the endogenous variables fluctuate in response to "sunspot" variables, that is, to random events that in fact have nothing to do with economic "fundamentals," and so do not directly affect the equilibrium conditions. It is possible to view such "sunspot equilibria" as a representation of an actual phenomenon economic fluctuations not caused by exogenous shocks to fundamentals, but rather by revisions of agents' expectations in response to some event, which revised expectations become self-fulfilling. Early discussions of such solutions sometimes suggested that a more rigorous derivation of the requirements for equilibrium might yield additional restrictions that would eliminate the sunspot solutions from the set of true equilibria. The demonstration by Karl Shell (1977), David Cass (1981), and Costas Azariadis (1981) that sunspot equilibria can exist in a rigorously formulated intertemporal equilibrium model, namely the overlapping generations model of Samuelson, has shown that this is not always the case. Nevertheless, many economists remain skeptical about the reasonableness of the sunspot hypothesis as a possible explanation of actual economic fluctuations, and for quite general reasons, independent of judgments about the empirical plausibility of any particular models. I discuss here three such general reasons for skepticism.

The market for ski runs or amusement rides often features admission tickets with no explicit price per ride. Therefore, the equilibrium i nvolves queues, which are systematically longer during peak periods s uch as weekends. Moreover, the prices of admission tickets are much l ess responsive than the length of queues to variations in demand, eve n when these variations are predictable. Despite the queues and stick y prices, the authors show that the outcomes are nearly efficient und er plausible conditions. They then show that similar results obtain f or some familiar congestion problems and for profit-sharing schemes i n the labor market.