Knowledge that Transforms

This paper examines the causes of the decline in black male teenage employment from 1950 to 1970. During this period, the employment-to-population ratio of black youth (age 16-19) declined from 46.8 percent to 27 percent. The white teenage employment ratio, in contrast, remained constant. The primary source of the decline is traced to the virtual demise of the market for low-skilled agricultural labor. All of the black teenage employment decline during this period occurs in the South. The employment ratio among those living outside the South actually increases. Within the South, the entire decline in employment is accounted for by a reduction in agricultural employment. This study argues that technological progress is the principal cause of the agricultural employment decline among black youths. Spurred by the rapid advance and adoption of labor-saving technology, southern agricultural production was transformed from a relatively labor intensive process to a highly capital intensive one. As a result, the demand for low-skilled agricultural labor plummeted. By 1970, a formerly important source of black youth employment virtually ceased to exist. Black teenagers who were displaced from agricultural work were not absorbed by the nonagricultural sector. An additional finding of this paper is that the federal minimum wage acted as an important barrier to nonagricultural employment in the South. The raw data reveal significant reductions in black teenage employment growth in precisely those industries where coverage of the minimum wage was increased : retail trade, construct ion, and the service sector. Regression estimates indicate a quantitatively large minimum wage effect.

The theory of the firm is a monumental achievement of neoclassical economics. Without this engine of analysis, it would be difficult, if not impossible, to comprehend the pricing, output, and input decisions of firms as they respond to routine events like the imposition of a tax, the opening of a new market, a technical innovation, and a sudden shortage of a key factor of production. It is remarkable that this theory has been successful in explaining behavior that to a large extent is motivated by both profit and risk when the theory itself has only explicitly considered the profit motive. This is not the place to dwell on the evolution of economic theory; it suffices to note that there are many important economic phenomena that the purely deterministic theory does not explain.' The purpose of this note is to elucidate the way in which risk influences the output decisions of riskaverse entrepreneurs and the number of riskneutral firms in a competitive industry. In both cases, the predicted behavior differs from that of the deterministic theory. In our study we shall restrict attention to the behavior of firms in a single period 2 setting. The firm has no control over price and, because storage makes no sense, simply sells all of its output at the going price. The source of uncertainty is the requirement that the firm produce before price is known, where the price is a random variable with a known probability distribution. The firm chooses output to maximize its expected utility. It is well-known that, in the presence of uncertainty, the optimal output of the risk-averse firm is less than that of the riskneutral firm; moreover, increases in risk aversion, in the sense of Arrow and John Pratt, lead to further diminutions in output. On the other hand, for a fixed degree of risk aversion, the change in output induced by a mean-preserving increase in risk depends on the shape of the cost curve as well as the sign of the third derivative of the utility function u and the sign of the second derivative of qu'(q). Next, competitive industry behavior under uncertainty is analyzed. In order to isolate the effect of uncertainty, firms are assumed to be risk neutral. We show that both the optimal number of firms in the industry and excess capacity increase as industry output becomes riskier. Results like this are important for probabilistic economics, for it would be unfortunate if the vitality of the stochastic theory of the firm relied solely on the controversial assumption of risk aversion.3

The purpose of this paper is to provide a simple framework in which to analyze the impact of a perfectly anticipated increase in the future selling price of houses on current house purchase decisions in the presence of capital market imperfections. Since, implicitly, it is the after-tax selling price of houses that is considered, this analysis is equivalent to one of a decrease in the capital gains tax on houses at retirement. In this paper assumptions about homeownership, mortgage markets, and liquidity constraints are added to a life cycle model of asset accumulation, taking the date of house purchase as exogenous. It is shown that the impact of an exogenous increase in the expected future price of houses depends on current mortgage market conditions, the future price of houses relative to the current price, and the ratio of liquid assets to future labor income, as well as preferences. Also, a simple model of a market for houses is presented to analyze the impact of an increase in the expected future price of houses on the current market-clearing price, the mortgage market, and the redistribution of the housing stock to consumers according to their wealth and liquidity characteristics. In the life cycle model as exposited by Franco Modigliani and Robert Brumberg, an increase in consumption in one period requires a decrease in consumption in another period. When owner-occupied housing is added to the model the tradeoff between consumption in different periods becomes more complex. Purchasing a larger house entails an increase in the consumption of housing services and an increase in assets held in the form of a house, but a decrease in either nonhousing consumption or the holdings of an alternative asset, or both. The response of the consumer to price or income changes is also limited by financial market constraints. Capital market imperfections have been introduced into the life cycle model by a number of authors (see, for example, Lester Thurow, Thayer Watkins, Thomas Russell, Clark Wiseman, and Christopher Pissarides). And, several authors have explicitly considered the impact of capital market imperfections on the house purchase decision (see William Dolde and James Tobin, William Poole, Donald Lessard and Modigliani, and Dolde). Most similar to this study, although developed independently, Roland Artle and P. Varaiya's paper includes the theoretical incorporation of the house-purchase decision into a life cycle model. They consider the problem of choosing the date of house purchase while treating the level of consumption of housing services as exogenous. In the life cycle model in this paper, the consumer chooses the size of house to purchase at an exogenous date. To use the life cycle model in the framework of a market of houses, it is assumed that the stock of houses and the prices of all other goods, including the rate of return on the alternative asset, are fixed. All consumers are identical, except perhaps for initial wealth. As noted by Irving Fisher (p. 325), in a world of perfect foresight and perfect markets the rates of return on all assets are equated in equilibrium. If markets are perfect, with the stock of houses and other prices fixed, the present price of houses will rise by an amount equal to the present value of an exogenous increase in a future price of houses. When mortgage market imperfections are introduced, this relationship no longer holds, and a future price increase may result in a redistribution of the current stock *Assistant professor of economics, University of Michigan. This paper is an extension of a chapter of my doctoral thesis at the University of Wisconsin-Madison. The helpful comments of Donald D. Hester, Charles A. Wilson, Hal Varian, and George Borts are gratefully acknowledged.