This essay examines the role of economic research in affecting the recommendations of the National Commission of Unemployment Compensation, and the likely impacts of that Commission and economists' research findings on policy. Using a questionnaire addressed to Commission members, I find that most became quite aware of the results of research on the labor- market effects of unemployment insurance, with the degree of recognition proportional to the strength of the consensus among economists on a particular result; that the members had little awareness of the identity of particular economists who had done the research; and that, though the members claimed their recommendations were influenced importantly by research, that influence is difficult to detect in the Commission's Report. Because that Report goes against the tenor of current labor- market policy, its short-run impact will likely be small; and, because the focus of interest in policy will change over time, its long-term influence may not be great. Economic research, though, is shown to have had an immediate impact in three specific cases; and its long-run effect, by conditioning the policy discussion, has been and will likely be substantial.
The share of the federal budget devoted to the older population (defined in this paper as people who are 65 and above) has expanded substantially from approximately 2 percent in 1940 to 25 percent today. Over the next fifty years this older population is expected to more than double in size and increase from 11 percent of the population to between 20 and 26 percent. These increases will come in two distinct periods, the 1980's and the twenty years beginning in 2010. Even if no further responsibilities are assumed by the federal government, this population increase alone will put inexorable fiscal pressure on future federal budgets.
In June of 1978, the voters of California approved Proposition 13, restricting the rate of local property taxation to no more than 1 percent of 1975 market values. In November 1978, the voters of Michigan approved the Headlee Amendment, which limited state revenues from own sources to a fixed share of state personal income. In November of 1980, Massachusetts voters followed the lead of California and required all cities and towns to limit their taxation to a rate of 22 percent of full and fair cash value. Numerous hypotheses have been advanced and analyzed to explain the emergence of these new restrictions on fiscal choice. The results point to two explanations: voters feel governments are too big, providing more services than what they prefer, or governments spend too much on redistributive activities to help the poor and, through higher wages, to help public employees themselves.' The response to this perceived failure of government has been to propose-and in California, Michigan, and Massachusetts to approve-absolute limits to government expenditures. The question I wish to address here is whether a compelling economic argument can be advanced for such a policy response, politics and personalities aside. The answer, I think, is yes, but particular preconditions must apply. First, and perhaps most importantly, is the inability of citizens to directly control the provision of public services. Responsibility for providing public goods is delegated to agents of the voter, and these agents-be they bureaucrats or elected representatives-have their own objectives and an ability to act upon them to the possible disadvantage of the voters. Second, without direct control over public outputs, voters must use indirect controls through the manipulation of their appointed agents. These indirect controls take two general forms: price incentives or quantity restrictions. Third, the choice of either of these indirect controls must take place before the agent acts to provide public goods. Further, voters must often make their choice of a price or quantity control before the benefits or costs of the public service are known to them with certainty. Agents, however, can wait to observe true benefits and coststhat is why we use agents-and then provide a level of public services in response to costs, benefits, and the voters' chosen control. Voter uncertainty over benefits and costs can be interpreted as placing the voter within a constitutional perspective where a voter's precise position in society, that is, his or her benefits and costs, are unknown when choosing a control. Geoffrey Brennan and James Buchanan (ch. 1) were the first to really stress this important point. Fourth, if benefit and cost uncertainty is predominantly over the position (rather than slope) of the marginal benefit and marginal cost schedules and if the marginal benefit schedule is relatively steep (loosely, an inelastic demand curve) while the marginal cost schedule is relatively flat (an elastic supply curve), then quantity controls on agents' behavior through tax or spending limitations will be the preferred control. These four preconditions strike me as quite plausible. Rather than just an emotional reaction to a peculiar configuration of political and economic circumstances, Proposition 13, the Headlee Amendment, and Proposition 24 may be perfectly reasoned responses to a failure in the politi*Professor, University of Pennsylvania, and research associate, the National Bureau of Economic Research, Inc. 'An alternative hypothesis which has been tested and generally rejected attributes voter approval to a desire to alter the tax mix away from property taxation and towards other taxes. What approving voters really want, it seems, is increased government efficiency and less redistribution. See the recent studies by Jack Citrin; Paul Courant, Edward Gramlich, and Daniel Rubinfeld; and Helen Ladd and Julie Wilson.
A number of economists have studied the input behavior (Eugene Silberberg 1974a; Lowell Bassett and Thomas Borcherding 1 970a, b, c; C. E. Ferguson and Thomas Saving, and Paul Meyer, 1967) of a competitive industry in which entry or exit continues until industry output price moves to the minimum average cost of the marginal firm in the industry. However, this analysis requires very strong assumptions which severely restrict diversity between firms. Silberberg (1974a), for example, assumes all firms' production functions are identical except for a scale factor. Complementary to these long-run investigations, I will present a compact but thorough analysis of the short-run case in which technology and the number of firms are fixed, but industry output-price responds to aggregate supply changes of existing firms resulting from changes in factor prices. In contrast to the long-run analysis, no assumptions limiting interfirm diversity, nor any other restrictions (beyond definition of the usual neoclassical firm) are needed. Furthermore, results are obtained for industry factor demand which do not necessarily hold for individual firms when they respond to factor prices jointly with other firms in the industry. This contradicts the older methodology associated with Paul Samuelson (1947) in which factor-demand responses are derived for firms acting in isolation from each other, and their isolated responses are aggregated to obtain the industry factor response. For example, traditional theory shows input response obeys the law of demand for isolated firms. But this standard result no longer holds when a firm adjusts within a larger industry of firms whose collective output response can affect output price. Thus, the law of demand for industry factor behavior cannot be established by aggregation of isolated firm responses. However, its validity does nevertheless hold in the short run in which the number of firms in the industry is constant. Therefore, the purpose of this paper is to characterize the short-run industry level factor-demand implications, and to show how these implications relate to the traditional theory of isolated firm behavior. In addition, it is briefly shown how these short-run results also imply that the law of demand is likely to hold even in the long run, where entry and exit from the industry can occur (even for an industry of quite dissimilar firms). Given the well-established literature of the standard neoclassical firm, the main body of the paper will confine presentation to required definitions, and the statement plus interpretation of the main results. All proofs and derivations are reserved for the Appendix.
In recent years an implication of a classic paper by Wassily Leontief (1946), that is, the possible inefficiency of the profit-maximization principle within a certain bargaining framework, has attracted the attention of economists. Faced with the increased possibility of such inefficiency due to the emergence of firm-specific employment structures in large enterprises, explorations into the possible modes of efficient and/or equilibrium bargains over wage-employment constellations have become a topic of recent research by economists, most notably, Robert Hall and David Lilien (1979), and Ian McDonald and Robert Solow (1981), among others. This paper investigates a similar and related problem: supposing that the firm internalizes its own employment structure organized on the seniority principle, is the value-maximization rule for investment decision making efficient? If it is not, can we determine the proper rule for striking a balance between the time preference of the shareholder body and that of the employee body? This problem will be dealt with in the framework of the cooperative game model of the firm as developed in my 1980 paper. It will be shown that lower investment, rationing of new jobs, and higher pay rates are the consequences of a shift in the power balance within the firm in favor of the incumbent employees vis-a-vis the shareholder body. This analysis will attempt to provide an integrated micro explanation of a widely observed macro phenomena in the 1970's, that is, the negative relationship between the real wage and capital accumulation, or between the real wage and employment (see, for example, Edmond Malinvaud, Pentti Kouri, and Jeffrey Sachs). The plan of the paper is as follows. Section I describes the model of the corporate firm internalizing employment structure hierarchically ordered upon the seniority principle. Section II derives the coalitional equilibrium values of the endogenous variables of the model as a cooperative game solution. It is shown that, in the determination of the equilibrium growth rate of the firm, gains from growth of the firm accruable to employees in the form of possible promotions must be taken into account to a degree determined by the power balance between the shareholders and the incumbent employees. But under what types of institutional mechanisms can the time preference of employees be incorporated into the corporate policymaking? Section III describes three highly stylized institutional models of shareholderemployee-manager relationships with a view to their efficiency implications. The Appendix gives some technical results.
Arthur Okun wrote Equality And Efficiency: The Big Tradeoff in 1974. The book focused on the tradeoffs between tax-transfer systems and the work or savings incentives necessary for economic growth. If society wished more equality it faced a leaky bucket where the amount given to the poor was inevitably less than the amount taken from the rich. If the book had been written ten years earlier, Okun would not have focused on the big tradeoff. The conventional wisdom (circa 1964) held that any society could have both more output and a more equal distribution of output if only it invested in more education-human capital. If a more equal distribution of education was pumped into the economy, the economy would automatically pump back a more equal distribution of earnings. As educational gaps diminished between blacks and whites, or men and women, earnings gaps would similarly disappear. The War on Poverty and Great Society programs as they were conceived by Presidents Kennedy and Johnson were based upon education-not tax-transfer-strategies. With more education, higher earnings for the poor would mean higher, not lower, incomes for the rich. Strangely, Equality and Efficiency says nothing about education. The only reference to education is a brief discussion of the Yale Plan where tuition loans could be repaid based on future earnings rather than some fixed repayment schedule. Nowhere in the book does Okun justify his association of equality with the tax-transfer system on the grounds that education empirically failed to deliver what was earhler promised. Without argument he just assumes that the tax-transfer system is the only way to get a more equal distribution of income. Between the mid-1960's and the mid-1970's, I am unaware of anyone who was advancing the argument that education had empirically failed as an economic strategy for generating both growth and equality. Yet Okun was not alone in ignoring education. Without explicit discussion, education had ceased to be seen as a viable economic strategy by almost everyone. Intellectually it is interesting to speculate as to why equality, which was so closely associated with education in 1960's, came to be just as closely associated with tax-transfer systems in the 1970's without any hard analysis that would have forced the shift in strategy. Perhaps it had something to do with the public's disgust with education flowing out of the student rebellion of the late 1960's and early 1970's. More education was not a politically viable strategy for promoting equality and efficiency whatever its economic merits. But more importantly, the evidence, at least on the surface, now indicates that the educational strategy of the 1960's did fail economically. The educational attainments of the labor force continued to accelerate in the 1970's, but productivity stopped growing by the end of the decade. (See the Economic Report of the President, 1981.) There is no educational gap between men and women who work at year-round full-time jobs (both have 12.0 median years of education in 1978), but women continue to earn 58 percent of what men earn. (See Current Population Reports... 1978, No. 123, pp. 213; 218.) Education has been much more equally distributed since World War II, but the earnings of the top quintile rose from 19 times that of the bottom quintile in 1948 to 27 times that of the bottom quintile in 1980 (Current Population Reports... 1968, No. 6, p. 28; No. 123, p. 271). Why didn't education deliver the growth and rising equality that was promised? One can quickly think of many reasons why education may appear to be failing as a strategy for promoting growth and equality *Massachusetts Institute of Technology.