Knowledge that Transforms

The author would like to acknowledge support for prior work on this topic from the U.S. Department of Health and Human Services, and helpful comments from three anonymous referees, Rebecca Blank, Howard Chernick, John Fitzgerald, Irwin Garfinkel, Peter Gottschalk, Edward Gramlich, David Greenberg, Judith Gueron, James Heckman, V. Joseph Hotz, Robert Hutchens, Michael Keane, Frank Levy, Larry Mead, Michael Murray, Robert Plotnick, Anuradha Rangarajan, Philip Robins, Howard Rolston, Jeffrey Smith, and Daniel Weinberg. All opinions and errors are those of the author alone.

The article studies the U.S. earning trends since 1950 and gives explanations for the inequality in earnings. Both slow growth and increased inequality appear in the comparison of adult male earnings distributions for 1979 and 1987. Trends in women's earnings paint a somewhat brighter picture. Women, like men, have experienced slow hourly wage growth and growing wage inequality. But in terms of annual earnings, both factors have been offset by changes in hours worked. The result is a significant increase in the proportion of women who earn $20,000 a year or more. A combination of shifts in supply and shifts in demand is necessary to explain the observed trends between these groups. A critical aspect of supply shifts was the entry into the labor market of the well-educated baby boom generation. Demand shifts can be characterized as a long-term trend toward increasing relative demand for highly skilled workers. The growth in within group earnings inequality has many potential explanations, but it is not well understood and contains opportunities for future research.

THIS ARTICLE critically reviews the Handbook of Industrial Organization (henceforward the Handbook), edited by Richard Schmalensee and Robert Willig. These two volumes are the tenth installment in the North-Holland Handbooks in Economics series, under the general editorship of Kenneth Arrow and Michael Intriligator. Like its predecessors, this Handbook contains a number of survey papers (in this instance, 26) on a variety of related topics. As such, they afford both authors and readers an opportunity to determine which directions research in the field has taken, what (if any) real advances have been made, and what questions are still unanswered. Consequently, this review also describes and appraises the current state of Industrial Organization. Research in Industrial Organization has undergone a dramatic change in the last 20 years. Neoclassical decision-theoretic analysis and competitive general equilibrium theory have been supplanted almost completely by noncooperative game theory. This change was not merely the adoption of the tools of another field.

WHILE THE U. S. PRODUCTIVITY slowdown wasn't first discovered by economists in 1980, it certainly began to get big play in that year. The American Economic Association devoted a session to the current retardation in U.S. productivity and the first in a series of major articles on the slowdown appeared in this journal. The latter was a review by Richard Stone (1980) of Edward Denison's Accounting for Slower Economic Growth: The United States in the 1970s (1979). Denison documented a substantial drop in the growth of labor productivity between 1948-73 and 197376, showing that the lion's share of that slowdown could be attributed to what had come to be known as the residual, or to what others have called total factor productivity growth. Stone's review of Denison was followed by contributions by Richard Nelson (1981), Roger D. Norton (1986), and Angus Maddison (1987). The citations to literature on the slowdown had ballooned from dozens to hundreds by the appearance of Maddison's article, and it had become everyday fare in our morning newspapers. In the midst of this surge of concern with the U.S. productivity slowdown, William Baumol was asked by the president of the Committee for Economic Development to prepare a statement on productivity policy for the United States. With disarming modesty, Baumol reports the CED was looking for someone whose ignorance of the subject ensured that the statement would not merely recapitulate the accepted shibboleths (p. ix). Baumol accepted the challenge in 1983 and with the appearance of Productivity and American Leadership seven years later he and his collaborators (Sue Anne Batey Blackman and Edward N. Wolff) have produced at least four books and nine articles. A productive collaboration indeed. Why another publication on the slowdown? In 1979, Denison regarded the slowdown as a mystery, and Stone concluded his review with a wistful sigh-If Denison is stumped who can expect to do better? (Stone 1980, p. 1539). A decade later, Baumol, Blackman, and Wolff (hereafter BBW) have shown that we can do a lot better. The book has four important virtues. First, it reveals an appreciation for history. If there ever was a topic for which an understanding of the long run mattered, productivity performance is surely it. United States experience with the productivity slowdown since the 1960s cannot be adequately understood without placing that experience in the perspective of a century of productivity growth, nor can it be * William J. Baumol, Sue Anne Batey Blackman, and Edward N. Wolff. Productivity and American Leadership: The Long View. Cambridge and London: The MIT Press, 1989. Pp. x, 395. $29.95. ISBN 0-262-02293-1.

G REAT WORKS often do not immediately get the attention they deserve. David Hume's Treatise of Human Nature fell, in his own words, dead born from the press.' John Stuart Mill's Subjection of Women was received coolly (it was the only book of Mill on which his publisher lost money).2 Bertrand Russell has recorded his disappointment at the reception that Principia Mathematica got: I used to know of only six people who had read the later parts of the book. Three of these were Poles, subsequently (I believe) liquidated by Hitler.3 remaining three readers apparently got back to their old lazy ways soon enough: The other three were Texans, subsequently successfully assimilated-a result as bad as being liquidated so far as the effect on the deserted Principia Mathematica

This survey outlines the evolution of thought leading to the rrecent delopments in the study of business cycles.The subject is almost coextensive with short-term macrodynamics and has a large interface withmeconomics of growth, money, inflation, and expectations.The coverage is therefore both very extensive , and selective. The paper first summarizes the "stylized facts" that ought to be explained by the theory.This part discusses the varying dimensions of business cycles; their timing, amplitude, and diffusion features; some international aspects; and recent changes. The next part is a review of the literature on "self-sustaining" cycles. It notes some of the older theories and proceeds to more recent models driven by changes in investment, credit, and price-cost-profit relations. These models are mainly endogenous and deterministic.Exogenous factors and stochastic elements gain importance in the part on the modern theories of cyclical response to monetary and real disturbances.The early monetarist interpretations of the cycle are followed by the newer equilibrium models with price misperceptions and intertemporal substitution of labor. Monetary shocks continue to be used but the emphasis shifts from nominal demand changes and lagged price adjustments to informational lags and supply reactions. Various problems arise, revealed by intensive testing and criticisms.This prompts new attempts to explain the persistence of'cyclical movements and the roles of uncertainty and financial instability, real shocks, and gradual price adjustments. One conclusion is that business cycle research will profit most from (a)the updating of findings from the historical and statistical studies, and (b)using the results to eliminate inconsistencies with the evidence and to move toward a realistic synthesis of the surviving elements of the extant theories.