Knowledge that Transforms

In an environment in which effort is private information to the worker, agreements between a risk-neutral principal and a risk-averse agent are likely to be risk-sharing and information-revealing mechanisms. It is shown that principal-agent contracts have significant implications for both compensation and employment rules in a simple work-sharing model. In general, such contracts involve incomplete income insurance and involuntary or excessive underemployment. This supports the view that models of worker-specific information, particularly with moral hazard, provide a natural explanation of underemployment.

Unions are introduced into a general equilibrium model of firm formation. I find, under reasonable conditions, that large firms are more likely to be unionized, and that unionized firms are more productive and "better managed" than nonunion firms of the same size. As well, unions reduce economic efficiency by distorting the "occupation choice" decision between managing a firm and working in one. Perhaps surprisingly, this distortion persists even when individual union contracts set both wages and employment in a fully efficient manner but can disappear when the mechanism that allocates property rights to union jobs is changed in certain ways.

This article develops a framework for analyzing the impact of taxes and transfers on the length of time a person waits to accept a job while receiving transfer payments. It considers the impact of changes in the parameters of a generic tax-transfer system characterized by a guarantee and a tax rate on the costs and benefits of search. The analytical results indicate that increases in guarantees need not increase duration of unemployment-the results for unemployment insurance are a special case of the more general formulation developed in this article. In fact, increases in guarantees and increases in tax rates may shorten the duration of unemployment while decreasing the labor supply of transfer recipients.

Economies are studied where labor contracts, even without changing real allocations, can make equilibria appear different. One basic example is that wage observations generated by long-term employment contracts are biased measures of theoretical market wages. This idea is analyzed in a dynamic, stochastic, economic model, including both overlapping generations of finite-lived workers and infinite-horizon employers, so that the implications for business cycle, life cycle, and cross-sectional phenomena can be explicitly addressed. Understanding contracts in this way potentially allows us to reconcile several ostensibly anomalous aspects of the data with equilibrium theory.

This article formulates a general equilibrium model for analyzing the youth labor market. At the heart of the model is an interplay between a labor force with heterogeneous ability levels and a minimum wage restriction. Ability affects performance on skilled jobs and, to a lesser extent, on unskilled jobs. Workers are less productive as youths than as adults. The model is applied to rationalize several results from available studies and to analyze the effects of three representative policies: a youth subminimum wage, subsidies paid to firms that hire youths, and subsidies that offset the costs of on-the-job training.

Life-cycle models of labor supply predict the presence of an unobserved individual effect in the labor-supply equation that is correlated with observed explanatory variables, leading to an omitted variables bias in the cross section. I examine the sensitivity of parameter estimates to the presence of these effects, using fixed- and random-effect Tobit models. The estimated effects of children are too large in the cross section. The estimated intertemporal substitution elasticity ranges from 1.1 to 1.7. The results are similar for fixed- and random-effects models and for models using different specifications of the dependent variable.

This paper explores the differential nature of labor-supply decisions regarding weeks of work per year and hours of work per week among female household heads. A model of labor supply that separates the weeks/hours decision is presented and estimated, allowing for simultaneity in the weeks/hours decision, as well as for the presence of either fixed costs or weeks and hours constraints. The results indicate that not only are weeks and hours decisions separate from the labormarket participation decision, but they are also quite different from each other, although they appear to be simultaneously determined.

This article develops and tests an implication of risk-shifting in labor market implicit contracts. A 2-period implicit contract model is presented. The optimal contract, in the face of bankruptcy constraints, calls for a real wage that responds asymmetrically to permanent and temporary shocks to the firm's revenue function. In particular, the real wage responds more to a permanent shock than to a temporary shock of the same size. This implication is tested on 12 4-digit Standard Industrial Classification (SIC) code industries. Eleven of the 12 industries sampled show evidence that supports the asymmetric wage response implication.

Previous studies of optimal unemployment insurance (UI) design ignore the impact of UI on human capital investment decisions. We show that fully experience-rated UI increases investment in human capital when future employment opportunities are not known with certainty. In the presence of wage taxation, the optimal level of UI trades off full insurance and the impact, through human capital, of UI on the wage tax base. This trade-off, in turn, depends on the extent to which human capital accumulation reallocates labor between market and untaxed nonmarket activities. Taxation of UI benefits increases the optimal level of UI provision.

Recent developments in rationing theory are used to examine the differences between the effects of in-kind and cash transfers on labor supply. It is not possible to tell a priori which type of transfer will cause the greater reduction in hours of work; the answer depends on the extent to which in-kind transfers distort consumption choices and on the relationship between the transferred commodities and leisure. Hicks-Allen complements can cause greater reductions in labor supply than equally generous cash transfers, while strong Hicks-Allen substitutes can induce increases in market work.