Knowledge that Transforms

This paper describes the equilibrium wage distribution and unemployment rate when firms recruit (search for) employees. A model in which firms' inability to distinguish workers who refuse job offers increases their expected recruiting costs, is contrasted with one in which indistinguishable low-productivity workers decrease firms' expected gains from hiring. In both, work force heterogeneity enhances search uncertainty, firms recruit less intensively than otherwise, and so the equilibrium unemployment rate rises. Heterogeneity reflects searchers' incomplete knowledge of desirable trading partners' locations and will likely be a confounding influence and source of unemployment in large economies with imperfectly observable sector-specific shocks.

The formation of implicit contracts in labor markets with heterogeneous employees is studied. If layoffs occur, the firm finds it optimal to offer differing contracts to differing employees, with employees who place a higher priority on leisure accepting contracts with higher layoff probabilities. The firm can do so without violating the constraint that employees voluntarily sort themselves into these contracts. Under plausible assumptions, the contracts match the empirical observation that relatively low wage rates and high unemployment probabilities tend to be correlated. Finally, an average or composite wage rate varies over states of nature, calling into question the ability of implicit contracts models to account for the constant, representative wage rate often found in macroeconomic models.

An unsettled issue in the literature relating to the relative wage effect of unions is the appropriate treatment of union status in a wage determination model. In the context of a three-equation model determining union membership and union- and nonunion-sector wage rates, this paper presents an instrumental variables (IV) procedure for estimating the parameters of the wage equations and a test of the exogeneity of union status using the Hausman specification test. An advantage of our IV procedure in comparison to the widely used inverse Mill's ratio procedure is that our procedure is a distribution-free estimator, whereas the inverse Mill's ratio estimator hinges in the assumption that the error term of the choice equation is normally distributed. Using data for a sample of middle-aged white workers, we estimate the parameters of the union and nonunion wage equations with both procedures. On the key question of the endogeneity of union status, the Hausman test decisively rejects the null hypothesis of exogeneity. The inverse Mill's ratio procedure, in contrast, provides coefficient estimates on the selectivity terms that fail to indicate evidence of sample selectivity in either sector.

This paper examines real wage measures that include leisure and nonlabor income in consumption decisions with respect to the advantages and disadvantages of partial versus complete welfare orderings and of utility-based versus utility-free wage indices. In addition, we argue that the usefulness of a real wage measure beyond welfare comparison has been ignored. To test the robustness of utility-based indices, these real wage measures are calculated for two different utility-function specifications, the indirect addilog system and the linear expenditure system. Further comparisons are made against index bounds that are independent of the functional form for preferences.

This paper describes trends in labor force participation of Spanish women since 1900. Earnings-generating functions and logit participation models are estimated using a 1979 survey of married women. Estimates are shown to overpredict historical changes in labor force participation rates. A new specification of the participation model using average experience of married women as endogenous variable produces estimates that fit time-series data. These results suggest an increasing effect of education on participation, which confirms Schultz's hypothesis of increasing returns to various quality components of the labor force in modernizing economies.

Because the relative quantities and prices of blue- and white-collar labor have changed dramatically over time, aggregation into a single factor of production distorts estimates of the substitutability between capital and labor. This distortion is a function of growth rates of human and nonhuman capital and the rate of shift of the labor force from blue- to white-collar occupations. Conventional methods of adjusting for labor quality may actually increase the problem. Previous estimates of unity or less for the elasticity of substitution between capital and aggregate labor are shown to be consistent with a production function with a constant elasticity of substitution of about 2.5.

The evidence that unions substantially increase productivity is contradicted by the evidence that the effect of unions on employment is small. It is shown in this paper that if the union is constrained by the firm's demand function, and it is the efficiency units of labor that are in the demand function, then essentially the only way to resolve this contradiction is for unions to raise the productivity of capital (and not of labor) under conditions where the substitutability between labor and capital is very limited. But estimates of the substitutability parameter are near unity, so that one of these effects must be wrong: either unions do not substantially increase productivity or they substantially reduce employment.

This paper attempts to develop a behavioral model of female labor supply in Italy using cohort data. Our starting theoretical assumptions of perfect information, intertemporal separability, and utility maximization under a lifetime wealth constraint are relaxed in a second stage. The results suggest that the flat female participation rate profile (from both a time-series and a cross-section perspective) is presumably produced by economic incentive effects that counter-balance each other. However, with the recent rise in cohort-specific earning power, we identify a decrease in the work-disincentive effects of aging and of children under 6.