One of the oldest questions in macroeconomics concerns the correlation between the business cycle and the real wage. We provide new evidence on this question by examining the possible bias that arises when (1) workers have unobserved characteristics that affect their wages and (2) those workers who move in and out of the work force over the cycle have unobserved characteristics systematically different from those who stay in. We distinguish as well between the bias that arises from those unobserved characteristics that are permanent components of wages and those that are transitory. We utilize micro, panel data, and maximum likelihood selectivity bias techniques to estimate both the extent of this selectivity-cum-aggregation bias and the true effect of the cycle on real wages. We find that selectivity bias is present: workers are more likely to lose employment during a recession if they have high wages, especially if they have a high transitory wage component. Overall, the effect of selectivity is to bias ordinary least squares estimates based only on workers in a procyclical direction. Our results show that the true effect of the cycle on wages is still procyclical but much smaller in magnitude than previous estimates using micro data have suggested.

This paper develops generalized method‐of‐moments tests for the rationality of earnings per share forecasts made by individual stock analysts. We fail to reject the hypothesis of rationality as long as we take into account two complications: (1) the correlation in a given period of analysts' forecast errors in predicting earnings for firms in the same industry and (2) discretionary asset write‐downs, which affect earnings but are intentionally ignored by analysts when they make earnings forecasts. Our results challenge earlier work by De Bondt and Thaler and by Abarbanell and Bernard that found irrationality in analysts' forecasts.

This paper provides structural estimates of a dynamic model of schooling, work, and occupational choice decisions based on eleven years of observations on a sample of young men from the 1979 youth cohort of the National Longitudinal Surveys of Labor Market Experience (NLSY). The authors find that a suitably extended human capital investment model can in fact do an excellent job of fitting observed data on school attendance, work, occupational choices, and wages in the NLSY data on young men and also produces reasonable forecasts of future work decisions and wage patterns.

We develop a life-cycle model of labor supply and human capital formation that incorporates health shocks, health insurance, and medical treatment decisions. We use the model to study effects of health shocks on health, labor supply, earnings, and earnings inequality. We also simulate provision of public insurance to agents who lack employer-sponsored insurance. While this increases medical spending substantially, it creates positive labor supply incentives for low-skill workers while reducing costs of social insurance, Medicaid, and free care. The net program cost is modest, and all model agents are ex ante better off in a balanced budget simulation.

One of the oldest questions in macroeconomics concerns the correlation between the business cycle and the real wage. We provide new evidence on this question by examining the possible bias that arises when (1) workers have unobserved characteristics that affect their wages and (2) those workers who move in and out of the work force over the cycle have unobserved characteristics systematically different from those who stay in. We distinguish as well between the bias that arises from those unobserved characteristics that are permanent components of wages and those that are transitory. We utilize micro, panel data, and maximum likelihood selectivity bias techniques to estimate both the extent of this selectivity-cum-aggregation bias and the true effect of the cycle on real wages. We find that selectivity bias is present: workers are more likely to lose employment during a recession if they have high wages, especially if they have a high transitory wage component. Overall, the effect of selectivity is to bias ordinary least squares estimates based only on workers in a procyclical direction. Our results show that the true effect of the cycle on wages is still procyclical but much smaller in magnitude than previous estimates using micro data have suggested.

We provide evidence of advantageous selection in the Medigap insurance market and analyze its sources. Conditional on controls for Medigap prices, those with Medigap spend, on average, $4,000 less on medical care than those without. But if we condition on health, those with Medigap spend $2,000 more. The sources of this advantageous selection include income, education, longevity expectations, and financial planning horizons, as well as cognitive ability. Conditional on all these factors, those with higher expected medical expenditures are more likely to purchase Medigap. Risk preferences do not appear as a source of advantageous selection; cognitive ability is particularly important.