Knowledge that Transforms

Previous analyses of postwar black/white earnings ratios have found a more rapid rate of increase in the period since 1964 than before. The reason for this acceleration is unresolved. One view is that federal equal-employment activities have increased the relative demand for black labor. An alternative view is that rising relative earnings reflects (1) reductions in relative supply and (2) the "statistical" effect of low earners raising median earnings by withdrawing from the labor market. This study differs from previous work on the subject in two ways. First, the restrictions on the universe from which published median earnings data by race are calculated are discussed explicitly. The restrict ion most commonly addressed in previous work (having positive earnings in the year in question) is found to be less important than an undiscussed restriction (being employed as a wage and salary worker the following March). Second, data on the distribution of earnings are used to determine the effect of labor market dropouts on median earnings, instead of trying to estimate this effect (as well as demand and supply effects) from time series data. This permits comparison of "corrected" and "uncorrected" post-1964 trends. For males, about half of the "uncorrected" trend remains after the relative earnings variable is corrected for labor market withdrawals. For females, between half and four fifths remains.

Commercial policy is often advocated as a useful tool for combating such macroeconomic ills as unemployment and chronic balance of payments deficits. This paper examines the role of expectations in determining the output and employment effects of various commercial policies. In a rational expectations framework in which workers have incomplete information, it is shown that (i) the short-run output and employment effects of commercial policy changes depend crucially on the correlation between real and nominal wages and that (ii) the use of commercial policy as an instrument of short-run stabilization policy cannot be divorced from its long-run effects on real wages, output, and employment.

A two-sector model is used to explore the role of the agricultural sector in the process of industrialization. Our hypothesis is that areas industrialize earlier where the wages for females and children relative to those for adult males are initially low. Furthermore, the lower this relative productivity of females and children in the pre-industrial economy, the proportionately more will their relative wages increase, and the higher will be the ratio of manufactured to agricultural goods. The model is used to interpret the conditions that fostered the rapid industrialization of the American Northeast, but not the South, from 1820 to 1850.