Knowledge that Transforms

This paper shows that when unemployed workers lose some of their skills, the effects of a temporary shock to employment can persist for a long time. The key mechanism is a thin market externality that reduces the supply of jobs when the duration of unemployment increases. The paper develops an overlapping-generations model of search equilibrium and shows that different patterns of persistence and multiple equilibria are possible even with constant returns production and matching technologies.

Teen childbearing is commonly believed to cause long-term socioeconomic disadvantages for mothers and their children. However, earlier cross-sectional studies may have inadequately accounted for marked differences in family background among women who have first births at different ages. We present new estimates that take into account unmeasured family background heterogeneity by comparing sisters who timed their first births at different ages. In two of the three data sets we examine, sister comparisons suggest that biases from family background heterogeneity are important, and, therefore, that earlier studies may have overstated the consequences of teen childbearing.

Access to private information is shown to generate both the incentives and the ability to manipulate asset markets through strategically distorted announcements. The fact that privileged information is noisy interferes with the public's attempts to learn whether such announcements are honest; it allows opportunistic individuals to manipulate prices repeatedly, without ever being fully found out. This leads us to extend Sobel's [1985] model of strategic communication to the case of noisy private signals. Our results show that when truthfulness is not easily verifiable, restrictions on trading by insiders may be needed to preserve the integrity of information embodied in prices.

Postwar U. S. time series for money, interest rates, prices, and GNP are characterized by a multivariate process driven by four exogenous disturbances. Those disturbances are identified so that they can be interpreted as the four main sources of fluctuations found in the IS-LM-Phillips curve model: money supply, money demand, IS, and aggregate supply shocks. The dynamic properties of the estimated model are analyzed and shown to match most of the stylized predictions of the model. The estimated decomposition is also used to measure the relative importance of each shock, to interpret some macroeconomic episodes, and to study sources of permanent shocks to nominal variables.

This paper investigates the effect of increased import competition on U. S. manufacturing employment and wages, using data for a panel of manufacturing industries over the 1977–1987 period. The empirical analysis uses previously unavailable industry import price data and an instrumental variables estimation strategy. The estimates suggest that changes in import prices have a significant effect on both employment and wages. The dramatic appreciation of the dollar between 1980 and 1985 is estimated to have reduced wages by 2 percent, and employment by 4.5–7.5 percent on average in this sample of trade-impacted industries.

This paper analyzes the extent to which ethnic skill differentials are transmitted across generations. I assume that ethnicity acts as an externality in the human capital accumulation process. The skills of the next generation depend on parental inputs and on the quality of the ethnic environment in which parents make their investments, or "ethnic capital." The empirical evidence reveals that the skills of today's generation depend not only on the skills of their parents, but also on the average skills of the ethnic group in the parent's generation.

Panel data on consumer bank deposit interest rates reveal asymmetric impacts of market concentration on the dynamic adjustment of prices to shocks. Banks in concentrated markets are slower to raise interest rates on deposits in response to rising market interest rates, but are faster to reduce them in response to declining market interest rates. Thus, banks with market power skim off surplus on movements in both directions. Since deposit interest rates are inversely related to the price charged by banks for deposits, the results suggest that downward price rigidity and upward price flexibility are a consequence of market concentration.

We present experimental evidence on nonbinding, preplay communication in bilateral coordination games. To evaluate the effect of "cheap talk, " we consider two communication structures (one-way and two-way communication) and two types of coordination games (one with a cooperative strategy and a second in which one strategy is less "risky"). In games with a cooperative strategy, one-way communication increases play of the Pareto-dominant equilibrium relative to the no communication baseline; two-way communication does not always decrease the frequency of coordination failures. In the second type of game, two-way communication always leads to the Pareto-dominant Nash equilibrium, while one-way communication does not.

Although surveys show that traditional orderings of average wage—i.e., higher earnings with higher schooling and concave age-wage profiles—have not changed during the past three decades, the actual size of the wage differentials measured by education or by work experience has varied from peak to trough by a factor of two-to-one. The patterns are not monotone, but there is a trend toward increased skill premiums. We first examine the structure of wages among white men distinguished by age and schooling for the period from 1963 to 1989. We then compare shifts in the distribution of wages and employment among the age x schooling categories to show in reference to a stable demand structure that employment alone cannot account for observed changes in relative wages. Finally, we describe the characteristics required of candidate demand shifters and offer examples using linear trend, business cycle shocks, and recent patterns of deficits in international trade.

The era of wage stretching has been a current focus, but we direct attention here to a decade of extraordinary wage compression—the 1940s. Wages narrowed by education, job experience, and occupation, and compression occurred within cells. The 90–10 differential in the log of wages for men was 1.45 in 1940 but 1.06 in 1950. By the late 1980s it returned to its 1940 level, thus restoring a dispersion of 50 years ago. World War II and the National War Labor Board share some credit for the Great Compression, but much was due to an increased demand for unskilled labor when educated labor was greatly expanding.