Knowledge that Transforms

European countries have enacted various job security provisions over the last 30 years. Employers are required to pay workers on separation or to give advance notice of termination. In anything less than a perfectly functioning market, there are effects of the provisions on employment. Incumbents are more likely to retain their jobs, but new workers are less likely to be hired. An examination of the European data suggests that severance pay requirements reduce employment.

Predictable variation in equity returns might reflect either (1) predictable changes in expected returns or (2) market inefficiency and stock price "overreaction." These explanations can be distinguished by examining returns over short time intervals since systematic changes in fundamental valuation over intervals like a week should not occur in efficient markets. The evidence suggests that the "winners" and "losers" one week experience sizeable return reversals the next week in a way that reflects apparent arbitrage profits which persist after corrections for bid-ask spreads and plausible transactions costs. This probably reflects inefficiency in the market for liquidity around large price changes.

Standard one-sector growth models often have the counterfactual implication that economies with access to similar technologies will converge to a common balanced growth path. We propose an elaboration of the Diamond model that permits multiple, locally stable stationary states. This multiplicity is due to increasing social returns to scale in the accumulation of human capital.

This paper introduces the fair wage-effort hypothesis and explores its implications. This hypothesis is motivated by equity theory in social psychology and social exchange theory in sociology. According to the fair wage-effort hypothesis, workers proportionately withdraw effort as their actual wage falls short of their fair wage. Such behavior causes unemployment and is also consistent with observed cross-section wage differentials and unemployment patterns.