Knowledge that Transforms

This article incorporates contract reopeners into the analysis of contract duration and compares contracts with a reopener to contracts that cannot be reopened. The model contains relative and nominal shocks. It is shown that the stated duration of a reopenable contract is shortened by uncertainty associated with small shocks but lengthened by uncertainty associated with large shocks. However, the discounted expected duration decreases with the uncertainty associated with both small and large shocks. There exists a critical size of a large shock for which a reopenable contract and a contract with an immutable duration are equally attractive.

This article tests the implications of the general human capital that (i) at the individual level, there is a negative relationship between the initial wage level and wage growth of inexperienced workers and (ii) at the market level, the ratio of the present values of wage profiles of investors and otherwise identical noninvestors equals one. We find a negative relationship between initial wage levels and wage growth, even after correcting for negative biases in existing estimates of this relationship. We also find that the ratio of the present values of rising wage profiles to flat wage profiles is generally close to one.

This article explores the measurement of labor force dynamics using longitudinal data, focusing in particular on the Canadian Labour Market Activity Survey (LMAS), which represents a potential advance in longitudinal data collection because it measures aspects of dynamics not available in existing panel data such as the Panel Study of Income Dynamics and the National Longitudinal Survey. We examine the implications of the LMAS questionnaire structure-the LMAS filter-for the study of labor market dynamics and undertake simulations to provide a quantitative assessment of the importance of this filter for labor force spells and transitions between labor force states.

This article develops analytic links between cohort composition and human capital accumulation across generations. By focusing on cohort composition rather than cohort size, it offers new links between demographic change and economic outcomes. The model shows that changes in the educational attainment of parents and changes in relative fertility rates between educational classes affect human capital accumulation of the next generation. The main prediction of the model, of a negative behavioral feedback, is shown to be consistent with data on the probability of attending college for men born between 1927 and 1962.

This article examines the effects of unemployment compensation when the size of the labor force depends on unemployment benefits. The analysis is based on an aggregate model with search and matching in which unemployment compensation affects the wage determination process and the number of jobs and workers. As with partial equilibrium models, unemployment compensation raises the unemployment rate and the ratio of unemployed to vacancies. However, wages may go up or down and firms may be better off. Generally, employed workers are worse off. Unemployment compensation transfers income from employed factors to unemployed factors, leading to greater input levels.

We use newly available data from the Ontario Ministry of Labour to estimate the effects of advance notification of permanent layoff on unemployment durations. While notice is strongly negatively correlated with unemployment in the raw data, most of this effect disappears when we control for personal characteristics and when we correct for endogeneity of notice by using only its cross-firm variation to identify its effects. Overall, while short notice intervals can have a substantial effect on the probability of experiencing a short unemployment spell, we find that even very long notice intervals have little impact on long-term unemployment.

Using micro data from the Canadian Survey of Consumer Finances, 1971-91, we investigate the return to a university education. Our conclusions are that while there appears to have been some decline in the return to a university degree during the 1970s in Canada (similar to the United States), the return did not rebound much during the 1980s except among the youngest experience (age) group. There is, however, considerable noise in the ratios from year to year so that one is likely to draw misleading inferences if only a few years of data are used.

The "efficiency wage hypothesis" offers an explanation for employment rents. According to this hypothesis, firms pay wages above the opportunity cost of labor to elicit productivity or quality-enhancing behaviors from employees. Firms pursue this strategy when alternative incentive schemes are unavailable or too costly. Thus, firms will not pay premium wages when employees post sufficiently large performance bonds. This article examines employment rents in a setting where employees post sizable performance bonds-large law firms. Contrary to the efficiency wage hypothesis, we find that associates in these large firms post substantial performance bonds while also receiving substantial, ex ante rents.

We estimate the effect of financial incentives for reenlistment on military retention rates using a stochastic dynamic programming model. We show that the computational burden of the model is relatively low even when estimated on panel data with unobserved heterogeneity. The estimates of the model show strong effects of military compensation, especially of retirement pay, on retention rates. We also compare our model with simpler-to-compute models and find that all give approximately the same fit but that our dynamic programming model gives more plausible predictions of policy measures that affect military and civilian compensation at future dates.

This article considers the implications of allowing a manager discretion over task assignment. If employees earn rents from carrying out tasks, and the manager cannot "sell" the jobs to her subordinates, she has an incentive to take on more tasks than is optimal and delegate too few to a subordinate. I show that although firms can alleviate this incentive by offering output-contingent contracts, even with the optimal contract, (i) the manager carries out too many tasks, (ii) she exerts too much effort on her own tasks, and (iii) her subordinate exerts too little effort on his tasks.