In a recent article, Cotton Lindsay and Bernard Feigenbaum (1984) present and test a model of rationing by waiting lists. Its novel feature is the recognition that being on some types of waiting list involves no opportunity cost and that consumers' surplus cannot be dissipated by waiters undertaking costly activities that will help secure the good or service in question. In this sense, time does not act as a price although it imposes costs. Although Lindsay's earlier version (1980) of this model has already been misinterpreted by some commentators,1 its heart is a waiting list that is equilibrated by attacking the assumption that the demand curve remains unchanged throughout the wait. Waiting time matters because the value of the good or service decays the longer it is delivered after order day. While not wishing to take issue with this insight, there are a number of points that need to be borne in mind when assessing the significance of the model, especially in relation to the authors' application to Britain's National Health Service (NHS).
Female-headed families have among the highest poverty rates of any major demographic group in the United States. The purpose of this paperis to investigate empirically the effectiveness of current child-support enforcement policies and to determine their role in reducing poverty and welfare dependency. A special supplement to the April 1982 Current Population Survey provides the data for the analysis. The results indicate that child support enforce-ment may represent an effective means for re-ducing welfare program costs but isunlikely to have a dramatic effect on either welfare de-pendency or poverty.
The paper provides evidence to show that many U.S. labor contracts havelittle or no private unemployment insurance provision. A model of an optional contract under asymmetric information, with no private unemployment insurance, is presented. Underemployment and involuntaryunemployment may coexist.
According to human capital theory, changes in the racial schooling gap are a key factor in the historical evolution of blackwhite male income ratios. In a recent paper in this Review (1984), James Smith points out a basic paradox in the human capital explanation. Race differences in years of schooling have diminished sharply and continuously for male cohorts born in the twentieth century. Black-white male income ratios, however, rose only slightly in the aggregate before 1960. After 1960, the ratios increased appreciably. Smith resolves the paradox by constructing new estimates of the racial schooling gap for cohorts stretching back to the Civil War, based on retrospective educational attainment data from the 1940 and subsequent censuses. Race differences in years of schooling widened among males born from 1886 to 1910. Additionally, the quality of black schooling fell relative to the quality of white schooling. Since these cohorts dominate the census occupation and income statistics until 1960, Smith claims the relative constancy of black-white income ratios until 1960 is consistent with the human capital model. This comment challenges one of Smith's conclusions. The increase in the racial schooling gap is shown to be spurious. Scholars often interpret census attainment data as a measure of years of schooling, but the data refer to highest grade completed. Historically, the average black pupil took longer than a single school year to complete a grade. Retention alone would not bias the census attainment data. Most blacks born in the late nineteenth century, however, were educated in ungraded schools. For them, census attainment data measure years of schooling, not grades. The shift from ungraded to graded schools took place throughout the period of educational retrogression identified by Smith. It is the change from years to grades that causes black schooling levels to appear to lag behind white schooling levels. Consistent data show a continuously decreasing racial schooling gap. Whatever the merit of Smith's explanation, it cannot rest on census attainment data. Beginning in 1890, the U.S. Bureau of the Census reported school attendance rates for narrow age groups (for example, ages 5 to 9).1 I use these data to construct new estimates of average years of schooling in the following manner. Let p(j) = proportion of children of age j at school, a(e) = minimum age at entering school, and a(L) = maximum age at leaving school. I assume that a(e) = 5 and a(L) = 20, since attendance rates before age 5 or after age 20 were negligible for the period. Because data are unavailable for single years of age, I also assume the agespecific attendance rates are equal to the average attendance rate for the relevant age 2 j-a(L) group. The sum Ej=a(e)P(j) estimates average years of schooling.3 Empirically, the number of students who skip a grade is less than the number who fail the grade. Hence average years of schooling should exceed average highest grade completed. Table 1 presents the cohort-specific estimates of years of schooling. According to my calculations, the racial schooling gap fell from 3.8 years among 1886-90 cohorts to 2.5 years among 1906-10 cohorts. According
Recent compositional changes in industrial and occupational structures have created technological displacement for many workers. Accompanying these institutional changes is increased foreign competition which has forced previously profitable firms to collapse. What happens to workers when competition and displacement create job loss? Many studies have found that with job termination, workers face long spells of unemployment and reentry into occupations with lower wages and fringe benefits; however, few studies have examined gender differences in the consequences of job termination. In fact, most research in this area has been case studies focusing solely on men. This study analyzes gender differences in employment and wages upon job termination. It answers the question, Do women fare better or worse than men upon job termination?
Sluggish wages and prices are generally the culprits in models of unemployment and business fluctuations. Price flexibility in standard fix-price models would restore the economy to full employment. This line of reasoning has often been at the heart of proposals to reform institutions in order to restore flexibility to wages and prices. There is, however, a strand of macroeconomic thought that questions the wisdom of too much price flexibility. John Maynard Keynes raised the issue in chapter 19 of the General Theory by noting that a deflation could raise real interest rates and thereby impede a return to full employment. In his 1975 paper Keynesian Models of Recession and James Tobin develops this point in a formal model. Low prices work to move the economy to full employment but falling prices, to the extent that they lead to expectations of deflation, raise the real interest rate (through the Mundell effect) and move the economy away from full employment. Instability is likely to occur if expectations of inflation adjust rapidly to actual inflation and the real interest rate effect is large. Our historical experience does include significant episodes where either reductions in inflation or actual deflation were accompanied by high real interest rates. Although other factors could be responsible, the experiences of the Great Depression, the Latin American countries in the late 1970's and the United States in the early 1980's all add surface plausibility to the real interest rate deflation link and thus to one aspect of the Keynes-Tobin story. Recently, Bradford De Long and Lawrence Summers (1984) have argued that the decrease in the variance of output following World War II can be largely attributable to the decrease in wage and price flexibility in the postwar era. The reason output fluctuations are smaller today is precisely because the Keynes-Tobin destabilizing mechanism is less operative today.' This paper examines whether increased price flexibility can be destabilizing in a version of John Taylor's contract model (1979, 1980) extended to include real interest rate effects. Taylor's model includes both backward and forward elements in wage-setting behavior and thus permits some rationality in the wage-setting process. We find that even with this limited degree of rationality, increased wage flexibility leads to a decrease in both the variance of output and the variance of prices. Nicholas Carlozzi and Taylor (1983) introduce the real rate of interest into a staggered contract framework and discuss in general terms and through simulations the effects that changing real rates may have on the system. They do not, however, study the effects of potential instability through increases in wage flexibility or provide any analytical results. They provide an extensive discussion of the implications of alternative policy rules on the stochastic behavior of the economy. We first add the real interest rate to the standard Taylor model and derive the solution and prove key analytical results. These results are further buttressed by simulations.
In his Nobel Lecture, Milton Friedman (1977) argued that the greater uncertainty associated with higher inflation leads to a misallocation of resources because of shorter duration of contracts and reduced efficiency of the price system. The result is reduced economic growth and, possibly, more unemployment (i.e., a positively sloped Phillips curve) over the fairly long term. In a subsequent article, Maurice Levi and John Makin (1980) found a significant negative impact of inflation uncertainty on employment growth. Evidence of a similar nature was reported by Yakov Amihud (1981), Makin (1982), and Ronald Ratti (1985), while Donald Mullineaux (1980) found a significant positive effect of inflation uncertainty on the rate of unemployment and a negative effect on industrial production. Given the substantial body of empirical literature linking higher inflation to greater inflation uncertainty, this provides support for Friedman's hypothesis.' Friedman also noted, however, that in the very long run, institutions should adapt to an inflationary economy in a way that offsets much of the real effect of higher inflation. An example of such adaptation is more widespread indexation of wages. Levi and Makin recognized the potential impact of indexing but did not attempt to estimate it: To the extent that inflation uncertainty persists and causes lower employment, our results tend to support the case for a wider use of indexing of nominal contracts, which should reduce the impact of uncertainty felt on the real (p. 1026). The purpose of this article is to estimate the impact of inflation uncertainty on employment, while also considering the second-round effects of labor market adjustments designed to reduce the risk associated with inflation uncertainty. Despite the limited scope of the data, an increase in the prevalence of wage indexation in major collective bargaining contracts is taken to indicate a general increase in the responsiveness of nominal wages to inflation surprises.2 In other words, as the percentage of contracts with indexation clauses increases, the degree to which already indexed wages adjust to price level changes is assumed to increase. Furthermore, the effect is assumed to extend beyond the sector of the labor market covered by major collective bargaining agreements to smaller union contracts and even to nonunionized labor. This article proceeds as follows. Section I discusses the measurement of inflation uncertainty and the level of wage indexation and estimates the impact of inflation uncertainty on indexation in the United States for the period 1961-83. Section II examines the impact of inflation uncertainty, indexation, and unanticipated inflation on employment. Section III presents the results of simulations designed to illustrate how increased wage indexation offsets at least part of the adverse *Department of Economics, University of Kentucky, Lexington, KY 40506. Helpful comments from R. W. Hafer, Ronald Ratti, Richard Sheehan, Daniel Thornton, two referees, and the participants in seminars at the Board of Governors of the Federal Reserve System, Claremont College, Georgia State University, and the University of Kentucky are gratefully acknowledged. This research was conducted at the Federal Reserve Bank of St. Louis with assistance from Jude Naes. The views expressed do not necessarily reflect those of the Federal Reserve Bank of St. Louis or the Federal Reserve System. 'My 1984 article provides a review of the literature linking higher inflation to greater inflation uncertainty. 2Formal indexing typically applies only to contracts in the unionized sector-less than 25 percent of the U.S. labor market. This measure should serve the purpose at hand, however, since the behavior of union wages influences the wages of other workers, and since adjustments to greater inflation uncertainty in the unionized sector can be expected to occur at roughly the same time as adjustments in other sectors of the labor market.
Many Keynesian macroeconomic models are based on the assumption that firms change prices at different times. This paper presents an explanation for this "staggered" price setting. The authors develop a model in which firms have imperfect knowledge of the current state of the economy and gain information by observing the prices set by others. This gives each firm an incentive to set its price shortly after other firms set theirs. Staggering can be the equilibrium outcome. In addition, the information gains can make staggering socially optimal even though it increases aggregate fluctuations.
In this paper we compare the implications of a symmetric information contracting model and a dynamic labor supply model for changes in individual earnings and hours over time. The critical distinction between these models is whether earnings represent optimal consumption or payment for current labor services. We develop a simple test between labor supply and contracting models based on the relative variability of earnings and hours with respect to changes in productivity. If earnings represent consumption then changes in productivity generate smaller changes in earnings than hours. The opposite is true in the labor supply model. We apply our test to longitudinal data on male household heads fran the Panel Study of Income Dynamics and the National Longitudinal Survey of Older Men, focusing on individuals who do not change employers during the survey period. Neither model fits the data well. In both surveys, however, the contrihition of changes in productivity to changes in earnings is greater than the contribution to changes in hours. The data are more consistent with a labor supply interpretation, although the estimated labor supply elasticities suggest that changes in hours occur at fixed wage rates.