Knowledge that Transforms

This paper examines when and to what extent an individual's relative wage depends on his/her productivity relative to others doing the same job. Starting wages were influenced by background characteristics and training cost realizations but not by relative productivity. Wages one year later were influenced by productivity but the effects were small. The wage elasticity was .2 at small establishments and 0 at establishments with over 400 employees. The wage response to relative productivity and training costs was weaker in small labor markets, suggesting that wages do not fully respond to performance because of the firm specificity of job performance differentials.

An employer must choose a procedure for screening job applicants, a rate of hire, a training program for new employees, a criterion for the retention of new employees after observing their on-the-job performance, a compensation package, and a rate of capital investment so as to minimize production costs across time. This paper examines the effects of employer size on these hiring and training decisions when larger employers have greater monitoring costs. A unique data set is employed to estimate the empirical relation among employer size and employer search, training, capital investment, and wages.

This paper uses recent results from incentive theory to study heretofore informal critiques of piece-rate compensation schemes. The informal critiques are based on the history of failed attempts to install piece-rate compensation schemes at the turn of the century. The formal analysis emphasizes the importance of information and commitment in contracting. The main result is as follows. In a work environment characterized by hidden information and a hidden action, if neither the firm nor the worker can commit to future behavior, then no compensation scheme, piece-rate or otherwise, can induce the worker not to restrict output.

We examine Henry Ford's introduction of the five-dollar day in 1914 in an effort to evaluate the relevance of efficiency wage theories of wage and employment determination. We conclude that the Ford experience strongly supports the relevance of these theories. Ford's decision to increase wages dramatically is most plausibly the consequence of labor problems of the kind efficiency wage theorists stress. The structure of the five-dollar day program is consistent with the predictions of efficiency wage theories. There is vivid evidence that the introduction of the five-dollar day resulted in substantial queues for Ford jobs. Significant increases in Ford productivity and profits accompanied the new regime.

A model of unemployment duration is estimated with weekly micro data on Canadian men. Ent itlement provisions in the unemployment insurance program and demand conditions are found to have a significant effect on the probability of leaving unemployment. The probability of a worker leaving unemploy ment declines with the duration of unemployment, holding unemployment insurance entitlement constant. When entitlement is allowed to vary, the probability of leaving first falls and then generally rises with unemployment duration. These results are robust with respect to allo wing for person-specific unobserved heterogeneity and alternative spe cifications of duration dependence. Copyright 1987 by University of Chicago Press.

JN THE LAST DECADE, the levels of unemployment in industrialized countries have risen dramatically. Rates now are typically two, and in some cases, three and four times those prevailing in the 1950s and 1960s. The fact that these new higher levels are widely tolerated suggests that our thinking about the meaning and significance of unemployment has changed enormously over the period. Such a change is certainly present in the thinking among professional economists. In the 1960s the standard view was that the unemployed represented unutilized resources; their existence in an economy where the vast majority of people had unsatisifed wants was seen as a major social paradox and the most important unsolved intellectual puzzle of the capitalist economic system. This fed the rationale for Keynesian countercyclical fiscal policy and government deficit spending: The government could reasonably print money in order to hire the unemployed because the resources absorbed in the process were essentially free Today, a good number of professional economists, certainly in the United States but to a lesser extent throughout the world, have come to view measured unemployment in industrial economies as an artifact in at least three senses. It is a statistical artifact of a measurement process that classifies as unemployed people who are not really available for work. It is an institutional artifact of a system of social insurance and public welfare that encourages an extension of the process of job search. And it is an artifact of the language that uses a term which in everyday parlance means forced idleness for activities that have important productive functions akin to the functions of inventories, information processing, and investment associated with the utilization of capital goods. These interpretations to be sure hardly constitute a consensus about the meaning of unemployment. But they are no more diverse than the range of views that underlay the older orthodoxy. And for policy makers and economic researchers, they carry a single message: There are many more serious problems toward which to direct attention. These new views about unemployment were developed out of a set of ideas originally associated with the Chicago School of economics, where the emphasis-at once positive and normative-was placed on the competitive market as the gover* A Review of Alexander Keyssar, Out of Work: The First Century of Unemployment in Massachusetts. Cambridge: Cambridge University Press, 1986 and Robert Salais, Nicolas Baverez, and B6nedicte Reynaud, L'invention du chomage: Histoire et transformations d'une categorie en France des annees 1890 aux annees 1980. Paris: Presses Universitaires de France, 1986.

We thank Lincoln Anderson, Orley Ashenfelter, Costas Azariadis, David Card, William A. Darity, Jr., Belton Fleisher, Richard Froyen, James J. Heckman, Solomon Polachek, Lawrence H. Summers, and two anonymous referees. Particular thanks go to Didi Dunphy for drafting the figures and to the University of North Carolina, College of Arts and Sciences, Endowment for Scholarly Publications for providingfinancial support. Sarah Mason did her usualfine job of typing, Karen Smith and Jonathan Veum provided valuable computing assistance, and Cynthia McCarty cheerfully checked citations for completeness and correctness. Preliminary versions of this paper have been presented at the 1982 Annual Meetings of the Econometric Society, the Fifth World Congress of the Econometric Society, 1985, and the 1986 Annual Meetings of the Eastern Economic Association.