Knowledge that Transforms

Self-selected migration presents one potential explanation for why observed returns to a college education in local labor markets vary widely even though U.S. workers are highly mobile.To assess the impact of self-selection on estimated returns, this paper first develops a Roy model of mobility and earnings where workers choose in which of the 50 states (plus the District of Columbia) to live and work.Available estimation methods are either infeasible for a selection model with so many alternatives or place potentially severe restrictions on earnings and the selection process.This paper develops an alternative econometric methodology which combines Lee's (1983) parametric maximum order statistic approach to reduce the dimensionality of the error terms with more recent work on semiparametric estimation of selection models (e.g., Ahn and Powell, 1993).The resulting semiparametric correction is easy to implement and can be adapted to a variety of other polychotomous choice problems.The empirical work, which uses 1990 U.S. Census data, confirms the role of comparative advantage in mobility decisions.The results suggest that self-selection of higher educated individuals to states with higher returns to education generally leads to upward biases in OLS estimates of the returns to education in state-specific labor markets.While the estimated returns to a college education are significantly biased, correcting for the bias does not narrow the range of returns across states.Consistent with the finding that the corrected return to a college education differs across the U.S., the relative state-to-state migration flows of college-versus high school-educated individuals respond strongly to differences in the return to education and amenities across states.

The flood of veterans enrolling in college at the end of World War II contributed to widespread rhetoric that the G.I. Bill brought about the "democratization" of American higher education. Whether military service, combined with educational benefits, led World War II veterans to increase their investments in college has received little research attention. Our estimation strategy focuses on between-cohort differences in military service, and we use census data to compare the collegiate attainment of veterans and nonveterans. The net effect of military service and G.I. benefits was substantial gains in the collegiate attainment of World War II veterans.

We study optimal incentives for a two‐stage production process. First, we identify conditions under which the optimal incentive structure for both workers is based on total volume and conditions for when the final stage worker’s incentives are based on relative performance. We show that a bottleneck‐free and balanced line is optimal only when both workers’ contracts are based on volume, while it becomes desirable to limit the final stage worker’s productivity when his compensation is based on relative performance. Thus, we demonstrate that the benefit of removing bottlenecks hinges critically on the structure of the optimal incentive arrangement.

We present a model in which unemployed workers simultaneously sample n potential employers. By varying n, we nest search and Walrasian‐type models of the labor market. We show that low values of n yield typical search equilibria: the wages are dispersed below the marginal productivity of labor. Interestingly, as n exceeds a relatively small threshold, the Walrasian‐type equilibrium emerges with the competitive wage quoted by all firms. For intermediate values of n, the equilibrium is a hybrid of the Walrasian and search equilibria. The model generates wage rigidity and yields novel predictions regarding the comovement of wages, firm turnover, and unemployment.

The negative effect of quits on the willingness of firms to provide on‐the‐job training is well documented in the theoretical literature. Here we explore the strength of this effect by solving a firm’s dynamic optimization problem where there is uncertainty about future productivity and nonzero firing costs. We find that the degree to which quit rates affect hiring depends on the ratio of firing to hiring costs. As this ratio rises, the negative effect of quits becomes less important, eventually reversing itself. We also describe how quit rates affect the firing decision. We highlight some testable implications of our analysis.

A substantial literature has developed to estimate the “true” cyclicality of real wages, that is, composition bias free. Two major issues are addressed in this article: aggregation of heterogeneous workers and potential bias in the measurement of the labor input. A general analysis of the biases is presented, and alternative approaches in the literature are nested in a single framework. Estimates based on an efficiency units concept that avoids the usual aggregation problems are presented. Composition bias underestimates the usual parameters of interest unless both the price and the quantity of the labor input are adjusted appropriately.

While much empirical research exists on labor market consequences of unemployment benefits, there is remarkably little evidence on the forces determining benefits. We present a simple model where workers desire insurance against unemployment risk and benefits increase the unemployment rate. We then conduct one of the first empirical analyses of the determinants of the parameters of the benefit system. Using data for developed countries for 1971–89, controlling for year and country fixed effects and the government's political color, we find evidence that the level of benefits falls when the unemployment rate is high. This is consistent with Wright's tax effect.

This article develops a model in which quit rates, and thus the income distribution, depend on employee perceptions of the accuracy of employer assessments of individual productivity because these latter assessments affect wages. When employees believe that these assessments are accurate, income inequality tends to be high. The model can account for the negative correlation across some countries of inequality and the extent to which inequality is deemed to be excessive. It also fits the contrast in U.S. and French experiences concerning the tenure of highly educated workers with high wages relative to the tenure of lower‐paid workers.

I argue for increased reliance on non–U.S. data and policy evaluations to understand basic labor market parameters and to predict the effects of changes in U.S. labor market policies. Foreign experiences generate exogenous shocks to labor costs that create unusual opportunities to measure impacts on labor demand. Foreign policies often provide more variation in the underlying parameters in systems that are often structured like their American counterparts. Foreign data sets are often larger and better suited to inferring behavior. An empirical examination shows the effect of author's location, data set, and journal on the research's subsequent impact.