Knowledge that Transforms

An unsettled issue in the literature relating to the relative wage effect of unions is the appropriate treatment of union status in a wage determination model. In the context of a three-equation model determining union membership and union- and nonunion-sector wage rates, this paper presents an instrumental variables (IV) procedure for estimating the parameters of the wage equations and a test of the exogeneity of union status using the Hausman specification test. An advantage of our IV procedure in comparison to the widely used inverse Mill's ratio procedure is that our procedure is a distribution-free estimator, whereas the inverse Mill's ratio estimator hinges in the assumption that the error term of the choice equation is normally distributed. Using data for a sample of middle-aged white workers, we estimate the parameters of the union and nonunion wage equations with both procedures. On the key question of the endogeneity of union status, the Hausman test decisively rejects the null hypothesis of exogeneity. The inverse Mill's ratio procedure, in contrast, provides coefficient estimates on the selectivity terms that fail to indicate evidence of sample selectivity in either sector.

In Britain, female labor force participation rose steadily from the Second World War to 1977. To explain this, we estimate a pooled time-series, cross-section supply function for single-year age groups of women. The life-cycle pattern is explained quite well by the presence of children. At a second stage we try to explain the rising level of the cohort intercepts estimated at the first stage. Real wage growth may be an explanatory factor, as cross-section evidence suggests it should be. Finally, we point to the 15% rise in the relative pay of women in the mid-1970s caused by the Equal Pay Act. This did not cause the expected decline in the relative demand for female employees.

A multiperiod, general equilibrium model of the labor market is developed in which risk-averse workers are faced with job-related uncertainty and labor turnover is costly. If a worker is unlucky and suffers a bad job match, he quits and joins another firm, hoping that he will like its work environment more. Because the quality of a job match is unobservable, workers cannot insure against the risk of a bad match. The firm provides implicit insurance against job dissatisfaction, typically by paying workers more than their net marginal products in their early years with the firm and less subsequently. Since the probabilities of the insured-against events (the quit rates over time) are affected by the amount of such insurance provided, this implicit insurance is characterized by moral hazard. Individuals quit when in the absence of insurance they would not. The equilibrium contract balances out efficiency in risk bearing with efficiency in turnover incentives. We show that the equilibrium contract is not (constrained) efficient and indicate why.

Except in special cases, market work and household membership are jointly chosen. A Nash bargaining model of family behavior is used to specify stochastic structural relationships (two indirect utility functions and a market and a reservation wage function) that jointly determine work, consumption, and household membership. The maximum likelihood estimates of the implied trinomial probit model differ sharply from those obtained when either market work or household membership is taken as exogenous. This application to white male youths from the National Longitudinal Surveys shows the insurance function of families: parents insure their sons against poor market opportunities.

Irish Committee for Social Science Research

-This paper proposes a modified version of Durbin's h-statistic for testing residual correlation in a dynamic regression model. Finite sample properties of the new statistic, Durbin's h-statistic and Sargan's modified version of h are investigated by simulation.

This paper represents part of a larger ongoing project to build and use a numerical general equilibrium model of the U.S. tax system. Charles Ballard,

This paper examines the shift in the relation between the inflation rate and the rate of growth of real output which has occurred in the United States over the past three decades, and attempts to assess the relative importance of three possible lines of explanation: a) the new classical view of the output-inflation tradeoff, initially specified by Lucas; b) the effect of supply-side shocks, such as energy prices; c) the effect of inflation variability on the natural rate of real output, as hypothesized by Milton Friedman. The paper concludes that b) and c) seem to have played a significant role in the observed shift from a positive to a negative correlation between the rate of inflation and the rate of real output growth, but that a) did not.

The variance bounds tests of the present value model of stock prices are re-examined in this paper.A direct test of the model based on ordinary least squares estimation of a simple regression equation is proposed as an alternative and it is shown that this regression approach has several advantages over the variance bounds tests.This test is easily adapted to the important case in which the percentage changes in real dividends and real stock prices are stationary pro- cesses.The t*ests are applied to quarterly data for the Standard & Poor's Index of 500 Common Stocks and tJie results are much more > conclusive than those obtained by previous tests.

Considerable debate has raged over the economic assumption that the large corporation, through the decisions of its managers, attempts to maximize its profits. Closely related to the notion of profit maximization is expense behavior of managers which would indicate a preference for expenses over firm profit. This study examines the market structure effects on expense behavior and, for the first time, tests are made using data which unambiguously reflect market structure differences between firms in the sample. The results provide evidence that is contrary to the expense hypothesis. 1E~ CONOMISTS have long been interested in managerial motivation. As Ciscel and Carroll ((1980); Carroll and Ciscel (1982)) recently explain, considerable debate has raged over the economic assumption that the large corporation, through the decisions of its managers, attempts to maximize its profits. Closely related to the notion of profit maximization is expense behavior of managers which would indicate a preference for expenses over firm profits. The tension between profit maximization behavior and expense behavior of managers has been discussed by Larner (1970). One condition which could affect a firm's ability and willingness to engage in expense behavior is the market structure in which it operates. This study examines the market structure effects on expense behavior and, for the first time, tests are made using data which unambiguously reflect market structure differences. The results provide evidence contrary to the expense hypothesis and the findings are quite consistent with the previous research of Ciscel and Carroll (1980), Larner (1970), Rhoades (1980), and Glassman and Rhoades (1980).