This paper uses a 1976 microdata base to estimate the marginal cost of reducing income inequality with a policy that has distributional effects similar to the present tax-transfer system. The analysis uses a simulation methodology in which only the labor supply effects are evaluated; other behavioral effects are ignored. The most striking finding is that marginal cost is quite high even for modest labor supply elasticities. For example, in the benchmark case with a weighted-average economy-wide uncompensated wage elasticity of 0.2 (and compensated elasticity of 0.31), the disposable money income of upper-income quintiles of households is depressed by 9.51 for each dollar increase in the disposable money income of lower-income quintiles. When income equivalent values that take account of the value of leisure are compared, the marginal cost for this case is estimated to be 3.49.

The implications of the economic theories of marriage and of household fertility behavior are tested in a framework in which educational investment, marital search, and marital matches are responsive to marriage-market conditions and the personal traits of individual agents, some of which are unobserved by the econometrician. Implications are also derived and tested for the effects of longevity, attractiveness, preferences, and labor- and marriage-market conditions on schooling, marriage age, and spouse choice. The empirical results indicate that inattention to heterogeneity and martial selection leads to a false rejection of the economic theory of marriage but to a false acceptance of the value-of-time fertility hypothesis.

This paper develops a model of unemployment rate dynamics that provides an explanation of persistent cyclical unemployment that does not involve persistent expectational errors or other nonoptimizing behavior. Our results are based on the interaction of search dynamics and inventory adjustments. An important element in these dynamics appears to be heterogeneity in the labor force which can be characterized as consisting of a relatively small group of high turnover individuals who comprise the bulk of normal unemployment and a larger group of low turnover individuals who dominate movements in cyclical unemployment. Our empirical results provide support for this theory as we demonstrate that the appropriately measured probability of becoming employed during a recovery falls relative to normal because of the unusually high proportion of low turnover individuals who have lost permanent jobs. As aresult, recovery is much slower than is indicated by normal relationships although each individual is searching optimally.