Knowledge that Transforms

DURING the past twenty years considerable work has been done concerning the behavior of wage differentials and wage dispersion.' In many of these studies attention has been confined to a particular wage differential, e.g., the North-South wage differential, and an attempt has been made to ascertain the average change over time in that differential in several industries. mere description of this important structural aspect of our industrial economy has general interest. Moreover, changes in wage dispersion and differentials imply shifts in the personal distribution of income which, in turn, have an impact upon the consumption function and upon resource allocation.2 It has been observed that in the period subsequent to the mid-I930's the personal distribution of income has become more nearly equal.3 This shift toward greater equality may be attributed, in part at least, to the absorption of the unemployed and the fuller employment of the partially employed. But changes in wage differentials can either strengthen or tend to offset the movement toward greater equality of income. Some studies have led to the conclusion that fuller employment accompanied by changes in wage differentials that strengthen the shift toward greater equality. Dunlop, Lebergott, and Ober,4 for example, have provided some empirical basis for the hypothesis that has been a trend toward a narrowing of the percentage differential between skilled and unskilled workers during the past half-century, and that the trend accentuated in boom periods of full employment and reversed in depressions. 5 This hypothesis has not gone unchallenged. Bell concludes that there is no logical pattern for cyclical variations in the structure of occupational differentials. . . . These cycli* This paper based largely on an M. A. thesis on file in the Duke University Library. work was done under the direction of Professor Frank A. Hanna and benefited from the comments of Professor Frank T. de Vyver. 1 See, for example, J. Dunlop, Cyclical Variations in Structure, this REVIEW, XXI (February 1939), 3039; S. Lebergott, Wage Structures, this REVIEW, XXIX (November I947), 274-85; H. Ober, 1907-1947, Monthly Labor Review, LXVII (August I948), I27-34; P. Bell, Cyclical Variation and Trend in Occupational Differentials in American Industry since 19I4, this REVIEW, XXXIII (November 1951), 329-37; J. Bloch, Regional Differentials; I907-46, Readings in Labor Economics, ed. F. Doody (Cambridge, Mass., 1950), 8I-9I; R. Lester, Differentials: Developments, Analysis, and Implications, Southern Economic Journal, XIII (April I947) 38694; H. Ober and C. Glasser, Regional Differentials, Monthly Labor Review, LXIII (October 1946), 5II-25; D. Roberts. The Meaning of Recent Changes, Insights into Labor Issues, ed. J. Shister and R. Lester (New York, 1948), 226-37; F. Meyers, Notes on Changes in the Distribution of Manufacturing Earners by StraightTime Hourly Earnings, 194I-48, this REVIEW, XXXII (November I950), 352-55; D. Brady, Equal Pay for Women Workers, Annals of the American Academy of Political and Social Science, XXLI (May 1947), 53-60. 2 It should be noted that the wage structure considered here the structure of average hourly earnings. Since the accounting period only one hour, this structure not strictly comparable with the personal distribution of income, in which the accounting period typically one year. In order to render them comparable, factors such as the variation among workers in annual hours of work must be taken into account. Despite the discrepancy, a direct relationship between the wage structure of an industry and the personal distribution of income would seem to exist. It should also be noted that the portion of labor income emanating from an industry in the form of salaries not included in the wage structure. Since average hourly earnings are used, the subsequent analysis concerned actually with the dispersion of average hourly earnings rather than the dispersion of wage rates. See J. Dunlop, op. cit., for a discussion of differences between average hourly earnings and wage rates. Attention here confined to the basic monetary remuneration of workers. In order to include the effects of fringe benefits in the analysis, data on the value per hour of such benefits to each worker would be required. Such data would provide new frequency distributions which would show the dispersion of average hourly earnings and fringe benefits combined. No such data are available. With regard to the North-South wage differential in the cotton textile industry, it has been suggested that fringe benefits tend to increase differences between the North and South. See the Report on the New England Textile Industry (by Committee Appointed by the Conference of New England Governors, 1952), pp. I37-43. 'H. Miller, Factors Related to Recent Changes in Income Distribution in the United States, this REVIEW, XXXIII (August 95I), 214-I8. 4 Dunlop, op. cit.; Lebergott, op. cit.; Ober, op. cit. 'Paraphrased in Bell, op. cit., p. 329.

M OST economists agree that the primary source of cyclical instability is to be found in the determinants of investment behavior. Current cycle theory largely takes the following simple form. Today's value of output is equal to today's aggregate demand, which is the sum of consumption and investment (plus government expenditures). Consumption is assumed to be more or less inflexibly tied to current or past income. Hence the essence of the problem is to find the determinants of current investment. These determinants, so far as they are considered endogenous, are usually taken to be either the rate of change in total output (the acceleration principle) or the level of total output and the size of the total capital stock. The business-cycle models which result from this approach are open to a number of objections. They are unable to account for the important differences among past cycles; they abstract from most of the complexities of economic growth; they ignore some features of the cumulative process which observation suggests may be important in shaping the course of the cycle; and they yield explanations of investment behavior which, as often as not, do not seem to fit the facts. The purpose of the present paper is to suggest a different approach to the study of economic fluctuations one which links cyclical change more closely to the underlying forces making for growth and structural change than is usually the case today.2 First, we shall examine whether cyclical fluctuations are likely to take place in the absence of significant variations in (long-term) investment. Following this, we shall attempt to lay the groundwork for a theory of investment behavior in terms of the opening up of investment opportunities and the varying inducements to exploit these opportunities. The analytical framework resulting from these two sections is then used to elaborate and refine the usual distinction between major and minor cycles. In a concluding section, we shall try briefly to evaluate this way of looking at the causes of cyclical instability.

This set of studies investigates the nature and magnitude of the redistribution of income throughout the world. Each of the distinguished authors addresses questions as complex as how governmental social policies effected the redistribution of income and what were the consequences.

Mitchell O. Locks, The Influence of Pattern-Bargaining on Manufacturing Wages in the Cleveland, Ohio, Labor Market, 1945-1950, The Review of Economics and Statistics, Vol. 37, No. 1 (Feb., 1955), pp. 70-76

ONE of Keynes' less controversial judgments has seemed to be his recommendation that the scope of central bank open market dealings be widened to include a greater variety of debts. Professor Hansen has reminded us that within the last two years, by design rather than through the legal hampers and traditional straitjackets that Keynes deplored, the monetary policy of the Federal Reserve System has reverted to the limited base of short-term dealings.' Though the issues are clear and the conflict joined, and despite the importance of the problem from the standpoint of public policy and correct principle, it is most distressing that the question has largely escaped scrutiny in the professional journals. We are indebted to Professor Hansen for provoking discussion and inviting rationalization of the behavior of responsible officials. My comments are directed mainly to the open market policy of dealing in the short-end of the market rather than to Hansen's perceptive review of postwar monetary events and his efforts to impart perspective and to correct loose generalization and interpretation of policies over this period. Several of my remarks aim only at supplementing his views, at some places giving added emphasis and at other points elaborating further implications of the present program. On one matter there may be a difference of principle. Partial abdication of fiscal agent functions. Professor Hansen indicates that, whereas new private flotations enjoy underwriting support, the instruction that the Open Market Committee refrain from dealing in comparable maturities during a period of Treasury financing constitutes an abdication of fiscal agent functions performed by the Federal Reserve System for the Treasury. Hansen inclines to the position that this abdication is only partial, for the System professes its readiness to correct a disorderly situation. Considering the vagueness and hedging of the latter injunction, and the fact that for over a month prior to the mid-Februarv I 0o g financing the I'4 ner cent issue of 1978-83 was permitted to slide by over three points without intervention, the current abdication seems to be more rather than less complete. It is astonishing that this policy emanates from individuals who have derived much of their experience from investment markets, as in the case of Chairman Martin, a former President of the New York Stock Exchange. It would be extraordinary for investment bankers to relinquish their right to stabilize the market while in the throes of a new financing venture. If the principle is sound in private finance, the Open Market Committee directive is an unnatural restraint to place upon the Reserve System in its role as fiscal agent for the federal government. Perhaps it is an opening wedge to challenge all investment-stabilizing actions. The proposal is hardly calculated to whip up great enthusiasm among investment bankers best informed on the practice. The Open Market Committee attitude is not without bearing on Treasury financing. Without the occasional assistance of the Reserve System an encore for the bond-market consternation of late April I953, when the 314 per cent, thirtyyear offering went to a discount before issuedate, is conceivable. If such a situation were to occur again while memories of this debacle are still fresh, the abstemious ordinance might pave the road for future lagging subscriptions and financing failures. To surmount the artificial handicaps placed in its path the Treasury would have to underprice a new issue, prof erring terms more generous than the underlying market facts would warrant. Bonuses and premium gratuities would be the unwitting result of Reserve primness.