Knowledge that Transforms

In an article appearing in this Review, Raveendra Batra and William Russell (hereafter B-R) analyze the effect of uncertainty in the international terms of trade on social welfare within the framework of a small country with two goods. They conclude that the expected social welfare decreases under both firstand second-degree stochastic dominance. Also in a recent issue of this Review, Richard Hartman, commenting on B-R's article, contends that (i) B-R do not allow for the change in the optimal consumption of one good, cl, as the probability distribution of the international terms of trade p undergoes a mean-preserving spread, and (ii) they do not take into account the change in cl when comparing the expected utility for different distributions of p. Based on these criticisms, Hartman presents an alternative proof to show a decrease in the expected social welfare when the distribution of p undergoes a mean-preserving spread. Batra and Russell are interested in the change of the expected social welfare when the distribution of p changes. In their model, cl is chosen before the uncertainty in p is resolved. To analyze the effect of uncertainty in p on social welfare, B-R do not allow for the change in the optimal cl under different distributions of p on the ground that cl is chosen optimally before p is known. However, as pointed out by Hartman, the optimal value of cl will be different for different distributions of p. To discuss the change in the relationship between the expected social welfare and the optimal cl, Hartman uses a diagram similar to my Figure 1. From his diagram Hartman argues that B-R's conclusion of the decrease in the expected social welfare under greater uncertainty is correct even if the optimal cl is different for different distribution of p.' In my view, B-R, as well as Hartman, only consider a special case where the expected utility curve under a probability distribution always lies above those under different probability distributions of p. If we accept Hartman's comments, I can think of another case where the expected utility curves under different probability distributions may cross. The purpose of this note is first to examine this case that could occur within the framework of the B-R analysis, but which has not been examined by B-R or Hartman. By failing to examine this case, the B-R and Hartman analyses seem incomplete. Also, by considering this case, I modify the B-R proof to show a decrease in the expected social welfare as the distribution of p undergoes a mean-preserving spread. First, Hartman's analysis of the B-R conclusion is presented. This is followed by an exami ation of the other possible situation. Finally, the modification of the proof is presented. The discussion in this note is confined to the B-R framework and their notation is used. The B-R proof simply provides a stronger sufficient condition for the decrease in the expected social welfare and does not rely on the usual comparative statics approach. In Figure 1, I denote the original equilibrium position by point 1 on the expected utility (EU) curve, I. Batra-Russell prove that for every cl, EU decreases when the exogenous changes in distribution of the international terms of *Takushoku University. I acknowledge Vincent Munley and Kambiz Kiani for their comments on an earlier version of this note. I am also indebted to an anonymous referee and Harry Ramcharran for their comments and suggestions. Any remaining errors are my own. 'In his alternative proof summarized in his equation (4) on page 927, Hartman treats cl as constant as B-R do. This contradicts his criticism of their article.

The future reduction of income inequality between whites and blacks in the United States is affected by the interaction of federal educational policy to encourage human capital investment and federal economic policy to achieve full employment and stable prices. The effect of a fullemployment economy on income disparity between blacks and whites is limited by the occupational distribution of the black labor force. However, human capital investment to upgrade the occupational distribution of the black labor force is more effective within a full-employment setting which assures a higher rate of return on investment than in a setting of persistent high unemployment. Thus from the point of view of blacks, the scenario for the best of all possible worlds is one in which economic policy strives actively to achieve full employment while educational policy stimulates the growth of human capital investment to upgrade the occupational distribution of the black labor force. No one policy without the other can be fully successful in reducing persistent income disparity. There is a general concensus that a fullemployment economy is particularly beneficial for blacks, since a tighter labor market will increase black income and reduce black unemployment rates by a greater proportion than that of whites. The net result is a reduction of black poverty and some improvement in the distribution of income. The relationship between poverty and unemployment in the 1960's is particularly striking in Table 1. Between 1964 and 1969 when black unemployment rates fell from 9.6 to 6.4 percent, the percentage of black families in poverty fell sharply from 40 percent to approximately 28 percent. This percentage appears to be some kind of a floor below which it has rarely fallen throughout the 1970-77 period, as the unemployment rate grew to over 13 percent. Needless to say, a proliferation of public welfare programs and the initial impact of the civil rights laws also played an important role in reducing poverty in the 1960's. In fact, it may be argued that expanded welfare programs combined with changes in the personal income tax structure helped to offset some of the negative income effects of rising black unemployment in the 1970's. The difference in the behavior of the income disparity between blacks and whites (as measured by the ratio of the median family incomes of the two groups) in the 1960's and the 1970's is also readily observed in Table 1. Declining unemployment rates for blacks in the 1960's were accompanied by an identifiable improvement in the black-white median family income ratio, from .54 in 1964 to .61 in 1969. But in the 1970's, the improvement did not continue; instead, there appears to be a general hardening of the median income gap into a permanence around a ratio of approximately .60. The proximate cause of this persistent income disparity between blacks and whites and among blacks is reflected in the dominance of low-productivity workers in the occupational distribution of the black labor force. In 1974, for example, the share of service workers in the total employed black labor force was 26.2 percent, compared to 11.8 percent for the employed white labor *Professor of economics, Howard University. I wish to thank Surinder Gujral, Reynold Madoo, and Margaret Simms for helpful comments on an earlier draft of this paper.

Interest in national welfare reform has generated several recent income-maintenance and employment and training demonstration projects targeted at welfare recipients and low-income persons. Incomemaintenance programs typically operate by providing cash grants to poor families in amounts decreasing with earned income. Employment and training programs focus on increasing employability through skill development and job placement. While income maintenance strategies address problems of poverty and income inequality, they do not consider the capability of the disadvantaged to achieve economic independence; also, marginal tax rates on benefits have been found to decrease labor supplied (see Michael Keeley et al.). Programs employing a social services and training approach address the issues of employment and labor supply more directly. Analysis of one such program, however, suggests only slight increments to annual earnings have accrued in the postprogram period, and these only for a select group of participants (see Bradley Schiller). Several explanations for these outcomes can be posited, one being that barriers to employability of welfare and low-income persons have not been adequately assessed or remedied. Many of these persons are unmarried female heads of household with little prior work experience, job skills, or labor market familiarity. Real barriers to employability exist for these women, some of which can be corrected via a regimen of training and improvement of existing skills, and others which are more difficult to ascertain and correct. These barriers must be overcome before individuals can be expected to benefit from any program designed to reduce their dependence on welfare. Once these barriers are overcome incentives may be used to increase their commitment to the workforce and to foster economic self-sufficiency. The Minnesota Work Equity Project was funded as a two-year demonstration, employment, and training program serving clients from a variety of public assistance programs (AFDC, GA, Food Stamp) via a common service delivery system. This experiment addresses issues of barriers to employability and incentive to work by guaranteeing a job to all clients deemed employable according to statutory criteria. Employable clients are in effect required to work as one aspect of program services, though emphasis is on employability development through counseling or training. In this paper we identify barriers to employability faced by Work Equity Program clients using preliminary data from the first months of program operation. We analyze clients' five-year preprogram work histories, determinants of the decision to work, and returns to labor market investments. We also discuss clients' reservation wage expectations which provide information about labor market orientation. Finally, we discuss policy implications of these results. *Abt Associates Inc., Harvard University and Abt Associates Inc., and University of Chicago and Abt Associates Inc., respectively. This paper is based on a larger report prepared under contract with the U.S. Department of Labor. We would like to thank Ernst W. Stromsdorfer, principal investigator of the Work Equity Project evaluation, for advice and encouragement throughout our work on this project, and for many helpful remarks on earlier drafts of this paper. The opinions expressed here are our sole responsibility and should not be attributed to the U.S. Department of Labor or any agency or other individuals associated with the Work Equity Project.