Knowledge that Transforms

As women's labor force participation rates have continued to increase, it has become commonplace to argue that the targets that policy planners set for average unemployment rates should be adjusted upwards to correct' for the fact that women's unemployment rates have historically been higher than men's.1 In this paper, we argue that most corrections are based on an oversimplified approach to labor market realities. This approach has tended to promote the attitude that the high unemployment rates of women are an incurable and unregrettable fact of nature, and has also tended to bias policy discussions in a direction that leads to the toleration of overall slack and puts low or zero emphasis on the labor market problems of women. Abstracting from issues of age and race, we may characterize the usual target correction methodology as starting with the estimation of a simple relationship between women's and men's unemployment rates (U, and U,,) such as

High measured unemployment, often accompanied by rapid wage and price increases, has plagued most Western nations in the 1970's. The aim of this paper is to appraise, albeit crudely, the contribution of three factors to these patterns in the Netherlands, Sweden, the United Kingdom, and the United States. These factors are: 1) insufficient aggregate demand, 2) structural imbalances in the composition of labor supplies and demands, and 3) changes in the relationship of measured unemployment to excess labor supply (referred to as the U-ES relationship). My main thesis is that measured unemployment bears a different relationship to real excess labor supply in the 1970's than it did in the 1960's, explaining much of the increase in measured unemployment from the 1960's to the 1970's.

In his criticism of several articles I have written alone or with colleagues, Arthur Goldberger concentrates on two issues. The first is the statistical methodology that yields our estimate that about 40 percent of the variance in earnings of white males at age 50 is attributable to differences in genetic endowments. He suggests the estimates rely on improper or overly strong assumptions. The second issue is whether in his words, the whole effort is misguided and that our results have no implication for policy. Clearly if the whole effort is misguided, any attempt to understand the statistical issues or to improve the methodology would be barren; hence, I concentrate initially on the question of what one can and cannot learn from (unbiased) estimates of the contribution of genetic endowments to inequality of earnings. There are some extremely important questions that we can answer and other important questions that we cannot answer with this information. Unfortunately people have tried to answer the unanswerable ones in the heated debate in the IQ literature. I believe Goldberger fears that some economists will mistakenly try to use my results to answer the last set of questions. It is helpful to conduct the analysis within the context of a human capital model in which parents and their children are assumed to invest optimally. We begin by assuming that a person's earnings depend upon his marginal productivity, which is a function of his skills. Let us assume further as numerous writers including Gary Becker and James Meade have done that a person's skills depend upon his genetic endowments (G) and his environment or investments in human capital (N). For simplicity let us also assume that a person's observed phenotypic earnings (Y) are related linearly to his genotype and environment as shown in equation (1).

Douglas Purvis' discussion of an integrated approach to consumption and portfolio decisions is an attractive extension of the framework advocated by William Brainard and James Tobin. The pitfalls is concerned with the portfolio allocation of a level of wealth which is predetermined by beginning of period asset holdings and current period saving and capital gains. One of the innovative features of this is the inclusion of all asset yields and lagged asset holdings as explanatory variables in the asset demand equations. Purvis supplements the BrainardTobin asset demands with a consumptionsaving relationship that includes a similar list of explanatory variables and reinterprets this system as a of integrated rather than sequential decision making. Despite his observation that, when combined with a consumption-savings relationship such as (2), the Brainard-Tobin will in principle give rise to exactly the same shortand long-run behavior as the integrated model (p. 407), most of Purvis' discussion is concerned with alleged dissimilarities between the two approaches. This is apparently due to his implicit coupling of a simple consumption function and sequential decision making. In particular most of his comments on the BrainardTobin approach are actually concerned with whether or not lagged asset holdings should be included in a consumption function. This is rather unfair to Brainard and Tobin since there is no consumption function in the pitfalls model, and the two issues are really conceptually distinct. An integrated approach does not preclude, and a sequential approach does not require, a simple consumption function. The spirit of Brainard and Tobin's work is in fact that the inherited composition of wealth is very important to consumption, but consumption decisions precede asset demand decisions. The substance of their sequential approach is not that the composition of wealth is unimportant to consumption but rather that there are some variables which influence consumption and yet do not separately affect asset demands; only the net amount of saving motivated by these influences is important. In this paper I have consequently tried to separate these two issues: the use of an integrated or sequential framework and the imposition of parametric assumptions. One of the reasons for the merging of these two issues in Purvis' discussion is that he uses a deterministic scenario which makes the distinction between integrated and sequential decisions unimportant. In Purvis' integrated model, consumption and asset demands are constrained by lagged asset holdings plus income. In the relevant sequential interpretation of this model, consumption is first determined, setting the amount of saving and the level of end of period wealth. Asset demands are then decided upon, subject to the budget constraint that they sum to the predetermined end of period wealth. Thus the integrated asset demands include income as an explanatory variable while the sequential asset demands instead include end of period wealth. In a deterministic world there are no substantive differences between these approaches as long as income and wealth are related through a consumption-saving equation. This equivalence breaks down if the marginal propensity to save out of income is zero (since wealth is then no longer related to income) or if there is an unobserved disturbance term in the consumption *Yale University. Note that equations numbered (1) through (11) are in Purvis' paper. My equations are numbered in the same sequence.