Journal Article The Theory of Relative Shares: Reply Get access Lowell E. Gallaway Lowell E. Gallaway Wharton School of Finance and Commerce, University of Pennsylvania Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 79, Issue 4, November 1965, Pages 676–679, https://doi.org/10.2307/1880662 Published: 01 November 1965

I. The theory of relative shares, 575. — II. The aggregation problem, 577. — III. A suggested integration, 584. —IV. An empirical test of the theory, 585. —V. Conclusions, 590.

Journal Article Impact of Unions on Wage Levels and Income Distribution: Comment Get access Lowell E. Gallaway Lowell E. Gallaway University of Wisconsin Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 74, Issue 2, May 1960, Pages 324–329, https://doi.org/10.2307/1884257 Published: 01 May 1960

highly abstracted purely competitive model A of a factor market has as an end result an equalization of factor prices throughout the market. Consequently, the persistence of sizeable regional wage differentials in a national labor market calls for an explanation. An often offered one is that there are barriers to the free flow of resources between regions, barriers such as a lack of labor mobility, high moving costs, lack of labor market information, etc. Such an explanation is suggested by Cairnes' concept of non-competing groups 1 and receives support from the findings of the labor market research of Reynolds, Kerr, et al.2 However, explaining regional wage differentials by such a device is not entirely satisfactory. To a sizeable extent this approach is a question-begging one. While it provides considerable insight into the factors which serve to perpetuate a wage differential, it does not afford much that is helpful with respect to determining the forces which generated the initial differential. After all, the existence of regional wage differentials insistently demands an explanation primarily because it represents a deviation from the expected result of a competitive market. Explaining such a differential by merely pointing out that the market is imperfect is next to no explanation at all. This is tautologically implicit in the conceptualization of the competitive market. If a competitive market eliminates differentials and differentials persist, then the market is obviously not competitive and barriers to the adjustment process must exist in order to perpetuate the differentials. This suggests that an appropriate point of departure for attempting to explain the existence of regional wage differentials is to accept as a working proposition the assumption that barriers to the free flow of resources between regions do exist. Given this, the task of accounting for regional wage differentials becomes one of determining what forces work to create differentials. Several alternative explanations may be considered. Trade union representatives would argue that regional wage differentials are created by the ability of employers to exploit an unorganized labor force. Others have suggested that an explanation may be found in a more plentiful labor supply or a deficiency of product demand 3 while a fourth possibility is that the production functions vary interregionally so as to produce a lower marginal value product schedule for the workers of one of the regions. In this paper an attempt will be made to shed some light on the nature of regional wage differentials by developing suitable empirical tests for several of the suggested explanations of their causes. As a vehicle for discussion, the best known of the regional wage differentials, the North-South one, will be treated.

The comments of Kazuo Sato and P. Garegnani indicate a technical problem in our original analysis. Its effect is to make it possible for reswitching to occur even though what Sato calls our capital-intensity condition is satisfied, provided that the factor price contours in question are quite similar in nature. Thus, as Sato notes, our condition only definitely reduces the possibility of reswitching. Unfortunately, all this may be simply a minor exegesis of what is perhaps a trivial question. Let us explain that statement. Consider the standard case of a full-employment steady-state economy (constant population and labor force) in which alternative two-commodity indecomposable production systems are available. Assume that producers will choose the technique that is profitable. Conventionally, this is taken to mean that they will choose the productive technique that will provide the highest rate. For example, Luigi Pasinetti states: Clearly, on grounds of profitability, that technique will be chosen which-for any given wage rate-yields the higher rate of profit (p. 507). In a micro-economic context one would not quarrel with this proposition. A given investment in capital goods will be the higher the rate of return on the investment. However, at our highly aggregated (economy wide) level of analysis of the meaning of capital and the nature of the production function, this is not so obvious. At the heart of the Cambridge (England) criticism of neoclassical analysis is the proposition that capital in an aggregate sense can only be measured through the use of some pricing numeraire which itself is functionally related to the level of wage and (interest) rates. In this highly interdependent world (illustrated by the twocommodity indecomposable production systems under discussion), it is alleged that the straightforward neoclassical propositions break down because of the interrelationship between the value of capital and the (interest) rate. Unfortunately, the analysis upon which this conclusion has been based appears to have ignored the fact that at the aggregate level the phrase more profitable has an added dimension that is lacking at the micro-economic level. This added dimension is the opportunity to employ capital. In the models under analysis the rate of and the quantity (in value terms) of capital employed are simultaneously determined. Together, they explain the volume of profits per head associated with a given technique and wage-profit rate combination. Since net output per head for any technique is constant (at the level of the wage rate associated with zero rate), profits per head may be calculated by subtracting any wage rate on the factor price contour from the zero wage. We have done this for Sato's example (Garegnani's would do just as well) and the results are shown in Table 1. They are fascinating in that they indicate that at any rate the most technique from the standpoint of profits per head is technique I. But, how important is this? Quite; in a macromodel that assumes 1) full emplovment and 2) that capital is used solely for the purpose of producing the commodities included in the model.' Together, these conditions imply that profits per head are a measure of the total profits associated with the use of any technique. This means that switching from technique I to technique II in Sato's example as the rate falls below .595 involves adopting a production system that yields

I. The theory of real balances, 303. — II. The permanent income hypothesis, 307. — III. Empirical findings, 308. — IV. Conclusions, 312.