This paper examines economy-wide and sector-specific responses of real wages to nominal shocks using micro panel data from the National Longitudinal Survey of Young Men. The observed response patterns provide no support for nominal-contracting theories of unemployment, which predict that nominal surprises should be negatively correlated with real wages. In fact, both inflation and money-growth surprises are found to be essentially uncorrelated with real wages. Either a real-business-cycle model or a model with rigidities in commodity prices could be consistent with these results.

I survey the male and female labor supply literatures, focusing on implications for effects of wages and taxes. For males, I describe and contrast results from three basic types of model: static models (especially those that account for nonlinear taxes), life-cycle models with savings, and life-cycle models with both savings and human capital. For women, more important distinctions are whether models include fixed costs of work, and whether they treat demographics like fertility and marriage (and human capital) as exogenous or endogenous. The literature is characterized by considerable controversy over the responsiveness of labor supply to changes in wages and taxes. At least for males, it is fair to say that most economists believe labor supply elasticities are small. But a sizable minority of studies that I examine obtain large values. Hence, there is no clear consensus on this point. In fact, a simple average of Hicks elasticities across all the studies I examine is 0.31. Several simulation studies have shown that such a value is large enough to generate large efficiency costs of income taxation. For males, I conclude that two factors drive many of the differences in results across studies. One factor is use of direct versus ratio wage measures, with studies that use the former tending to find larger elasticities. Another factor is the failure of most studies to account for human capital returns to work experience. I argue that this may lead to downward bias in elasticity estimates. In a model that includes human capital, I show how even modest elasticities—as conventionally measured—can be consistent with large efficiency costs of taxation. For women, in contrast, it is fair to say that most studies find large labor supply elasticities, especially on the participation margin. In particular, I find that estimates of “long-run” labor supply elasticities—by which I mean estimates that allow for dynamic effects of wages on fertility, marriage, education and work experience—are generally quite large.

The response of aggregate labor supply to various changes in the economic environment is central to many economic issues, especially the optimal design of tax policies. Conventional wisdom based on studies in the 1980s and 1990s has long held that the analysis of micro data leads one to conclude that aggregate labor supply elasticities are quite small. In this paper we argue that this conventional wisdom does not hold up to empirically reasonable and relevant extensions of simple life cycle models that served as the basis for these conclusions. In particular, we show that several pieces of conventional wisdom fail in the presence of human capital accumulation or labor supply decisions that allow for adjustment along both the extensive and intensive margin. We conclude that previous estimates of small labor supply elasticities based on micro data are fully consistent with large aggregate labor supply elasticities.

The allocation of children’s time among different activities may be important for cognitive and noncognitive development. Here, we exploit time use diaries from the Longitudinal Study of Australian Children to study the effects of time allocation. By doing so, we characterize the trade-off between different activities to which a child is exposed. On the one hand, our results suggest that time spent in educational activities, particularly with parents, is the most productive input for cognitive skill development. On the other hand, noncognitive skills appear insensitive to alternative time allocations. Instead, they are greatly affected by the mother’s parenting style.

This paper tests the rationality of individual price forecasts in a panel of professional forecasters. Here, unlike in most previous studies, rationality is not rejected. The results here differ because (1) using individual forecasts avoids aggregation bias, (2) comparison of forecasts to initial data avoids bias due to data revision, (3) the professional forecasters have economic incentives to state their expectations accurately, (4) a new covariance matrix estimator consistent when forecast errors are correlated across individuals is used.

In this paper I develop a practical extension of McFaddens method of simulated moments estimator for limited dependent variable models to the panel data case. The method is based on a factorization of the MSM first order condition into transition probabi

One of the oldest questions in macroeconomics concerns the correlation between the business cycle and the real wage. We provide new evidence on this question by examining the possible bias that arises when (1) workers have unobserved characteristics that affect their wages and (2) those workers who move in and out of the work force over the cycle have unobserved characteristics systematically different from those who stay in. We distinguish as well between the bias that arises from those unobserved characteristics that are permanent components of wages and those that are transitory. We utilize micro, panel data, and maximum likelihood selectivity bias techniques to estimate both the extent of this selectivity-cum-aggregation bias and the true effect of the cycle on real wages. We find that selectivity bias is present: workers are more likely to lose employment during a recession if they have high wages, especially if they have a high transitory wage component. Overall, the effect of selectivity is to bias ordinary least squares estimates based only on workers in a procyclical direction. Our results show that the true effect of the cycle on wages is still procyclical but much smaller in magnitude than previous estimates using micro data have suggested.

In this article, we provide quantitative evidence on the effects of monetary incentive schemes designed to reduce racial differences in school attainment and earnings. Our analysis is based on the structural estimation of a dynamic model of schooling, work, and occupational choice decisions over the life cycle. We consider two recent proposals that, although not specifically targeted to blacks, can be expected to have differential racial impacts. One proposal, suggested by Robert Reich, provides a high school graduation bonus to youths from lower‐income families. The other, suggested by Edmund Phelps, provides wage subsidies to low‐wage workers.