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Quantity commitment discounts (QCDs) are vertical agreements in which a seller conditions price discounts on the specified quantity or share of a product line that the buyer commits to purchase fro...

We treat rising inequality as an equilibrium outcome in which human capital investment fails to keep pace with rising demand for skills. Investment affects skill supply and prices on three margins: the type of human capital in which to invest, how much to acquire, and the intensity of use. The latter two represent the intensive margins of human capital acquisition and utilization. These choices are substitutes for the creation of new skilled workers, yet they are complementary with each other, magnifying inequality. When skill-biased technical change drives economic growth, greater inequality reduces growth.

Economic studies of the value of a new good or product innovation are typically retrospective: after a new good has been developed and marketed to consumers, data on prices and consumer choices can be used to estimate welfare gains. This paper calibrates the prospective welfare gains in the United States from a nascent vehicle platform, fuel cell electric vehicles (FCVs), that may or may not succeed in competition with existing vehicle platforms. Prospective gains are due to three main sources: (1) possibly reduced carbon emissions compared to existing vehicle alternatives; (2) the monopsony benefit to the U.S. from reducing world oil demand and hence the price of oil; (3) national security benefits due to reduced “oil dependence”, mitigating the impact of oil price shocks on national income. I find that the benefits of reduced carbon emissions are likely to be quite small because reduced oil demand in the U.S. as only a small impact on world oil consumption and carbon emissions. Net monopsony benefits to...

National security economics is a nascent field in our discipline. 1 We define national security (NS) as the set of public policies that protect the safety or welfare of a nation’s citizens from substantial threats. While NS policies are typically thought of in terms of military assets, our definition includes the development and deployment of any public good that would mitigate catastrophic outcomes for a large segment of the population. Thus we include certain investments in public health, safeguarding supplies of certain natural resources, as well as environmental and climate policies designed to mitigate possibly catastrophic future outcomes. Our main focus is on the common structure of

Murphy and Topel (2006, henceforth MT) develop methods for valuing health improvements based on individuals’ willingness to pay. Our results indicate that past health improvements have been enormously valuable. We estimate that gains in life expectancy over the twentieth century were worth more than $1.2 million per person to the current US population, and that rising longevity added about $3.2 trillion per year to national wealth between 1970 and 2000, as mortality rates among older adults fell sharply. Looking ahead, we estimate that even modest progress against major lifethreatening diseases would be extremely valuable. For example, the two most prominent causes of disease-related mortality in the United States are cardiovascular diseases (CVD) and cancer. We find that a permanent 10 percent reduction in mortality rates from CVD would be worth about $5.7 trillion to current and future Americans, while similar progress against cancer would be worth $4.7 trillion. A 10 percent reduction in overall mortality would be worth about $18 trillion. If past progress is an indication, there is little doubt that these or greater gains will eventually be realized. The questions are when and at what cost? In comparison to these prospective benefits of health progress, expenditures on basic and applied health research in the United States are modest. Public support for basic biomedical research—mainly through the National Institutes of Health (NIH) and associated grants to research universities—totals about $28 billion annually. Adding expenditures on health research and development (R&D) by private institutions and by pharmaceutical and medical products companies brings the total for basic and applied health research to about $60 billion Social Value and the Speed of Innovation

We develop an economic framework for valuing improvements to health and life expectancy, based on individuals' willingness to pay. We then apply the framework to past and prospective reductions in mortality risks, both overall and for specific life-threatening diseases. We calculate (i) the social values of increased longevity for men and women over the 20th century; (ii) the social value of progress against various diseases after 1970; and (iii) the social value of potential future progress against various major categories of disease. The historical gains from increased longevity have been enormous. Over the 20th century, cumulative gains in life expectancy were worth over $1.2 million per person for both men and women. Between 1970 and 2000 increased longevity added about $3.2 trillion per year to national wealth, an uncounted value equal to about half of average annual GDP over the period. Reduced mortality from heart disease alone has increased the value of life by about $1.5 trillion per year since 1970. The potential gains from future innovations in health care are also extremely large. Even a modest 1 percent reduction in cancer mortality would be worth nearly $500 billion.

In this paper, we develop and apply an economic framework for valuing improvements in health, based on Murphy and Topel (2002). Past improvements in health and longevity have had enormous social value. By our estimation, the contributions to the economic well-being of longer lifetimes have been worth about dollar 73 trillion since 1970, or about dollar 2.6 trillion per year. The average 50-year-old man gained additional life-years worth roughly dollar 350,000, while a 50-year-old woman gained about dollar 180,000. Looking ahead, prospective benefits from further progress are also large: a 10 percent reduction in mortality from heart disease would be worth over dollar 4 trillion, and even a 1 percent reduction in cancer deaths would be worth over dollar 400 billion. These values suggest that public investments in basic medical research may yield huge social returns, but distortions in the allocation of medical care and in research incentives may yield future benefits that are smaller than the costs of achieving them. While the average net health benefits of increased medical expenditures are large, costs may have greatly exceeded benefits in certain periods and age groups.

ELEVEN YEARS AGO, our Brookings Paper "Why Has the Natural Rate of Unemployment Increased over Time?" analyzed long-term changes in joblessness among American men. (1) We documented the dramatic rise between 1967 and 1989 in both unemployment and nonparticipation in the labor force among prime-aged males. Our main conclusion was that a steep and sustained decline in the demand for low-skilled workers had reduced the returns to work for this group, leading to high rates of unemployment, labor force withdrawal, and long spells of joblessness for less-skilled men. We found that time spent out of the labor force and time spent unemployed accounted in roughly equal measure for the long-term growth in joblessness. We concluded that structural factors, primarily the decline in the demand for low-skilled labor, had dramatically changed the prospects for a return to low rates of joblessness any time soon. After that paper was published, things appeared to change. The 1990s opened with a brief recession that was followed by the longest sustained decline in unemployment in modern U.S. history. By the end of that expansion, the unemployment rate had reached its lowest level since the late 1960s, falling below 4 percent for the first time since 1969. Some macroeconomists argued that the so-called natural rate of unemployment had permanently shifted to 5 percent or below. (2) Because we had emphasized changes in the structure of labor demand that had made a return to low rates of joblessness unlikely, these facts presented a challenge to our 1991 framework. Maybe we were just wrong--maybe the demand and supply framework of our previous work is inconsistent with rates of joblessness in the post-1990 period. If so, we would join a distinguished group of social scientists who have drawn attention to a significant empirical phenomenon only to watch that phenomenon disappear immediately thereafter. (3) As it turns out, however, the framework that we developed for thinking about pre-1990 patterns of joblessness also does fairly well in helping to understand jobless time in the post-1990 period. In this paper we look in some detail at employment data from the 1990s, revisiting issues raised in our earlier work. Specifically, we ask: --Have the trends we identified in our earlier paper--the concentration of nonemployment among the less skilled, the growth of nonparticipation in the labor force, and the increased duration of joblessness--been reversed with the fall in aggregate unemployment? --Did the expansion of the 1990s really return the U.S. labor market to conditions of the late 1960s, as unemployment statistics seem to indicate? --Does the economic framework of supply and demand we utilized a decade ago still help in understanding long-term developments in unemployment, nonemployment, and labor force participation? Our answers are surprising. First, the basic trends toward longer spells of joblessness and rising nonemployment have continued in spite of the prolonged expansion of national output and the concomitant fall in unemployment rates. Long jobless spells and labor force withdrawal were more important in the 1990s than ever before. Second, the fall in unemployment to levels close to historical lows is very misleading. Broader measures of joblessness show that the labor market of the late 1990s was more like the relatively slack labor market of the late 1980s than like the booming labor market of the late 1960s. Finally, the basic forces of supply and demand identified in our previous paper continue to have explanatory power. The theory does a reasonably good job of explaining those trends that have continued, as well as those that have changed. Recent data also provide considerable insight into what has happened in the labor market over the past decade. Over the 1990s, even as unemployment was falling, time spent out of the labor force was rising. …

Supply-side factors may contribute to rising wage inequality. First, certain changes in the supply of skills allegedly exacerbate wage inequality. Women's increased labor force participation and increased immigration are the leading candidates; both allegedly reduce the wages of less-skilled men. However, immigration's impact on wage inequality has been minor and the effects of women's participation is inconclusive. Second, in evaluating the likelihood that human capital investment will mitigate future inequality, evidence suggests that rising returns to education have increased the proportion of young people attending college, limiting the growth of inequality among high-wage workers.

John Lott: When we first attempted to put this program together, I was a bit worried that with a general session, a luncheon and five paper sessions, it might be a little difficult to find enough participants. Well, I can assure you, those concerns were short lived. In fact I have a little more appreciation for what it might be like to be a journal editor, because I think I have probably ended up offending about three or four times more people for not including them in sessions such as this than I have possibly made friends by having them included. So far, we have had one session of original papers in Armen's honor, and immediately after this, Ben Klein will address the luncheon, and tomorrow we have four more sessions. Right now, we are going to hear the thoughts of five prominent individuals as they speak about Armen's influence as a teacher, researcher, coauthor and colleague. Two of the people here are Nobel prize winners; Bill Sharpe had Armen as his dissertation advisor, and incidentally he also had Harold Demsetz on his committee, so this is kind of old home week for him; Jim Buchanan, another Nobel prize winner, had Armen as a colleague; Axel Leijonhufvud has been in the same economics department as Armen for thirty years. Others have had him as a teacher, like Bob Topel, and as both a colleague and as a coauthor, like Harold Demsetz. I thought I would take advantage of my position as moderator and organizer to reflect personally on what Armen has meant to me. He may not want to own up to the responsibility for the blame or credit that I attribute to him. When I was in high school, the summer after my sophomore year, an economics professor moved in next door to me, M. Bruce Johnson (who teaches now at the University of California at Santa Barbara). I went over and asked Bruce what types of economics textbooks I should look at, and he gave me seven of them. I think the first three that I looked through seemed okay, but they were nothing particularly exciting. Then I got to Armen's textbook with Bill Allen, University Economics, and I think that book was responsible for me not only becoming an academic but also deciding to go to UCLA. It is hard to explain now, though I guess some of you can relate to how exciting reading the questions in the back of the chapter were. Whether it be things like "Why Rose Bowl ticket prices are set low so that they have more people demanding them than the supply of tickets available?" Or the shipping of good apples out; or why rent control results in students not obtaining apartments, but elderly old ladies who are less likely to damage the apartment buildings. The amazing thing was that such clear and simple insights could provide such powerful implications, and it seemed amazing to me that people could actually go and earn income thinking about such fun and interesting problems. I suppose that was responsible for me wanting to become an academic. To give you an idea of the youthful enthusiasm that I had, I decided at that point I was going to UCLA. My mom, who was living in Miami, felt that California was a dangerous place all the way across the continent, and she was unwilling to let me go there. So I went to school in the south for a year and then for my sophomore year I said, "Well, it's still a plane trip away, it's still going to be a plane trip away in California, it can't be much worse." So, I ended up at UCLA. Less than a week after I had moved there, I went over and knocked on Armen's door because I wanted to go in and offer my services and see if he would be willing to hire me for a research assistant. He was not in his office, and so I went over to Bill Allen's office and I knocked on the door, and he was in. So I told him how anxious I was for him to hire me as an RA, and he said, "How about $4.50 an hour?" And I said, "Oh that's great!" I didn't notice at that time that Clay LaForce had walked in behind me, and his response was, "Bill, I think you're paying too much. …

We analyze the central features of economic policies to mitigate climate change. The basic structure of Pigouvian “carbon pricing” is shown to follow from a standard Hotelling problem for the intertemporal pricing of an exhaustible resource. We extend this analysis to consider the strength and timing of research incentives, the costs of implementation delay and the impact of anticipated future technologies on current carbon prices. We study a variety of issues related to the valuation of climate investments, including uncertainty as to the future timing and distribution of climate impacts and the appropriate social rate of discount for valuing policies. Under reasonable circumstances the insurance properties of climate investments may warrant unusually low discount rates. We use the same framework to argue that policy makers in developing countries will discount the expected returns from climate investments more heavily, because such investments have weaker insurance value in the developing world.

Most of the economics literature on compensation and organizations builds from the theory of agency.’ For the most part, the literature analyzes situations in which agents’ performance can be controlled by tying compensation to objective performance measures such as output or sales. It ignores the fact that most compensation arrangements involve superiors’ subjectire. and hence non-contractible. judgements about employee performance. In our view, much of what is interesting about actual employment relations follows from the observation that ‘performance appraisal is a process by which humans judge other humans’ [Milkovich and Wigdor (1991)]. This paper studies the implications of subjective performance evaluation for compensation policies and for the efficiency of employment relations. Our objectives are two fold. First. we propose the importance of subjectivity of evaluations to better understand organizatlonal practices such as politicking, favoritism. and compression of wage scales. Second, we hope to orient the study of subjective performance evaluation in ways that are consistent with empirical evidence on what organizations actually do.

Over the course of the twentieth century, Sweden carried out one of the most ambitious experiments by a capitalist market economy in developing a large and active welfare state. Sweden's generous social programs and the economic equality they fostered became an example for other countries to emulate. Of late, Sweden has also been much discussed as a model of how to deal with financial and economic crisis, due to the country's recovery from a mid-1990s banking crisis. At that time economists debated whether the welfare state caused Sweden's crisis and should be reformed - a debate with clear parallels to current concerns over capitalism. Bringing together leading economists, "Reforming the Welfare State" examines Sweden's policies in response to the mid-1990s crisis and the implications for the subsequent recovery. Among the issues investigated are the way changes in the labor market, tax and benefit policies, local government policy, industrial structure, and international trade affected Sweden's recovery. The way that Sweden addressed its economic challenges provides valuable insight into the viability of large welfare states, and more broadly, into the way modern economies deal with crisis.

This paper studies determinants of the geographic distribution of unemployment in the United States since 1950. We argue that "equilibrium" differences in unemployment among markets are partially supported by corresponding differences in the covariance structure of sectoral demands for labor. When workers are mobile, greater diversification of sectoral demands reduces unemployment. We confirm this point using pooled time-series-cross-section data on state unemployment and employment by industry. We also find evidence for nonneutrality of aggregate disturbances based on geographic differences in industrial composition, and that permanent changes in the sectoral composition of employment lead to transitory fluctuations in unemployment.

This paper studies what happens to people who lose their jobs, drawing inferences for the private costs of unemployment an the importance of specific capital in employment relationships. I argue that specific capital is a central factor determining the size of earnings losses among displaced workers. Using panel data from two different sources, I find substantial and long-lasting effects of job loss on annual earnings and wages. In one data source these losses are strongly related to prior job tenure - suggesting the importance of specialization-but this finding does not occur in other data. Implications of these results for macroeconomic adjusments are discussed.

We consider three questions related to the choice between war in Iraq and a continuation of the pre-war containment policy. First, in terms of military resources, casualties and expenditures for humanitarian assistance and reconstruction, is war more or less costly for the United States than containment? Second, compared to war and forcible regime change, would a continuation of the containment policy have saved Iraqi lives? Third, is war likely to bring about an improvement or deterioration in the economic well-being of Iraqis? We address these questions from an ex ante perspective as of early 2003.According to our analysis, pre-invasion views about the likely course of the Iraq intervention imply present value costs for the United States in the range of $100 to $870 billion. Our estimated present value cost for the containment policy is nearly $300 billion and ranges upward to $700 billion when we account for several risks stressed by national security analysts. Our analysis also indicates that war and forcible regime change will yield large improvements in the economic well-being of most Iraqis relative to their prospects under the containment policy, and that the Iraqi death toll would likely be greater under containment.

We review and extend the empirical literature that seeks evidence of a wedge between the private and social returns to human capital, specifically education. This literature has two main strands. First, much of modern growth theory puts human capital at center-stage, building on older notions of human capital externalities as an engine of economic growth. Empirical support for these ideas, based on both the comparative growth of national outputs and on the geographic dispersion of wages within countries, is meager. There is a strong association between average earnings and average education across nations and regions in the U.S. that exceeds the private returns to education. However, problems of omitted variables and endogeneity inherent in spatial equilibrium models mean that this association can hardly be understood as evidence for social returns. There is no evidence from this literature that social returns are smaller than private ones, yet neither is there much to suggest that they are larger. We then turn to the literature on job market signaling, which implies that social returns to education are smaller than private returns. Consistent with our earlier conclusions, we find scant evidence of this. We construct a model of the speed of employer learning about workers' unobserved talents, and we estimate the model using panel data on young workers. We find that employer learning about productivity occurs fairly quickly after labor market entry, implying that the signaling effects of schooling are small.

This article examines how differences in longevity over time and across groups add to the typical measures of economic progress and intergroup differentials. We focus on gains for and differences between groups defined both by race (black and white) and by gender, relying on willingness to pay as our measure of the economic value of gains in longevity. Measured at birth, the gains for white males between 1968 and 1998 were about 245,000 dollars per person, while the gains for black males were far larger, about 390,000 dollars per person. The gains for women were somewhat smaller, with white females gaining about 150,000 dollars per person and black females gaining about 305,000 dollars per person. Our estimates suggest that differences in income explain about 1/3 to 1/2 of the current black-white gap in longevity.

We analyze entry, pricing and product design in a model with differentiated products. Under plausible conditions, entry into an initially monopolized market leads to higher prices for some, possibly all, consumers. Entry can induce a misallocation of goods to consumers, segment the market in a way that transfers surplus to producers and undermine aggressive pricing by the incumbent. Post entry, firms have strong incentives to modify product designs so as to raise price by strengthening market segmentation. Firms may also forego socially beneficial product improvements in the post-entry equilibrium, because they intensify price competition too much. Multi-product monopoly can lead to better design incentives than the non-cooperative pricing that prevails under competition.

Publisher Summary Among macroeconomists, the shift of research effort is near total, eclipsing the business-cycle focus that had dominated the field for decades. Behind this is a recognition of the enormous welfare implications of sustained economic growth, and a renewed desire to understand the vast differences in living standards among countries, which dates back at least to Smith. What some have called the "neoclassical revival" in growth economics has come to dominate macroeconomic research. Developments in this area should be of particular interest to labor economists because much of the revival of growth economics builds on the theory of human capital. Because human capital is, by definition, embodied skills and knowledge, and because advances in technical knowledge drive economic growth, it follows that human capital accumulation and economic growth are intimately related. This chapter reviews recent developments in growth economics, with a particular focus on labor market and human capital issues.

Acknowledgments Introduction Richard B. Freeman, Robert Topel, Birgitta Swedenborg. 1: Generating Equality and Eliminating Poverty, the Swedish Way Anders Bjorklund, Richard B. Freeman. 2: Public Employment, Taxes, and the Welfare State in Sweden Sherwin Rosen 3: Tax Policy in Sweden Erik Norrman, Charles E. McLure, Jr. 4: Wage Policy and Restructuring: The Swedish Labor Market since 1960 Per-Anders Edin, Robert Topel. 5: The Effects of Sweden's Welfare State on Labor Supply Incentives Thomas Aronsson, James R. Walker. 6: An Evaluation of the Swedish Active Labor Market Policy: New and Received Wisdom Anders Forslund, Alan B. Krueger. 7: Taxes and Subsidies in Swedish Unemployment Lars Ljungqvist, Thomas J. Sargent. 8: The Social Costs of Regulation and Lack of Competition in Sweden: A Summary Stefan Folster, Sam Peltzman. 9: Industrial Policy, Employer Size, and Economic Performance in Sweden Steven J. Davis, Magnus Henrekson. 10: A Heckscher-Ohlin View of Sweden Competing in the Global Marketplace Edward E. Leamer, Per Lundborg. Contributors Author Index Subject Index

Publisher Summary This chapter describes the numbers and characteristics of international migrants to selected developed countries, explores some of the economic factors motivating international migration, examines the impact of immigration on the receiving country's labor markets, discusses the extent to which immigrants assimilate to the receiving country's labor market, and presents several studies of immigrants' effects on the social welfare system. The chapter focuses on the experiences of Australia, Canada, and the United States. Increased immigration has a modest impact on the distribution of income, and most of these adverse affects fall on immigrants themselves. These effects may be small as a result of the effects that immigrants have on local labor demand or of changes in natives' migration patterns. First, there is evidence of a significant amount of immigrant assimilation in the US data, although there is less evidence of it in Australian, Canadian, and European data. This result implies that the adverse effects that US immigrants have on wages lessen as they spend more time in the United States. Second, this assimilation does not mean that immigrants' wages approach those of the median native.

In the US, fluctuations in relative wages and employment across regional markets are very large. For example, during the so-called ‘Massachusetts miracle’ of the 1980s, average wages of men in New England increased by 17 percent, while wages in the ‘rustbelt’ states of the Midwest fell by about 8 percent. At the same time, annual weeks worked increased by about 4 weeks per person in New England, but fell by about 2 weeks in the Midwest. Changes such as these are apparently demand driven in the sense that wage and employment fluctuations are positively correlated over time (Juhn, Murphy and Topel, 1991).

Objective measures of employee performance are rarely available. Instead, firms rely on subjective judgments by supervisors. Subjectivity opens the door to favoritism, where evaluators act on personal preferences toward subordinates to favor some employees over others. Firms must balance the costs of favoritism-arbitrary rewards and less productive job assignments-against supervisors' demands for authority over subordinates. We analyze the conditions under which favoritism is costly to organizations and the effects of favoritism on compensation, the optimal extent of authority, and the use of bureaucratic rules. Economists rarely address the fact that firms are social institutions, where personal relations among coworkers, bosses, and subordinates constitute an important component of many workers' daily lives. This paper takes a step toward addressing organizations as social entities by considering how favoritism by superiors, based on personal preferences toward subordinates, affects compensation and the structure of organizations. The underlying premise of the paper is that accurate and objective measures of a worker's performance are typically unavailable. Instead performance is gauged from subjective opinions

This paper reassesses the evidence on the assimilation and the changing labor market skills of immigrants to the United States. We find strong evidence of labor market assimilation for most immigrant groups. For Asian and Mexican immigrants the first ten years experience in the united States raise earnings by more than 20 percent. Further, this estimate may understate the actual rate of assimilation because of the sharp decline in the relative wages of unskilled U.S. workers. We also find little evidence of declining immigrant "quality" within ethnic groups. The diminished labor market skills of new immigrants result entirely from changes in the immigrants' countries of origin.

This paper reassesses the evidence on the assimilation and the changing labor market skills of immigrants to the United States. We find strong evidence of labor market assimilation for most immigrant groups. For Asian and Mexican immigrants the first ten years experience in the united States raise earnings by more than 20 percent. Further, this estimate may understate the actual rate of assimilation because of the sharp decline in the relative wages of unskilled U.S. workers. We also find little evidence of declining immigrant "quality" within ethnic groups. The diminished labor market skills of new immigrants result entirely from changes in the immigrants' countries of origin.

The idea that wages rise relative to alternatives as job seniority accumulates is the foundation of the theory of specific human capital, as well as other widely accepted theories of compensation. The fact that persons with longer job tenures typically earn higher wages tends to support these views, yet this evidence ignores the decisions that have brought individuals to the combination of wages, job tenure, and experience that are observed in survey data. Allowing for sources of bias generated by these decisions, this paper uses longitudinal data to estimate a lower bound on the average return to job seniority among adult men. I find that 10 years of current job seniority raise the wage of the typical male worker in the United States by over 25 percent. This is an estimate of what the typical worker would lose if his job were to end exogenously. Overall, the evidence implies that accumulation of specific capital is an important ingredient of the typical employment relationship and of life cycle earnings ...

THE AMERICAN DREAM IS THAT each generation should live twice as well as its predecessor. During the hundred years before 1973, real average hourly earnings rose by 1.9 percent a year. ' At that rate earnings doubled every thirty-six years, and the dream was realized. The dream no longer holds. Since 1973 the United States has failed to match its historic track record. In 1973 average real hourly earnings, measured in 1982 dollars by the consumer price index (CPI), were $8.55. By 1992 they had actually declined to $7.43-a level that had been achieved in the late 1960s. Had earnings increased at their pre-1973 pace, they would have risen by 40 percent to more than $12.00. Or consider average real hourly compensation. This is a more comprehensive measure of the payments to labor because it includes fringe benefits as well as earnings. Between 1973 and 1991, real hourly compensation rose by only 5 percent. However the growth of labor income is measured, it clearly has slumped since 1973. A second ominous development in the American economy has accompanied this slump: a dramatic increase in the inequality of earnings. In

Unemployment rates in the United States and other Western economies have shown a pronounced secular increase over the past twenty years. This article studies the determinants of unemployment dynamics in the United States since 1968. The primary goal is to document the empirical facts about the evolution of unemployment that theory must accommodate. Our key empirical findings are in four areas: (1) The secular increase in unemployment in the United States is surprisingly evenly distributed across subcategories of the labor force, including industries, regions, and demographic groups; (2) Most of the increase is accounted for by a pronounced shift toward long-term unemployment; (3) Based on the observed characteristics of workers, the occurrence of unemployment is now much more evenly distributed than it was in the recent past; (4) Interindustry mobility and fluctuations in the pace of labor reallocation among sectors have played only minor roles in affecting observed unemployment. These points challenge th...

In labor market equilibrium, sectoral differences in "natural" rates of unemployment generate a conformable distribution of wage differentials that compensate workers for bearing unemployment risk. This paper offers new empirical evidence on the determinants of this equilibrium. The analysis consists of two stages. First, I estimate a three-state model of employment and unemployment that identifies the determinants of individuals' rates of entering and leaving unemployment spells. Sectoral, demographic, and policy-induced differences in unemployment probabilities evolve naturally from this framework. Second, I estimate the impact of these differences on the distribution of wages. An important finding is the powerful impact of the unemployment insurance (UK) system both on unemployment and on equalizing wage differences. The evidence is strong that the availability of UK increases unemployment, while simultaneously reducing the magnitude of compensating wage differentials. Most of the effect of UK on unemp...

A supply-determined model of housing investment is estimated from quarterly data over the 1963-83 period. The model is built on dynamic marginal cost pricing considerations and allows short- and long-run supply elasticities to differ. These are estimated as 1.0 and 3.0, respectively, but most of the long-run response occurs within one year. Rapid adjustment speed and the sizable long-run elasticity of supply are important factors in understanding the volatility of housing investment. The data also suggest some anomalies in the expected present value theory of asset pricing for housing capital. Copyright 1988 by University of Chicago Press.

This paper studies the processes of wage and employment dynamics within local labor markets. The theoretical context is a dynamic spatial equilibrium among locales that is supported by incentives to migrate to markets offering the greatest present value of future earnings. Thus costly migration arbitrages geographic wage differences. Using a time series of cross-sectional files from the Current Population Surveys of 1977-79, I find that wages are sensitive to interarea differences in market conditions. A positive relative shock to local labor demand increases relative wages within a locale, but expectations of future demand actually reduce current wages because of increased current migration. Thus wages are more flexible in response to transitory changes in local market conditions than to permanent ones. Consistent with theory, wages are most flexible among the least mobile demographic groups, who are inelastically supplied across geographic areas.

AMONG workers who are laid off from their previous jobs, more than 70 percent collect benefit payments from the unemployment insurance (UI) system.' These benefits are widely asserted to reduce the rate at which unemployed individuals find new jobs, so that measured unemployment is increased by unemployment insurance. A large body of empirical evidence now exists that shows this effect on the duration of unemployment spells.2 Far less attention-both in policy debate and in research-has been paid to the fact that the unemployment insurance system encourages persons to become unemployed. In this paper, I focus on the empirical structure and the effects of these incentives. The results show that unem

Using longitudinal data, we study the processes of job mobility and wage growth among young men. During the first ten years in the labor market, a typical worker will hold seven jobs, about two thirds of his career total. The evolution of wages plays a key role in this transition to stable employment: wage gains at job changes account for at least a third of early-career wage growth, and the wage is the key determinant of job changing decisions among young workers. Job changing is a critical component of workers' movement toward the stable employment relations of mature careers.

A decentralized market theory of investment based on rising supply price is formulated and explained. Asset prices embody all available information in a competitive market and serve as "sufficient statistics" for future market conditions. Construction is determined myopically by marginal cost pricing: rising supply price constrains aggregate investment. Market dynamics imply that anticipated pulses in demand and interest rates lead to "bubbles" in prices, rentals and construction, because it pays to "build ahead of demand" in the presence of rising supply price. This model, similar to q-theory, assumes that long and short run elasticities of supply are identical. Short-run supply is less elastic than long-run supply when internal adjustment costs are superimposed on rising supply price. Then the current construction decision is no longer myopic and current price (or current q) is no longer sufficient for investment. Instead, builders must anticipate the future path of asset prices for current construction decisions. This enriched model is estimated under the hypothesis of rational expectations. The short-run elasticity is found to be 1.0 inquarterly data. The long-run elasticity is 3.0. The long-run is achieved within one year, indicating substantial built-in flexibility in the industry to accomodate great volatility in housing construction. Elastic supply helps account for the large fluctuations in output and employment observed in this industry. The data also show that prices alone do not clear the market. Other nonprice dimensions, including expected time-to-sale and overall transactions volume play independent roles which remain to be explained.