Of Pencils and Computers
(Although a number of people, including
most of the key players in the debate, have given me very positive feedback
about this paper, it was written primarily for students in my graduate labor
classes and has no obvious outlet. This website seems like a good place for it.)
This paper discusses
the well-known papers by Alan Krueger and by John DiNardo and Steve Pischke on
the relation between computers and the rise in wage inequality. It addresses
what can be learned from the exercise in the context of simple
The Pricing of Job Characteristics When Markets Do Not Clear: Theory and Policy Implications (with Sumon Majumdar) extended version of paper in International Economic Review
This paper examines a model of nonsequential search when jobs can vary with respect to nonpecuniary characteristics. We find that in the presence of frictions in the labor market, the equilibrium distribution need not show evidence of compensating wage differentials. The model also generates several pervasive features of labor markets: (a) unemployment and vacancies, (b) apparent discrimination, and (c) market segmentation. When workers are homogeneous, there is no positive role for policy -- restrictions on the range of job offers must decrease welfare and cannot reduce unemployment. However, when workers have heterogeneous preferences, such restrictions may lower unemployment and even lead to a Pareto-improvement in welfare. In particular, we consider the impact of policies banning discrimination and regulating working-conditions.
Inference with Difference in Differences and Other Panel Data (with Stephen Donald) forthcoming in the Review of Economics
and Statistics
We examine inference in
panel data when the number of groups is small as is typically the case for
differences-in-differences estimation and when some variables are fixed within
groups. In this case, standard asymptotics based on the number of groups going
to infinity provide a poor approximation to the finite sample distribution. We
show that in some cases the t-statistic is distributed as t and propose simple
two-step estimators for these cases. We apply our analysis to three well-known
papers. We confirm our theoretical analysis with
The Effect of the Payroll Tax on Earnings: A Test of
Competing Models of Wage Determination
Under the standard competitive model, if a tax change affects a group of workers with highly inelastic labor supply, their earnings will fall by essentially the entire nominal employer share of the tax increase. Allowing the wage to play a motivational role but maintaining the market-clearing assumption broadens the range of possible outcomes. With a 50/50 split in the nominal share, given a reasonable estimate of the elasticity of demand, earnings could fall from anywhere between 0 and more than 100% of the employer's nominal share but would not rise. In contrast, because there is excess labor (involuntary unemployment) in equilibrium, efficiency wage models function very much like models in which the supply of labor is perfectly elastic, and thus earnings rise by more than the worker's nominal share. I argue that the 1968, 1974 and 1979 increases in the taxable earnings base for FICA provide good opportunities to test the models. This tax increase affected only those workers earning significantly more than the median earnings for male full-time/year-round workers. Such workers' labor force participation is likely to have been highly inelastic. In addition, low earnings workers did not experience this tax increase. The results are supportive of models in which the motivational effects of wages are important but cannot clearly distinguish between the efficiency wage and market-clearing versions of those models.
Worker Sorting, Taxes and Health Insurance Coverage (with Hong Kang)
We develop a model in which firms hire heterogeneous workers but must offer all workers insurance benefits under similar terms. In equilibrium, some firms offer free health insurance, some require an employee premium payment and some do not offer insurance. Making the employee contribution pre-tax lowers the cost to workers of a given employee premium and encourages more firms to charge. This increases the offer rate, lowers the take-up rate, increases (decreases) coverage among high (low) demand groups, with an indeterminate overall effect. We test the model using the expansion of section 125 plans between 1987 and 1996. The results are generally supportive.
Ability Bias, Discount Rate Bias and the Return to
Education
This is a paper that I
wrote a long time ago and for which I still get frequent requests. Although I
got a “revise and resubmit” from a prestigious journal, I never rewrote the
paper because I thought there were errors in the approach. There are definitely
mistakes in the paper, but in retrospect I regret not revising it. I believe
the paper was very influential in making people think about the proper
interpretation of instrumental variables when coefficients are not constant
and, in particular, laid some of the groundwork for the work of Josh Angrist
and Guido Imbens on LATE and the work of Jim Heckman and his coauthors on the
interpretation of instrumental variables. I post it here for the historical
record.
The Consequences of Teenage Childbearing (with Adam Ashcraft)
We examine the effect of teenage childbearing on the adult outcomes of a sample of women who gave birth, miscarried or had an abortion as teenagers. If miscarriages are (conditionally) random, then if all miscarriages occur before teenagers can obtain abortions, using the absence of a miscarriage as an instrument for a live birth provides a consistent estimate of the effect of teenage motherhood on women who give birth. If all abortions occur before any miscarriage can occur, OLS on the sample of women who either have a live birth or miscarry provides an unbiased estimate of this effect. Under reasonable assumptions, IV underestimates and OLS overestimates the effect of teenage motherhood on adult outcomes. For a variety of outcomes, the two estimates provide a narrow bound on the effect of teenage motherhood on adult outcomes and which is relatively modest. The bounds can also be combined to provide consistent estimates of the effects of teen motherhood. These effects are generally adverse but modest.
Education and Labor Market Discrimination (with Michael Manove)
We propose a model that combines statistical discrimination and educational sorting that explains why blacks get more education than do whites of similar cognitive ability. Our model explains the difference between blacks and whites in the relations between education and AFQT and between wages and education. It cannot easily explain why, conditional only on AFQT, blacks earn no more than do whites. It does, however, suggest, that when comparing the earnings of blacks and whites, one should control for both AFQT and education in which case a substantial black-white wage differential reemerges. We explore and reject the hypothesis that differences in school quality between blacks and whites explain the wage and education differentials. Our findings support the view that some of the black-white wage differential reflects the operation of the labor market.
The Return to English in a Non-English Speaking Country: Russian Immigrants and Native Israelis in Israel (with Erez Siniver)
We
use a unique sample of Russian immigrant and natives in