Of Pencils and
(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 Roy and hedonic models. I think there has been a great deal of misinterpretation of the Krueger/DiNardo/Pischke exchange. This paper helps to clarify the issues but does not break new theoretical or empirical ground.
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.
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.
If firms hire heterogeneous workers but must offer all workers insurance benefits under similar terms, then 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. This pattern is consistent with trends in the U.S. economy following the creation of section 125 plans.
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.
Social Ties and the Job Search of Recent Immigrants (with Deepti Goel)
We show that increasing the probability of obtaining a job offer through the network should raise the observed mean wage in jobs found through formal (non-network) channels relative to that in jobs found through the network. This prediction also holds at all percentiles of the observed wage distribution, except the highest and lowest. The largest changes are likely to occur below the median. We test and confirm these implications using a survey of recent immigrants to Canada. We also develop a simple structural model, consistent with the theoretical model, and show that it can replicate the broad patterns in the data. For recent immigrants, our results are consistent with the primary effect of strong networks being to increase the arrival rate of offers rather than to alter the distribution from which offers are drawn.
Monitoring for Worker Quality (with Gautam Bose)
Much nonmanagerial work is routine, with all workers having similar output most of the time. However, failure to address occasional challenges can be very costly, and consequently easily detected, while challenges handled well pass unnoticed. We analyze job-assignment and worker-monitoring for such `guardian' jobs. If monitoring costs are positive but small, monitoring is nonmonotonic in the firm's belief about the probability that a worker is good. The model explains several empirical regularities regarding nonmanagerial internal labor markets: low use of performance pay, seniority pay, rare demotions, wage ceilings within grade and wage jumps at promotion.
The Black-White Education-Scaled Test-Score Gap in Grades K-7 (with Timothy Bond)
We address the ordinality of test scores by rescaling them by the average eventual educational attainment of students with a given test score in a given grade. We show that measurement error in test scores causes this approach to underestimate the black-white test score gap and use an instrumental variables procedure to adjust the gap. While the unadjusted gap grows rapidly in the early school years, particularly in reading, after correction for measurement error, the education-scaled gap is large, exceeds the actual black-white education gap and is roughly constant. Strikingly, the gap in all grades is largely explained by a small number of measures of socioeconomic background. We discuss the interpretation of scales tied to adult outcomes.
The Effect of High School Exit Exams on Graduation, Employment and Incarceration (with Olesya Baker)
We evaluate the effects of high school exit exams on high school graduation, incarceration, employment and wages. We construct a state/graduation-cohort dataset using the Current Population Survey, Census and information on exit exams. We find relatively modest effects of high school exit exams except on incarceration. Exams assessing academic skills below the high school level have little effect. However, more challenging standards-based exams reduce graduation and increase incarceration rates. About half the reduction in graduation rates is offset by increased GED receipt. We find no consistent effects of exit exams on employment or the distribution of wages.
Does Competition Eliminate Discrimination? Evidence from the Commercial Sex Market in Singapore (with Huailu Li and Kaiwen Leong)
The street sex worker market in Geylang, Singapore is a highly competitive market in which clients can search legally at negligible cost, making it ideal for testing Diamond's hypothesis regarding search and monopoly pricing. As Diamond predicts, price discrimination survives in this market. Despite an excess supply of workers, but consistent with their self-reported attitudes and beliefs, sex workers charge Caucasians (Bangladeshis) more (less), based on perceived willingness to pay, and are more (less) likely to approach and reach an agreement with them. Consistent with taste discrimination, they avoid Indians, charge more and reach an agreement with them less frequently.
The Sad Truth About Happiness Scales (with Timothy Bond)
Nearly all happiness research assumes that happiness can be cardinalized to be distributed normally across different groups. We show that whenever this assumption is true, it is impossible to rank groups by average happiness. The CDFs will (almost) always cross when estimated using large samples. There are an infinite number of equally correct alternative cardinalizations that reverse this ranking. We provide several examples and a formal proof. Whether Moving-to-Opportunity increases happiness, men have become happier relative to women, and an Easterlin paradox exists depends on whether happiness is distributed normally or log-normally. We discuss restrictions that may permit such comparisons.
Discrimination and Worker Evaluation (with Costas Cavounidis)
We develop a model of self-sustaining discrimination in wages, coupled with higher unemployment and shorter employment duration among blacks. While white workers are hired and retained indefinitely without monitoring, black workers are monitored and fired if a negative signal is received. The fired workers, who return to the pool of job-seekers, lower the average productivity of black job-seekers, perpetuating the cycle of lower wages and discriminatory monitoring. Under suitable parameter values the model has two steady states, one corresponding to each population group. Discrimination can persist even if the productivity of blacks exceeds that of whites.