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 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.

 

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

 

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.

 

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: Consistent Estimates When Abortion Makes Miscarriage Nonrandom (with Adam Ashcraft and Ivan Fernandez-Val) forthcoming Economic Journal after minor revisions

 

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. Because teens who abort are more favorably selected than the set of teens who become pregnant, teens who miscarry are less favorably selected than those who either give birth or abort but more favorably selected than those who give birth. Consequently, using miscarriage as an instrument for non-birth is biased towards a benign view of teen motherhood while OLS on a sample of those giving birth or miscarrying is biased towards a negative view. We derive a consistent estimate based on a weighted average of OLS and IV. The estimated effects are generally adverse but modest.

 

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.

 

School Entry, Educational Attainment and Quarter of Birth: A Cautionary Tale of LATE (with Rashmi Barua)

 

Partly in response to increased testing and accountability, states and districts have been raising the minimum school entry age, but existing studies show mixed results regarding the effects of entry age. These studies may be severely biased because they violate the monotonicity assumption needed for LATE. We propose an instrument not subject to this bias and show no effect on the educational attainment of children born in the fourth quarter of moving from a December 31 to an earlier cutoff. We then estimate a model that reconciles the different IV estimates including ours. We find that one standard instrument is badly biased but that the other diverges from ours because it estimates a different LATE. We also find that an early entry age cutoff that is applied loosely (as in the 1950s) raises educational attainment but one that is strictly enforced lowers it.

 

Racial Discrimination in the Labor Market:  Theory and Empirics (with Jee-Yeon K. Lehmann) forthcoming Journal of Economic Literature

 

We review theories of race discrimination in the labor market. Taste-based models can generate wage and unemployment duration differentials when combined with either random or directed search even when strong prejudice is not widespread, but no existing model explains the unemployment rate differential. Models of statistical discrimination based on differential observability of productivity across races can explain the pattern and magnitudes of wage differentials but do not address employment and unemployment. At their current state of development, models of statistical discrimination based on rational stereotypes have little empirical content. It is plausible that models combining elements of the search models with statistical discrimination could fit the data. We suggest possible avenues to be pursued and comment briefly on the implication of existing theory for public policy.

 

A Theory of Monitoring and Internal Labor Markets (with Gautam Bose)

 

We analyze a firm's job-assignment and worker-monitoring decisions when workers face occasional crises. Firms prefer to assign good workers to a difficult task and to not employ bad workers. Firms observe failures but only observe successfully resolved crises if they monitor the worker. If monitoring costs are positive but sufficiently small, for a range of probabilities that the worker is good, the firm assigns the worker to a low task (less sensitive to crises) and monitors her. At probabilities below this range and not too much above it, she is assigned to the low task and not monitored. At high probabilities of being good, she is assigned to the difficult task. We analyze the implications for internal labor markets of the case where a worker has the same ex ante probability of being good at all firms and learning is about ability at this particular firm.

 

Evaluating Student Outcomes at For-Profit Colleges (with Russell Weinstein)

 

Using the Beginning Postsecondary Student Survey, we examine the effect on earnings of obtaining certificates/degrees from for-profit, not-for-profit, and public institutions. Students who enter certificate programs at any type of institution do not gain from earning a certificate. However, among those entering associates degree programs, there are large, statistically significant benefits from obtaining certificates/degrees from public and not-for-profit but not from for-profit institutions. These results are robust to addressing selection into the labor market from college, and into positive earnings from unemployment, using imputation methods and quantile regression along with a maximum likelihood sample selection model.

 

The Evolution of the Black-White Test Score Gap in Grades K-3: The Fragility of Results (with Timothy Bond)

 

Although both economists and psychometricians typically treat them as interval scales, test scores are reported using ordinal scales. Using the Early Childhood Longitudinal Study and the Children of the National Longitudinal Survey, we examine the effect of order-preserving scale transformations on the evolution of the black-white reading test score gap from kindergarten entry through third grade. Plausible transformations reverse the growth of the gap in the CNLSY and greatly reduce it in the ECLS-K during the early school years. All growth from entry through first grade and a nontrivial proportion from first to third grade probably reflects scaling decisions.