Kevin M. Murphy

Wage Inequality and the Rise in Returns to Skill

Using data from the March Current Population Survey, we document an increase over the past 30 years in wage inequality for males. Between 1963 and 1989, real average weekly wages for the least skilled workers (as measured by the tenth percentile of the wage distribution) declined by about 5 percent, whereas wages for the most skilled workers (as measured by the ninetieth percentile of the wage distribution) rose by about 40 percent. We find that the trend toward increased wage inequality is apparent within narrowly defined education and labor market experience groups. Our interpretation is that much of the increase in wage inequality for males over the last 20 years is due to increased returns to the components of skill other than years of schooling and years of labor market experience. Our primary explanation for the general rise in returns to skill is that the demand for skill rose in the United States over this period.

The Allocation of Talent: Implications for Growth

A countrys most talented people typically organize production by others, so they can spread their ability advantage over a larger scale. When they start firms, they innovate and foster growth, but when they become rent seekers, they only redistribute wealth and reduce growth. Occupational choice depends on returns to ability and to scale in each sector, on market size, and on compensation contracts. In most countries, rent seeking rewards talent more than entrepreneurship does, leading to stagnation. Our evidence shows that countries with a higher proportion of engineering college majors grow faster; whereas countries with a higher proportion of law concentrators grow more slowly.

Estimation and Inference in Two-Step Econometric Models

A commonly used procedure in a wide class of impirical applications is to impute unobserved regressors, such as expectations, from an auxiliary econometric model. This two-step (T-S) procedure fails to account for he fact that imputed regessors are measured with sampling error, so hypothesis tests based on the estimated covariance matrix of the second-step estimator are biased, even in large samples. We present a simple yet general method of calculating asymptotically correct standard errors in T-S models. The proceedure may be applied even when joint estimation methods, such as full information maximum likelihood, are inappropriate or computationally infeasible. We present two examples from recent empirical literature in which these corrections have a major impact on hypothesis testing.

The Structure of Wages

Although surveys show that traditional orderings of average wage—i.e., higher earnings with higher schooling and concave age-wage profiles—have not changed during the past three decades, the actual size of the wage differentials measured by education or by work experience has varied from peak to trough by a factor of two-to-one. The patterns are not monotone, but there is a trend toward increased skill premiums. We first examine the structure of wages among white men distinguished by age and schooling for the period from 1963 to 1989. We then compare shifts in the distribution of wages and employment among the age x schooling categories to show in reference to a stable demand structure that employment alone cannot account for observed changes in relative wages. Finally, we describe the characteristics required of candidate demand shifters and offer examples using linear trend, business cycle shocks, and recent patterns of deficits in international trade.

The Value of Health and Longevity

We develop a framework for valuing improvements in health and apply it to past and prospective reductions in mortality in the United States. We calculate social values of (i) increased longevity over the twentieth century, (ii) progress against various diseases after 1970, and (iii) potential future progress against major diseases. Cumulative gains in life expectancy after 1900 were worth over

A Simple Theory of Advertising as a Good or Bad

1.2 million to the representative American in 2000, whereas post‐1970 gains added about

The Family and the State

3.2 trillion per year to national wealth, equal to about half of GDP. Potential gains from future health improvements are also large; for example, a 1 percent reduction in cancer mortality would be worth

The Transition to a Market Economy: Pitfalls of Partial Reform

500 billion.

Wage Inequality and Family Labor Supply

Our analysis treats advertisements and the goods advertised as complements in stable metautility functions, and generates new results for advertising by building on and extending the general analysis of complements. By assimilating the theory of advertising into the theory of complements, we avoid the special approaches to advertising found in many studies that place obstacles in the way of understanding the effects of advertising. We also use this approach to evaluate advertising from a welfare perspective. Whether there is excessive or too little advertising depends on several variables: the effects on consumer utility, the degree of competition in the market for advertised goods, the induced changes in prices and outputs of advertised goods, and whether advertising is sold to consumers.

Efficiency Wages Reconsidered: Theory and Evidence

The immaturity of children sometimes precludes efficient arrangements between children and parents or others responsible for child care. The difficulty in establishing efficient relations within families provides the point of departure for our interpretation of the heavy state involvement in the family. The authors believe that a surprising number of state interventions mimic the agreements that would occur if children were capable of arranging for their care; many regulations of the family improve the efficiency of family activities. These interventions include subsidies to education and training social security and other old age support subsidies to births laws that limit access to divorce and the sale of children and laws that require parents permission for early marriage and other choices of children. Families that leave bequests can force children to repay parents for investments in human capital by reducing bequests. Therefore these families do not underinvest in childrens human capital. By contrast families that do not leave bequests often poorer families do underinvest in children; the state may subsidize schools and other training facilities to raise investments in children by poorer families to efficient levels. (authors modified)