Ronald S. Warren

The marginal welfare cost of public funds: Theory and estimates

Abstract We derive a general analytic formula for the marginal welfare cost (MWC) of public funds without imposing restrictive assumptions on preferences or technologies. The framework encompasses the various special cases previously considered, and reconciles the disparities among the reported estimates of MWC. Unresolved differences in existing estimates are fully explained by appropriate interpretations of intended thought experiments and alternative assumptions about the elasticity of labor supply with respect to public spending. Further progress in measuring MWC requires empirical estimation of labor-supply functions that include government spending as an explanatory variable.

Returns to scale in a matching model of the labor market

Abstract This paper presents evidence on the degree of returns to scale in the labor market, using a transcendental logarithmic model of the labor-market matching technology. The empirical results imply (locally) increasing returns to scale, and are consistent with multiple equilibria, thereby suggesting a potentially welfare-enhancing role for macroeconomic policy intervention.

HUMAN CAPITAL INVESTMENT AND LABOR SUPPLY UNDER UNCERTAINTY

The authors extend the theory of human capital investment under uncertainty by incorporating postinvestment labor supply as a choice variable. They show that human capital investment decreases in response to an increase in risk about its return if such investment is an inferior activity and preferences exhibit decreasing risk aversion. However, if investment is normal, then the effect of an increase in risk is indeterminate. These results highlight the importance of obtaining empirical evidence on the income elasticity of demand for human capital investment for arriving at refutable hypotheses about the effect of risk. Copyright 1990 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Customer Discrimination in Professional Basketball: Evidence from the Trading-Card Market

This paper presents evidence on the existence of customer racial discrimination in professional basketball from recent prices for the trading cards of former players in the National Basketball Association. Data were collected on the 258 active roster players in the NBA during the 1976-77 season, 133 of whom had cards issued that year. Maximum-likelihood estimation of a card-price equation is carried out, accounting both for the nonrandom selection of the players for whom cards exist and for left-censoring of the dependent variable. Overall, the empirical results suggest the absence of customer racial discrimination in the pricing of basketball trading cards. However, there is some evidence that the effect of career length on trading-card prices is lower for whites than for blacks, and that the card-price premium for players who subsequently coached in the NBA is lower for blacks than for whites.

The Estimation of Frictional Unemployment: A Stochastic Frontier Approach

This paper reports an estimate of the frictional unemployment rate in U.S. manufacturing that is derived from a parametric, statistical method for estimating stochastic frontiers. The steady-state, perfect-foresight solution to an estimated employment growth frontier provides a locus of technically efficient (frictional) rates of unemployment. The mean frictional unemployment rate during the sample period is estimated to be 3.7 percent of the manufacturing labor force. This estimate conforms closely to an estimate of 3.5 percent that is derived from manufacturing-sector data presented by David M. Lilien (1980) for roughly the same time period. Copyright 1991 by MIT Press.

The effect of unionization on labor productivity: Some time-series evidence

This paper presents evidence concerning the effect of unionization on the average productivity of labor using time-series data from the private, domestic sector of the U.S. economy over the 1948–73 period. Aggregate technology is specified by a constant-returns-to-scale, Cobb-Douglas production function which incorporates union and nonunion labor and proxies for both embodied and disembodied technical change. Maximum likelihood estimates of the model indicate that union membership significantly decreased average labor productivity, holding constant the quality and mix of capital and labor and controlling for cyclical effects.

The effect of unionization on labor productivity: Some additional evidence

Following Brown and Medoff (1978), a number of studies have investigated the effect of unionization on labor productivity using a log-linear, Cobb-Douglas model of technology. To derive this model, a first-order Taylor-series approximation to the intrinsically nonlinear unionization variable is made; the resulting linear equation is estimated with generalized least-squares (GLS) techniques. We demonstrate that this approximation introduces a bias that necessarily results in an overstatement of the absolute value of the exact union productivity effect. We illustrate the magnitude of this bias by comparing GLS estimates of the linear Brown-Medoff model with GLS estimates of the exact, nonlinear relationship, using aggregate time-series data from the private domestic sector of the U.S. economy.

Accounting for Growth and Output Gaps: Evidence from New Zealand

We evaluate New Zealands macroeconomic performance over the 1967-96 period, which witnessed numerous economic reforms. Using both index-number and econometric techniques, we decompose nominal GDP growth and the output gap into contributions from price level changes, productivity growth and changes in factor utilisation. Changes in domestic prices accounted for four-fifths of the growth in nominal GDP, while capital accumulation and employment growth were the most important factors determining real-output growth. Deviations in the domestic price level around its long-run trend contributed most heavily to changes in the nominal output gap. The real gap was influenced in any year variously by deviations of the terms of trade and labour input from their long-run trends, as well as by productivity shocks. Copyright 2002 by The Economic Society of Australia.

Optimal Taxation with Deferred Compensation

The traditional theory of optimal taxation assumes that wage and interest incomes are received and taxed at different times. For example, Atkinson and Sandmo [2] and King [9] derived formulae for optimal wage and interest tax rates in the standard two-period life-cycle model in which a representative consumer/taxpayer receives wage income in the first (working) period and saves out of this post-tax wage income. The net return from saving accrues and is taxed as interest income in the second (retirement) period. In practice, however, a substantial portion of present wage and salary compensation is paid in the form of (expected) future pension benefits and is therefore tax-deferred. Table I presents data on total civilian wages and salaries and various tax-deferred pension contributions taken from individual income tax returns for 1988 in the United States. These data show that approximately 12 percent of wage income is comprised of tax-deferred pension contributions. In this paper we derive rules for optimal taxation in an alternative two-period setting in which not only interest income but also a part of wage income is deferred. As in the standard model, we assume that interest income accrues in the second period because investors bear temporal risk, so that the return to saving is received only after the resolution of uncertainty about the productivity of capital. However, we assume that incentive contracting in the form of deferred compensation is required to deal with moral hazard and adverse selection in the labor market. For example, Lazear [10] argued that deferred compensation can mitigate the moral hazard problem arising from costly monitoring of the effort and productivity of workers. Salop and Salop [17] showed that pension-type arrangements may act as a sorting device which reduces adverse selection costs when there is asymmetric information about worker productivity.1 These imperfections dictate

The Effect of Wage Payment Reform on Workers’ Labor Supply, Wages, and Welfare

We examine the economic consequences of an 1886 reform in Massachusetts that mandated the weekly payment of wages. We derive conditions on key elasticities of labor supply that determine the qualitative effects of the reform on workers’ effective wages and utility. We match census and administrative data on workers in a Lowell textile mill for a period encompassing the switch from monthly to weekly payment. Empirical estimates of a labor supply equation imply that the reform increased workers’ effective wage rates and welfare. The reform also decreased the mill workers’ average wage, as predicted by the theory of compensating differentials.