501 Economics -- 1999 Lance Lochner
Course Overview
This course begins by describing basic theories of wage growth over the lifecycle. Substantial time will be devoted to human capital theory and its implications for wage growth, income inequality, and government policy. We also consider job matching/search theory, agency theory and models of learning and uncertainty as alternative explanations for individual wage growth. Screening theories of education and occupational choice models are also studied. Next, we explore the market demand for various skills and what that implies for the distribution of earnings in the economy. We examine alternative theories for and evidence of the recent rise in wage inequality. Finally, we finish the course with a discussion of labor market and human capital policies. What can be done about the declining market for the unskilled? We explore the empirical support for training programs, improving school quality, more generous tuition policies, wage subsidies and the Earned Income Tax Credit, general tax policy, and early childhood intervention programs. We will compare the implications of government policy when incorporating the effects of general equilibrium with those predicted by partial equilibrium analyses. Differences can sometimes be substantial. Throughout the course, we will emphasize the testable implications of various theories and discuss the evidence in support of those theories. A presentation, practice referee report, and short paper (5-10 pages) will be required.
Reading List
* Required--will be discussed. + Can be chosen for class presentation
I. General Readings (on reserve in Management Library) Ashenfelter, O. and Layard, R., eds., Handbook of Labor Economics, vol. 1, North-Holland, 1986. Becker, G. Human Capital, 2nd ed. University of Chicago Press, 1975. Hamermesh, D. Labor Demand. Princeton University Press, 1993. Killingsworth, M. Labor Supply. Cambridge University Press, 1983. Kamien, M. and N. Schwartz, Dynamic Optimization: The Calculus of Variations and Optimal Control in Economics and Management. North-Holland, 1991. (I will provide a copy of relevant sections.)
II. Theories of Wage Determination (5-6 weeks) A. Basic Human Capital Theory * Willis, R. "Wage Determinants: A Survey of Human Capital Earnings," in Ashenfelter, O. and Layard, R., eds., Handbook of Labor Economics, vol. 1, North-Holland, 1986. * Becker, G. Human Capital, 2nd ed. University of Chicago Press, 1975 (Chapter 3). Mincer, J. Schooling, Experience and Earnings, Columbia University Press, 1974. Weiss, Y. "The Determination of Life Cycle Earnings," in Ashenfelter, O. and Layard, R., eds., Handbook of Labor Economics, vol. 1, North-Holland, 1986, 603-40. * Ben-Porath, Y. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, 75, 1967, 352-65. Heckman, J. "A Life-Cycle Model of Earnings, Learning and Consumption," Journal of Political Economy, 84(4), part 2, August, 1976, S11-44. * Killingsworth, M. " Learning by Doing and Investment in Training Two Rival Models of the Life Cycle, : " Review of Economic Studies, 49, 1982, 263-71. * Rosen, S. "Learning and Experience in the Labor Market," Journal of Human Resources, 7(3), 1972, 326-42. * Cossa, R., J. Heckman, and L. Lochner. Wage Subsidies and Skill Formation: A Study of the EITC, forthcoming in E. Phelps (ed.), Subsidies to Low-Wage Employment, Russell Sage Foundation: New York, 1999. + C. Dustmann, and C. Meghir. Wages, Experience and Seniority, IFS Working Paper W99/1, 1999. + Williams, J. Uncertainty and the Accumulation of Human Capital Over the Life Cycle, Journal of Business, vol. 52(4), 1979. * Topel, R. "Specific Capital, Mobility, and Wages: Wages Rise with Job Seniority," Journal of Political Economy, 99(1), 1991, 145-76. * Neal, D. "Industry-Specific Human Capital: Evidence from Displaced Workers," Journal of Labor Economics, 13(4), 1995, 653-77.
B. Education and Occupational Choice * Willis, R., and S. Rosen. "Education and Self-Selection," Journal of Political Economy, 87, 1979, S7-36. + Cameron, S., and J. Heckman. "Life Cycle Schooling and Dynamic Selection Bias: Models and Evidence for Five Cohorts of American Males," Journal of Political Economy, 106(2), 1998. * Heckman, J., L. Lochner, and C. Taber. "Explaining Wage Inequality: Explorations with a Dynamic General Equilibrium Model with Heterogeneous Agents," Review of Economic Dynamics, 1(1), 1998, 1-52. * Siow, A. "Occupational Choice Under Uncertainty," Econometrica, 1984. Zarkin, G. "Occupational Choice: An Application to the Market for Public School Teachers," Quarterly Journal of Economics, 1985. + Keane, M., and K. Wolpin. The Career Decisions of Young Men, Journal of Political Economy, vol. 105(3), June, 1997.
C. Screening Theory of Education * Stiglitz, J. "The Theory of Screening,Education and the Distribution of Income," American Economic Review, 1975.
D. Job Matching/Search and Uncertainty/Learning Theories Jovanovic, B. "Job-Matching and the Theory of Turnover," Journal of Political Economy, 87, Oct., 1979, 972-990. * Sargent, T. Dynamic Macroeconomic Theory, Harvard University Press, 1987 (chapter 2.9). MacDonald, G. "A Market Equilibrium Theory of Job Assignment and Sequential Accumulation of Information," American Economic Review, 72(5), Dec., 1982, 1038-55. Miller, R. "Job Matching and Occupational Choice," Journal of Political Economy, 92(6), 1984, 1086-1121. * Harris, M., and B. Holmstrom. "A Theory of Wage Dynamics," Review of Economic Studies, 49, July, 1982, 31533.
III. Agency Theory and the Employment Contract (2-3 weeks) * Lazear, E. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, Sept., 1981. * Lazear, E. "Why is there Mandatory Retirement?" Journal of Political Economy, 1979. Becker, G. and G. Stigler, "Law Enforcement, Malfeasance and Compensation of Enforcers," Journal of Legal Studies, Jan., 1974. Holmstrom, B. "Moral Hazard and Observability," Bell Journal of Economics, 1979. * Holmstrom, B., and P. Milgrom. "Multi-task Principal and Agent Analyses," Yale School of Management, May, 1990. * Rosen, S. "Prizes and Incentives in Elimination Tournaments," American Economic Review, 1986. * Lazear, E., and S. Rosen, "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, 89, 1981,841-64. + Jensen, M., and K. J. Murphy. "Performance Pay and Top-Management Incentives," Journal of Political Economy, 98(2), 1990, 225-63.
IV. Demand for Skill and the Distribution of Income (4 weeks) A. Theories * Neal, D., and S. Rosen, S. "Theories of the Distribution of Earnings," 1998. * Roy, A. "Some Thoughts on the Distribution of Earnings," Oxford Economics Papers, 3(2), 1951. * Rosen, S. "The Economics of Superstars," American Economic Review, 71, 1981, 845-58. MacDonald, G. "The Economics of Rising Stars," American Economic Review, 78, March, 1988. Rosen, S. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, 13, 1982, 311-23. + Lucas, R., On the Size Distribution of Business Firms, Bell Journal of Economics, vol. 9(2), 1978. * Rosen, S. "Substitution and Division of Labor," Economica, Rosen, 1978. S. "A Note on Aggregation of Skills and Labor Quality [Linear Synthesis of Skill Distribution]," Journal of Human Resources, 18, Summer, 1983, 425-31. * Sattinger, M. "Assignment Models of the Distribution of Earnings," Journal of Economic Literature, 31, 1993, 831-80. + Murphy, K. M. "Specialization and Human Capital," PhD Dissertation, University of Chicago, 1986. B. Evidence + Heckman, J., and J. Scheinkman, "The Importance of Bundling in a Gorman-Lancaster Model of Earnings," Review of Economic Studies, 54, 1987, 243-55. + Heckman, J., and Sedlacek, G. "Heterogeneity, Aggregation and Market Wage Fluctuations," Journal of Political Economy, 93, 1985, 1077-1125. C. Changes in Wage Inequality, Labor Supply, and Unemployment * Murphy, K. M., and L. Katz. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," Quarterly Journal of Economics, 107, Feb., 1992. * Bound J., and G. Johnson, "Changes in the Structure of Wages during the 1980s: An Evaluation of Alternative Explanations," NBER Working Paper #2983, May, 1989. Gottschalk, P., Inequality, Income Growth, and Mobility: The Basic Facts, Journal of Economic Perspectives, vol. 11(2), 1997. + Blundell, R., and I. Preston, Inequality and Uncertainty: Short-Run Uncertainty and Permanent Inequality in the U.S. and Britain, Working Paper, 1999. * Heckman, J., L. Lochner, and C. Taber. "Explaining Wage Inequality: Explorations with a Dynamic General Equilibrium Model with Heterogeneous Agents," Review of Economic Dynamics, 1(1), 1998, 1-52. Aghion, P., P. Howitt, and G. Violante, Technology, Knowledge, and Inequality, Working Paper, 1999. Greenwood, J., and Yorokoglu, M., "1974", Carnegie-Rochester Series on Public Policy, 1997. Krussel, P., et al., "Capital Skill Complementarity and Inequality: A Macroeconomic Analysis," Working Paper, 1997. * Killingsworth, M. Labor Supply. Cambridge University Press, 1983.
* MaCurdy, T. "An Empirical Model of Labor Supply in a Life Cycle Setting," Journal of Political Economy, 89, 1981, 1059-86. * Juhn, C., K. M. Murphy, and R. Topel. "Why has the Natural Rate of Unemployment Increased Over Time?" Brookings Papers on Economic Activity, 2, 1991, 75-142.
V. Evaluating Labor and Human Capital Policy (3-4 weeks) Heckman, J., L. Lochner, J. Smith, and C. Taber. "The Effects of Government Policy on Human Capital and Wage Inequality," Chicago Policy Review, 1, 1997. * Heckman, J., and L. Lochner, "Rethinking Myths About Education and Training: Understanding the Sources of Skill Formation in a Modern Economy," 1998. A. Training Programs LaLonde, R., Evaluating the Econometric Evaluations of Training Programs with Experimental Data, American Economic Review, Vol. 76(4), pp. 604-620, 1996. * LaLonde, R. "The Promise of Public Sector-Sponsored Training Programs," Journal of Economic Perspectives, 9(2), 1995, 149-68. * Heckman, J., N. Hohmann, M. Khoo, and J. Smith. "Substitution and Drop-Out Bias in Social Experiments: A Study of an Influential Social Experiment," Working Paper, 1998.
B. School Quality * Hanushek, E. "The Economics of Schooling: Production and Efficiency in Public Schools," Journal of Economic Literature, 24, Sept., 1986, 1141-77. + Card, D., and A. Krueger, "Does School Quality Matter? Returns to Education and Characteristics of Public Schools in the United States," Journal of Political Economy, 101(1), 1992. Heckman, J., A. Layne-Farrar, and P. Todd, "Human Capital Pricing Equations with an Application to Estimating the Effect of Schooling Quality on Earnings," Review of Economics and Statistics, 78(4), 1996. + Heckman, J., A. Layne-Farrar, and P. Todd, The Schooling Quality-Earnings Relationship: Using Economic Theory to Interpret Functional Forms Consistent with the Evidence, NBER Working Paper No. 5288. + Krueger, A. Experimental Estimates of Education Production Functions, NBER Working Paper No. 6051, 1997.
C. Tuition Policy: Credit Constraints & Externalities + Kane, T. "College Entry by Blacks Since 1970: The Role of College Costs, Family Background, and the Returns to Education," Journal of Political Economy, 102(5), 1994, 878-911. + Elwood, D., and T. Kane, Who is Getting a College Education: Family Background and the Growing Gaps in Enrollment, Working Paper, 1998. + Cameron, S., and J. Heckman. "The Dy...