Topics: Econ 521, Spring 2007

SECTION ONE: DERIVED DEMAND FOR FACTORS

I. Production theory: Primal

A. Single input

· Output elasticity

· Scale elasticity

· Stages of production and optimal demand

· Short-run derived demand for labor

· Cobb-Douglas as a first-order approximation to an unknown production function

· Relationship between marginal and average products

· Graphical representations of demand

· Wages, Labor Productivity and Unit Labor Cost

· Unit Labor Cost and trade flows

B. Multiple inputs

· Convex Isoquants and firm optima

· Concave production and the bordered Hessian

· Elasticity of substitution

· Output constant input demand

C. Empirical Strategies for primal estimation

· Translog as a second order approximation to an unknown production function

· Application: Efficiency wage models: Solow and Shapiro-Stiglitz

· Huang et al

· Ackerloff-Yellen

· Hibbs-Locking

· Matched firm worker data

· Hellerstein et al on wages and marginal products

· Moretti on human capital externalities

D. Fundamental Law of Factor Demand

· Derivation

· Scale and Substitution elasticities

· Hicks-Marshall Laws of Derived Demand

E. Digression on O-ring Production

· Role of complementary skills on

o Matching across worker skills

o Firm size

o Returns to skill

o Organization of production by stages

II. Production Theory: Dual

A. Cost function

· Derivation of input demands

· Derived relationship between dual and primal

· Translog cost function as a second order approximation to an unknown cost function

· Output constant demand

· Elasticities of substitution

B. Empirical Strategies for dual estimation

• Adams on the impact of R&D investment on demand for low and high skill workers
• Ollinger et al on returns to scale and technology adoption

III. CES methods

• General application to two input problems
• Relative wages as a function of relative input quantities
• Example: returns to skill, technology change and the baby boom
• Card and Lemieux: allowing more elasticities of substitution
• Hanson on illegal immigration and extension to three inputs

IV. Rules of thumb for designing studies

• Defining the unit of observation

• Time series vs cross section data
• Single vs multiple equation methods
• Level of aggregation
• Elasticity of complementarity and inverse demands
• Primal is for exogenous inputs, dual is for exogenous prices
• Instrumental variables
• Measurement errors

V. Nonlinear isocost lines: choosing hours versus numbers of workers

• Policy applications
• Labor marker regulations and relative unemployment in OECD countries
• Trejo on overtime premiums
• Autor on exceptions to the “employment at will doctrine” and temporary employment

SECTION TWO: EARNINGS INEQUALITY

I. Measures

• Gini coefficients
• Standard deviations or coefficient of variation
• 90-10 wage ratios
• earnings function residual variances

II. Stylized facts for North America and Europe

• Inequality has been increasing steadily in the U.S. since the 1980s
• Women are gaining relative to men
• Minorities gained relative to whites before the 1980s, but relative earnings for minorities stabilized thereafter
• There have been coincident increases in returns to schooling over that period
• There have been rising returns to experience over that time frame
• Wage inequality between women increased, as did wage inequality between men
• Inequality for men started rising in the 1970s, for women in the 1980s
• Residual inequality began to increase for both men and women in the 1970s
• Marriage makes inequality worse if there is a positive correlation between earnings of spouses
• Recessions raise inequality, at least for men
• Young college graduates have gained the most, especially in the 1990s
• There are similar patterns in many industrialized nations, especially those that do not have high minimum wages, strict employment protection, or strong union concentration.

III. Explanations

• Katz and Murphy (1987), Murnane-Levy (1992) Econ 1 test
• Demand side-factors must have a role except in the 1970s
• Use of concavity to test for inverse relationship between relative supply and relative wages
• Shift-share analysis
• Residual inequality
• Earnings variance decomposition
• Dunne et al (2004): Inequality due to variance in IT investment, skill-biased technical change
• Beaudry and Green (2005): Inequality due to increase in capital deepening

IV. Discrimination

• Male-Female wage gap
• Age vs. Cohort Effects
• Earnings decomposition into explained and unexplained gaps
• Role of residual inequality (swimming upstream)
• Gaps on exogenous vs endogenous factors
• Multiple Markets and inappropriate measures of market discrimination
• Sorting on qualifications: Affirmative Action

NONRANDOM SORTING

I.  Sorting and Comparative advantage

• Plywood vs Hardwood example
• Piece rates and sorting on quality
• Sorting on effort
• Optimal piece rate
• When to offer or accept piece rates vs salries
• Lazear and Safelite: Sorting vs Incentives
• Roy Model
• Implications of hierarchical sorting on earnings distributions

II. Enrepreneurship

• Lazear: the role of narrow versus braod skills
• Hamilton: sorting versus human capital versus compensating differentials

III.  Statistical Tools for Nonrandom Sorting

• Heckman Selection Corrections
• Missing Variables
• Implications of adding endogenous regressors
• Control function estimators
•             Selection on observables
•             Selection on unobservables
• Twins
• Instrumental Variables
• Wald Estimator
• Regression Discontinuity
• Fixed Effect Estimators
• Difference-In-Differences
• Propensity score matching

III.  Experimental; Designs

• Reflexive designs
• Ex post matched comparisons
• Ex ante matched comparisons
• Difference-in-Differences
• Covariate controls
• Potential Problems
•             Ongoing Programs vs pilots
•             Randomization bias
•             Substitution bias
•             Dropout bias
•             Limited duration pilots vs long-term impacts
• Hawthorne effects
• JTPA and other training programs
•             Experimental vs nonexperimental estimates
•             Heckman and Smith (2004): Nonrandom selection into experiments

IV. Compensation Issues

· Lazear Models

· Tournaments

· Hawks and Doves

· Stock Options

· Executive compensation and the principle-agent problem

· Empirical evidence on tournaments, Bognano (2001) and Audas et al (2004)

· Empirical evidence on CEO compensation, Bertrand and Mullainathan (2001, 2003)