NBER Reporter: Fall 2001
Kremer and Olken apply principles from evolutionary biology to the study of unions. They show that unions that maximize the present discounted wages of current members will be displaced in evolutionary competition by unions with more moderate wage policies that allow their firms to live longer. This suggests that unions with constitutional incumbency advantages allowing leaders to moderate members' wage demands may have a selective advantage. When incumbency advantages are reduced exogenously, the model predicts, unions should increase their wage demands. These predictions seem broadly consistent with the evidence.
Beaudry and Collard's paper is motivated by a set of cross-country observations on labor productivity growth among industrial countries over the period 1960-97. In particular, the authors show that the speed of convergence among industrialized countries has decreased substantially over this period while the negative effect of a country's own employment growth (or labor force growth) on labor productivity has increased dramatically. The paper shows how these observations further support the view that industrialized countries may have been undergoing a particularly drastic technological revolution over the recent past. In effect, the authors show how the process of endogenous technological adoption following the diffusion of a general purpose technology can explain these observations when demographic factors temporarily become a major determinant of labor productivity growth.
Blanchard and Giavazzi build a model based on two central assumptions: 1) monopolistic competition in the goods market, which determines the size of rents; and 2) bargaining in the labor market, which determines the distribution of rents between workers and firms. They then think of product market regulations as determining both the entry costs faced by firms and the degree of competition between firms. Labor market regulation in turn determines the bargaining power of workers. Having characterized the effects of both labor and product market deregulation, the authors study two specific issues. First, they attempt to shed light on macroeconomic evolutions in Europe over the last 20 years, in particular on the behavior of the labor share. Second, they look at political economy interactions between product and labor market deregulation.
Acemoglu analyzes an economy in which firms can undertake technological improvements that are both labor- and capital-augmenting. In the long run, the economy resembles the standard growth model in which technical change mainly augments labor and the share of labor in GDP is constant. Along the transition path, however, there is technical change which augments capital and factor shares change. Tax policy and changes in labor supply or savings typically change factor shares in the short run, but have little or no effect on the long-run factor distribution of income.
Krueger and Perri investigate the relationship between the cross-sectional income and consumption distribution in the United States. Using data from the Consumer Expenditure Survey and the Current Population Survey, they find that rising income inequality has not been accompanied by a rise in consumption inequality during the last two decades. This is consistent with their hypothesis that the increase in income inequality has caused a change in the sophistication of financial markets, allowing individual households to better insure against idiosyncratic income fluctuations. The authors develop a model of endogenous debt constraints in which the degree of asset market development depends on the volatility of the individual income process. They show that this model is consistent with the joint observation of increasing income inequality and constant inequality in consumption over time. A standard incomplete markets model, on the other hand, predicts a significant increase in consumption inequality in response to increasing income inequality.
Mankiw and Reis examine a model of dynamic price adjustment based on the assumption that information disseminates slowly throughout the population. Compared to the commonly used sticky-price model, this sticky-information model displays three related properties that are more consistent with accepted views about the effects of monetary policy. First, disinflations are always contractionary (although announced disinflations are less contractionary than surprise ones). Second, monetary policy shocks have their maximum impact on inflation with a substantial delay. Third, the change in inflation is positively correlated with the level of economic activity.