INTER-INDUSTRY WAGE DIFFERENTIALS: Sector Model 6


After controlling for this bias they find that male wages increase as a function of hours first in an increasing then at a decreasing rate. Less in line with our work are papers on the intertemporal behavior of hours and earnings such as Bernanke(1986) and Abowd and Card( 1987,1989). These papers are concerned again with the supply side. Abowd and Card consider how individuals alter their hours of work over time. Bernanke is interested in how earnings and hours varied in eight industries during the great depression.

The efficiency wage literature has some elements of similarity with our approach, but the differences are substantial and important. Our key variable is the capital-intensity of the task – the greater the capital-intensity the greater is the effort exerted by the worker. Most of the efficiency wage theoiy initiated by Shapiro and Stiglitz( 1984), collected in Akerlof and Yellen(I986) and surveyed in Katz(1986) makes no reference at all to the capital intensity of the operation. These efficiency wage models are all based on the idea that firms can increase profits by raising wages above the market clearing price. These above-market wages reduce monitoring costs since workers are induced to provide high effort by the threat of termination and thus a wage reduction.
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INTER-INDUSTRY WAGE DIFFERENTIALS: Sector Model 5

Barzel(1973) added another curved portion to the budget constraint based on the assumption that labor productivity falls as the number of working hours increased within a fixed period of time, leading to the reversed ’S’ shaped budget constraint cited in such empirical work as Moffit(1984). BarzePs and Oi’s budget curves are displayed in Figure 2.6.

There has been a substantia] amount of empirical work in this field, although again most of this work has been more concerned with labor supply than labor demand.. Sherwin Rosen(1973) was one of the first to investigate the interindustry relationship between wages and hours. His reasoning of the apparent wage-hour tradeoff was neatly summarized in his introduction fully.
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INTER-INDUSTRY WAGE DIFFERENTIALS: Sector Model 4


Figure 2.5 depicts an initial wage-effort offer curve and the first changes that are induced by three different kinds of technical change in the capital-intensive sector: a reduction in the rental cost of existing equipment, introduction of new more-costly equipment, and learning by doing. A reduction in the rental cost of the existing equipment simply shifts the intercept upward of the wage-effort line applicable to the capital-intensive sector, as indicated by the positioning of the new wage-effort offer (the dashed gray line). New more costly equipment creates a new wage-effort line that has a lower intercept but a steeper slope – meaning that the rental cost of the equipment is greater but the productivity is higher.
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INTER-INDUSTRY WAGE DIFFERENTIALS: Sector Model 3


With identical workers, this cannot be an equilibrium because capital constraints do not allow all workers to operate in the preferred capital-intensive sector. An increase in the capital-rental rate would be needed to ration the consequent excess demand for capital. This rise in the rental rate of capital shifts both wage-effort offer lines downward. Both the initial rotation and the shift downward worsen the terms of the low-wage low-effort contract and it follows that the final equilibrium selects a lower worker indifference curve for the representative worker.

The negative income effect that shifts the contracts to a lower indifference curve will also cause lower wages and higher effort in both sectors provided that both leisure and the consumption goods are “normal”. There is also a substitution effect that tends to drive the contracts in opposite directions; the low effort-low wage contract shifts in favor of lower effort and lower wages, and the high effort-high wage contracts shift in favor of higher wages and higher effort. Thus a rise in the relative price of the capital-intensive good makes workers worse off and increases income inequality. Keep in mind that the workers are indifferent between the two contracts and there is no ‘real’ inequality in the model. The principle message is that the wage-effort offer curve twists, as shown in Figure 2.4. We do find this kind of twisting in the 1970s.
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INTER-INDUSTRY WAGE DIFFERENTIALS: Sector Model 2

High effort saves capital costs. These savings are offset by the wage premiums necessary to compensate workers for high levels of effort. Multiple shifts and other forms of capital sharing can also save capital costs. When two workers share the same capital the intercept of the zero-profit line for each worker shifts upward towards the origin by the factor of two. This allows firms to offer better wage-effort contracts. But capital sharing doesn’t come without costs. Among the costs of capital sharing are wage premia for second and graveyard shifts, transitional down-times and increased non-capital fixed costs such as training and benefits, as well as moral hazard problems and coordination costs. Competition among firms will lead to efficient work practices that optimally trade off the gains from capital sharing with the costs.
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INTER-INDUSTRY WAGE DIFFERENTIALS: Sector Model

This section reviews Learner’s( 1997b) two-sector model with endogenous effort. The key building block is a production function defined as
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where Q is the rate of output per unit of time, К and L are the (timeless) stocks of capital and labor inputs respectively, /(.,.) is a function homogeneous to degree one, s is the “intensity” of operation, h is the hours of operation, and e~s-h is the overall effort exerted by each worker. Intensity is influenced by speed of operations but includes also the level of care or attentiveness a worker must exert to reduce the likelihood of breakdowns and other costly delays in the production process.
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INTER-INDUSTRY WAGE DIFFERENTIALS: Introduction 3

The most likely alternative explanation for the correlation between wages and capital intensity is complementarity of human and physical capital. We include measures of human capital as well as rate of unionization in our equations that explain wages and hours. Unionization and education both have positive simple correlations with weekly wages and weekly hours. Controlling for capital intensity of the sector, both education and union membership have a positive and statistically significant effect on wages but do not have a measurable effect on hours. Even after controlling for education and unionization, there remains strong evidence of the positive relationship between wages and effort that we are looking for.

Another possible explanation for the apparent wage-effort offer curve is rent-sharing with rents especially high in capital intensive sectors. We explore this possibility by using an imperfect measure of industry rents and do not find that rents can explain away our findings.
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INTER-INDUSTRY WAGE DIFFERENTIALS: Introduction 2


Given the measurement difficulties, we shouldn’t be expecting much. The big surprise is that there is a remarkably clear relationship between hours, wages and capital intensity. The capital-intensive sectors have longer annual hours and higher hourly wage rates, exactly what the theoiy would suggest if hours were a perfect indicator of effort. Not only do we find a wage-effort offer curve; we also find it shifting just as the theory suggests. In the 1960s with stable relative prices but improving technologies, the curve shifts “upward” with higher real wages offered at every level of effort.

Starting in the mid-1970s, when relative prices of apparel and footwear and textiles and other labor-intensive goods fell substantially, the offer curve “twists” with wages falling for low-effort contracts but rising for high-effort contracts. In the eighties the curve began shifting “to the right”, with more hours required to attain any given level of earnings. The theory allows this last shift to be due either to the introduction of new machinery (computers) or to a rise in fixed costs other than capital, namely benefits.
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INTER-INDUSTRY WAGE DIFFERENTIALS: Introduction

The purpose of this paper is to provide empirical support for the theory of effort in a multi-sector model developed in Leamer( 1996). That theory is built on the familiar idea that a firm can contract with workers regarding both the wage level and also the working conditions. Those features of the labor contract that enhance productivity but are disliked by workers are called “effort” and the labor market thus offers a set of wage-effort contracts with higher wages offsetting higher effort. If “effort” does not affect capital depreciation, the high effort-high wage jobs occur in the capital-intensive sectors where the capital cost savings from high effort are greatest.

Among the implications of this theory are: Communities inhabited by industrious workers who are willing to exert high effort for high wages have high returns to capital. A minimum wage does not cause unemployment. It forces effort in the low effort-low wage contracts up enough to support the higher wage. These and many other aspects of the model of endogenous effort are discussed in Leamer(1997b). In this paper we focus on the following two implications:
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A DISTRIBUTIONAL ANALYSIS OF AN ENVIRONMENTAL TAX SHIFT: Conclusion

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I have considered a number of environmental and other tax reforms in this paper to measure the distributional impact of changes in the tax system. A reform that raises environmental taxes and uses the proceeds to lower the personal income tax will affect consumers directly (paying the gasoline tax at the pump) and indirectly (through higher consumer prices). Using the 1992 Input-Output Accounts, I have traced through changes in intermediate goods prices resulting from taxes on these goods to changes in consumer prices. Assuming forward shifting of taxes, I allocate these taxes to households in the 1994 Consumer Expenditure Survey to measure the distributional impact using both annual income and lifetime income approaches to ranking households.

A modest tax reform in which environmental taxes equal to 10 percent of federal receipts are collected has a negligible impact on the income distribution when the funds are rebated to households through reductions in the payroll tax and personal income tax. The degree of income shifting can be adjusted with changes in how the revenues are returned to households and it is possible to increase the progressivity of the tax system with an environmental tax reform.

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