http://individual.utoronto.ca/zheli/sa1.pdf

On the mechanics of economic development

This paper examines whether the Solow growth model is consistent with the international variation in the standard of living. It shows that an augmented Solow model that includes accumulation of human as well as physical capital provides an excellent description of the cross-country data. The paper also examines the implications of the Solow model for convergence in standards of living, that is, for whether poor countries tend to grow faster than rich countries. The evidence indicates that, holding population growth and capital accumulation constant, countries converge at about the rate the augmented Solow model predicts. This paper takes Robert Solow seriously. In his classic 1956 article Solow proposed that we begin the study of economic growth by assuming a standard neoclassical production function with decreasing returns to capital. Taking the rates of saving and population growth as exogenous, he showed that these two vari- ables determine the steady-state level of income per capita. Be- cause saving and population growth rates vary across countries, different countries reach different steady states. Solow's model gives simple testable predictions about how these variables influ- ence the steady-state level of income. The higher the rate of saving, the richer the country. The higher the rate of population growth, the poorer the country. This paper argues that the predictions of the Solow model are, to a first approximation, consistent with the evidence. Examining recently available data for a large set of countries, we find that saving and population growth affect income in the directions that Solow predicted. Moreover, more than half of the cross-country variation in income per capita can be explained by these two variables alone. Yet all is not right for the Solow model. Although the model correctly predicts the directions of the effects of saving and

/pdf/a-contribution-to-the-empirics-of-economic-growth-27cl5gkqam.pdf

A Contribution to the Empirics of Economic Growth

Growth in this model is driven by technological change that arises from intentional investment decisions made by profit-maximizing agents. The distinguishing feature of the technology as an input is that it is neither a conventional good nor a public good; it is a nonrival, partially excludable good. Because of the nonconvexity introduced by a nonrival good, price-taking competition cannot be supported. Instead, the equilibrium is one with monopolistic competition. The main conclusions are that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth.

/pdf/endogenous-technological-change-4yzdlw043b.pdf

Endogenous Technological Change

Existing strategies for econometric analysis related to macroeconomics are subject to a number of serious objections, some recently formulated, some old. These objections are summarized in this paper, and it is argued that taken together they make it unlikely that macroeconomic models are in fact over identified, as the existing statistical theory usually assumes. The implications of this conclusion are explored, and an example of econometric work in a non-standard style, taking account of the objections to the standard style, is presented. THE STUDY OF THE BUSINESS cycle, fluctuations in aggregate measures of economic activity and prices over periods from one to ten years or so, constitutes or motivates a large part of what we call macroeconomics. Most economists would agree that there are many macroeconomic variables whose cyclical fluctuations are of interest, and would agree further that fluctuations in these series are interrelated. It would seem to follow almost tautologically that statistical models involving large numbers of macroeconomic variables ought to be the arena within which macroeconomic theories confront reality and thereby each other. Instead, though large-scale statistical macroeconomic models exist and are by some criteria successful, a deep vein of skepticism about the value of these models runs through that part of the economics profession not actively engaged in constructing or using them. It is still rare for empirical research in macroeconomics to be planned and executed within the framework of one of the large models. In this lecture I intend to discuss some aspects of this situation, attempting both to offer some explanations and to suggest some means for improvement. I will argue that the style in which their builders construct claims for a connection between these models and reality-the style in which "identification" is achieved for these models-is inappropriate, to the point at which claims for identification in these models cannot be taken seriously. This is a venerable assertion; and there are some good old reasons for believing it;2 but there are also some reasons which have been more recently put forth. After developing the conclusion that the identification claimed for existing large-scale models is incredible, I will discuss what ought to be done in consequence. The line of argument is: large-scale models do perform useful forecasting and policy-analysis functions despite their incredible identification; the restrictions imposed in the usual style of identification are neither essential to constructing a model which can perform these functions nor innocuous; an alternative style of identification is available and practical. Finally we will look at some empirical work based on an alternative style of macroeconometrics. A six-variable dynamic system is estimated without using 1 Research for this paper was supported by NSF Grant Soc-76-02482. Lars Hansen executed the computations. The paper has benefited from comments by many people, especially Thomas J. Sargent

/pdf/macroeconomics-and-reality-3v6kkpl8jz.pdf

Macroeconomics and reality

Growth in this model is driven by technological change that arises from intentional investment decisions made by profit maximizing agents. The distinguishing feature of the technology as an input is that it is neither a conventional good nor a public good; it is a nonrival, partially excludable good. Because of the nonconvexity introduced by a nonrival good, price-taking competition cannot be supported, and instead, the equilibriumis one with monopolistic competition. The main conclusions are that the stock of human capital determines the rate of growth, that too little human capital is devoted to research in equilibrium, that integration into world markets will increase growth rates, and that having a large population is not sufficient to generate growth.

https://papers.ssrn.com/sol3/Delivery.cfm/nber_w3210.pdf?abstractid=226703&mirid=1

A firm starts with a group of insiders or seasoned workers. There is also a large pool of outsiders who are initially less productive, but are transformed into insiders after one period of employment. The firm gains from having a large pool of insiders, some of whom may be laid off in bad years. Insiders gain from keeping their numbers small. If the insiders set their wage unilaterally, they will choose a path that—in this extreme case—prevents employment of outsiders even if future employment prospects are good. If the wage path is set by bilateral bargaining, the extra advantage to the firm permits employment of some outsiders in some situations.

/pdf/insiders-and-outsiders-in-wage-determination-3orhjh03vi.pdf

Insiders and Outsiders in Wage Determination

OVER THE PAST FIFTEEN YEARS there has been an extraordinary increlase in the dispersion of wages among manufacturing industries in the United States. While there were moderate cyclical swings in the coefficient of variation of hourly wages between 1955 and 1970, there was no obvious trend in this indicator of dispersion.' Yet between 1970 and 1984, it increased by about a third,2 reflecting primarily an increase in relative wages in high-wage industries. In a sample of average hourly earnings in fifty-seven manufacturing industries (at the three-digit SIC level), the

/pdf/manufacturing-wage-dispersion-an-end-game-interpretation-1uupdqibtc.pdf

Manufacturing Wage Dispersion: An End Game Interpretation

Learning from ‘Learning by Doing’: Lessons for Economic Growth

IN THE MODERN American economy, fiuctuations in unemployment usually persist from one year to the next. Past decades have seen two lengthy deviations from equilibrium in the labor market: 1958 through 1963, when the market was slack for six straight years, and 1964 through 1970, when it was tight for seven straight years. Virtually all forecasters agree today that the sharp recession of 1974-75 will mark the beginning of another extended period of slack, with the official unemployment rate above 6 percent perhaps until the end of the decade. These forecasts are fully consistent with the behavior of the economy after the only comparable postwar recession, in 1957-58. Explanation of the persistence of unemployment has been a major focus of macroeconomic theory since the Great Depression. Though his predecessors had begun to think seriously about the challenge to classical economic theory raised by successive years of high unemployment, John Maynard Keynes was the great pioneer in creating a theory that came to grips with the facts of persistent unemployment, and he remains the dominant figure today. This paper presents a detailed critique of modern explanations of the behavior of unemployment, both within the Keynesian tradition and outside it. The critique begins with a close look at the modern theory of disequilibrium, which claims to provide a microeconomic foundation for the theory of unemployment and wage adjustment. This theory attributes both the

/pdf/the-rigidity-of-wages-and-the-persistence-of-unemployment-45iqnsztja.pdf

The Rigidity of Wages and the Persistence of Unemployment

1990s surprised economists by its rapidly falling unemployment rate at low and constant inflation. This book is the result of a project jointly sponsored by the Century Foundation and the Russell Sage Foundation, whose aim was to understand the reasons for this unexpected performance. The two editors chose the topics and authors and wrote a long and very useful introduction to the book, which reflects as much their own view as that of the contributors. The

Robert M. Solow

Papers

Insiders and Outsiders in Wage Determination

Manufacturing Wage Dispersion: An End Game Interpretation

Learning from ‘Learning by Doing’: Lessons for Economic Growth

The Rigidity of Wages and the Persistence of Unemployment

The Roaring Nineties: Can Full Employment Be Sustained?