Showing papers on "Earnings published in 1979"

Education and Self-Selection

Abstract: A structural model of the demand for college attendance is derived from the theory of comparative advantage and recent statistical models of self-selection and unobserved components. Estimates from NBEr-Thorndike data strongly support the theory. First, expected lifetime earnings gains influence the decision to attend college. Second, those who did not attend college would have earned less than measurably similar people who did attend, while those who attended college would have earned less as high school graduates than measurably similar people who stopped after high school. Positive selection in both groups implies no "ability bias" in these data.

Job satisfaction, wages, and unions*

Abstract: This paper provides a systematic empirical analysis of the effect of union membership on job satisfaction and wages, and shows how the interaction between these effects leads to empirically observable relations between unionization and individual quit probabilities. Using the National Longitudinal Survey of Mature Men, several empirical results were obtained. First, union members, on average, report lower levels of job satisfaction. Interestingly, unionization causes greater dissatisfaction at higher tenure levels. These findings are attributed to both the politicization of the unionized labor force and the fact that union members face flatter earnings profiles. The importance of the latter effect is reflected by the empirical fact that unions have a strong negative effect on quit probabilities at low levels of tenure, but the effect diminishes (absolutely) as tenure increases.

Labor Mobility and Wages

Abstract: In this essay we explore the implications of human capital and search behavior for both the interpersonal and life-cycle structure of inter-firm labor mobility. The economic hypothesis which motivates the analysis is that individual differences in firm-specific complementarities and related skill acquisitions produce differences in mobility behavior and in the relation between job tenure, wages and mobility. Both "job duration dependence" and "heterogeneity bias" are implied by this theory. Exploration of longitudinal data sets (NLS and MID) which contain mobility, job and wage histories of men in the 1966-76 decade yield several findings, among others: 1. The initially steep and later decelerating declines of labor mobility with working age are in large part due to the similar but more steeply declining relation between mobility and length of job tenure. 2. Given tenure levels, the probability of moving is predicted positively by the frequency of prior moves and negatively by education. The inclusion of prior moves in the regression reduces the estimated tenure slope because it helps to remove the "heterogeneity bias" in that slope. 3. The popular "mover-stayer model" is rejected by the existence of tenure effects on mobility. 4. Differences in mobility during the first decade of working life do not predict long-run differences in earnings. However, persistent movers at later stages of working life have lower wage levels and flatter life-cycle wage growth. 5. The analysis calls for a reformulation of earnings (wage) functions. Inclusion of tenure terms in the function permits separate estimates of returns to general and specific human capital after correction for heterogeneity bias. A rough estimate is that 50 percent of life-time wage growth is due to general (transferable) experience and 25 percent each to firm-specific experience and inter-firm mobility.

Education, Unemployment, and Earnings

Abstract: Using data on adult male workers, we first investigate the incremental effect of 1 year of schooling on unemployed hours and use this calculation to explain the difference in the proportional effects of schooling on earnings and wages. Schooling apparently reduces unemployed hours by reducing the incidence of unemployment spells, but it does not significantly affect their duration. We next test whether unemployed hours represent real constraints on worker behavior. To do this we develop and estimate life-cycle models of labor supply for workers with and without spells of unemployment, using longitudinal data. The results imply that perhaps three-quarters of the unemployed hours of male workers are part of the offer to sell labor.

Value of Life Saving: Implications of Consumption Activity

Abstract: This paper focuses on the typical individual's value of a small change in the probability of his survival. With a simple life-cycle model, the value is shown to be implied by consumption activity which affects risk. The premium an individual is willing to pay to reduce risk is estimated using probit analysis of automobile seat-belt use. The "value of life" is found to be about $370,000. This estimate is contrasted with the foregone-earnings approach by showing that a surplus value above earnings exists and the elasticity of the value with respect to earnings is less than one.

On-The-Job Training and Earnings Differences by Race and Sex

Abstract: M OST theoretical and empirical work on the determinants of individual earnings has placed special emphasis on an individual's educational attainment and on his or her years of work experience. Although interpreting the effects of education on earnings is relatively straightforward,1 the proper interpretation of the effects of experience on earnings is much less clear. It is certainly true that earnings tend to rise with years of experience, but the nature of the underlying mechanism that generates that increase is still largely an unresolved issue. An understanding of the way in which experience increases earnings is especially critical for the analysis of wage differentials by race and sex. Previous empirical research has shown that black men and both black and white women have flatter experience-earnings profiles than white males and that differences in the returns to experience account for a large portion of observed wage differences.2 The most widely accepted interpretation of the relationship between experience and earnings is that of the human capital model, which considers years of work experience as a proxy for unobservable investment in on-the-job training.3 According to the human capital model, wage differentials among individuals over the life-cycle are largely the result of differential patterns of investment in human capital, primarily in the form of investments in on-the-job training. Most human capital training models have been developed for the case of training that increases worker productivity in more than one firm (general training) as opposed to specific training that increases productivity in only one firm. It is frequently argued that because women expect to have a less regular pattern of labor force participation, they have a shorter work horizon than otherwise similar men and, thus, they have clear economic incentives to invest in less on-the-job training.4 As a result, women will, in general, have accumulated less human capital than men with the same number of years of experience and, consequently, their returns to experience would be expected to be lower. For black males, lower human capital investment is attributed to discrimination and/or their presumed poorer quality of schooling. Discrimination reduces the value of any potential investment, while poor schooling is thought to increase the costs of acquiring training.5 An alternative view of the earnings-experience relationship draws on models of labor market segmentation.6 These models differ from the human capital model primarily in their focus on the characteristics of jobs and job markets, rather than the characteristics of individuals. Earnings are thought to be largely determined by the labor market in which an individual works rather than the skills (or human capital) he or she possesses. Training itself is viewed as being largely technologically determined by the design of jobs, so that a specified amount of training is intrinsic in any given job. An individual acquires training by first gaining access to a job that provides training; that is, jobs and job markets intercede between an individual and investment in on-the-job training. Segmented market theorists usually argue that because hiring decisions involve a considerable amount of subjective input there is ample opportunity to practice discrimination. They cite entry level discrimination as a major institutional barrier between the primary and secondary sector, Received for publication January 17, 1978. Revision accepted for publication November 1, 1978. * Institute for Social Research and University of Michigan, and University of Delaware, respectively. 1 A recent review of this literature is given in Blaug (1976). 2 For example, see Mincer and Polachek (1974), Blinder (1973). 3The basic references are Becker (1964), Ben-Porath (1967), and Rosen (1972). 4 Mincer and Polachek (1974); Johnson and Stafford (1974). 5 The effect of discrimination on investment varies in different versions of the human capital model. It has no effect in a Ben-Porath type model, but reduces optimal investment in Rosen's model. 6 This model was popularized by Doeringer and Piore (1971).

Bankruptcy, Secured Debt, and Optimal Capital Structure: Comment

Abstract: IN AN ARTICLE WHICH recently appeared in this Journal1, James Scott raises the issue of why a firm might issue debt which was "secured" by the lender's right to seize designated assets of the firm upon default. Scott argues that "the issuance of secured debt can increase the total value of a firm, even in the absence of corporate taxes". He concludes that the optimal strategy for the firm is to issue as much secured debt as possible. Scott's result is at odds with the irrelevance propositions of Modigliani and Miller [4]. Although his treatment is technically correct in the sense that his conclusions do follow from his assumptions, Scott's result depends critically on the assumption that the firm's net operating earnings are independent of its level of secured debt. In this note, we argue that, within Scott's framework, such an assumption is inconsistent with the notion of rationality on the part of individuals. Furthermore, for reasons which we discuss, making such an assumption presupposes the very result which Scott seeks to establish. Relaxing Scott's assumption about the nature of the firm's operating earnings, we show why the issuance of secured debt will not alter the value of the firm. Since Scott's analysis does not account for the existence of secured debt, we suggest an alternate explanation.

Organizational Career Mobility: Promotion Chances in a Corporation During Periods of Growth and Contraction

Abstract: This study analyzes the age distribution of upward mobility in a large corporation, examining changes in the age-promotion relationship for different levels in the organizational hierarchly, for different kinds of employess, and across time periods of increasing and creasing organizational growth. Analyzing the corporation's complete personnel records over three times periods, this paper test a precipitous-decline hypothesis derived from the organizational careers literature, an exponential-decline hypothesis derived from the Markov literature on career mobility, and an increase-decrease hipothesis derived from the economic literature on life-cycle earnings patterns. Analysis finds partial support for each hypothesis for different groups of employees. It also finds remarkable stability in these patterns across periods, particularly for the most and least favored groups; the changes which do occur tend to "spillover" to specific stadby age-education groups. The age-promotion curves and the spillover patter...

Human Capital and Earnings: British Evidence and a Critique (1979)

Abstract: What is the private rate of return to schooling and to on-the-job training? And how far does human capital explain the inequality of earnings? We try to answer these questions for Britain for a random sample of about 7000 employed males. Basically, we use the framework of Mincer (1974), but at some important points we find this unsatisfactory, and offer our own critique.1 In Mincer’s regression approach log earnings are regressed on schooling, work experience and experience squared. (The effects of experience are held to reflect the influence of costly investment in on-the-job training.) But this method only yields valid estimates of the direct effects of schooling on earnings if there is no relationship between schooling and the amount of post-school investment and its profitability. A necessary (though not sufficient) condition for this to be true is that the profiles of log-earnings, as experience varies, are vertically parallel for all schooling groups. Casual inspection is not sufficient to verify whether this is so. So the obvious approach is to specify a model in which the pattern of post-school investment and its profitability are allowed to depend on schooling. Such a model also allows one to estimate the rate of return to on-the-job training.

Life Span, Health, Savings, and Productivity

Abstract: In this paper we begin by drawing attention to the dramatic increases in the life span of people in most low-income countries during recent decades. We then argue that longer life and the associated improvement in health have important economic implications which have been ignored in the literature. Last, we present evidence in support of two of these implications, namely, the growth of educational investments including the foregone earnings of students and the apparent gains in the productivity of agriculture in India over a period of about 2 decades.

Why Do Companies Pay Dividends

Abstract: This paper presents a simple model of market equilibrium to explain why firms that maximize the value of their shares pay dividends even though the funds could instead be retained and subsequently distributed to shareholders in a way that would allow them to be taxed more favorably as capital gains. The two principal ingredients of our explanation are:(1) the conflicting preferences of shareholders in different tax brackets and (2) the shareholders' desire for portfolio diversification, we show that companies will pay a positive fraction of earnings in dividends. We also provide some comparative static analysis of dividend behavior with respect to tax parameters and to the conditions determining the riskiness of the securities.

Standardized Unexpected Earnings—1971–77

Abstract: A RECENT ARTICLE IN this journal [5] measured the informational content of quarterly earnings reports and the effects of this information on stock prices. The empirical evidence presented, covering early 1971 through mid-1974, suggested that unexpected earnings were very significantly related to excess holding period returns and that the adjustment to the unexpected earnings was relatively slow. The semi-strong form of the Efficient Capital Market Hypothesis, while based on the postulate that stock prices respond to unanticipated earnings, leads to the additional hypothesis that the market response to unanticipated earnings changes occurs either before or simultaneously with publication of earnings and hence that unexpected earnings is not significantly correlated with excess returns for any period beginning after the publication date. As Sharpe [7] has noted: "If better-than-expected earnings announcements indicate attractive opportunities for stock purchases days or weeks after the announcement has been made, the market is not performing in a perfectly efficient manner." The importance of this issue led us to perform additional tests with updated data in an attempt to answer the following questions (with answers contained in the cited tables): 1. What is the distribution of SUE (standardized unexpected earnings)? (Table 1) 2. Were cumulative returns related to unexpected earnings in the period 1974

The Distribution of Family Earnings

Abstract: This paper investigates the influence of wives' earnings on the distribution of family earnings In the process, some differences in the manner in which family earnings are distributed within racial groups are highlighted Earnings of wives equalize income distributions in white families but increase dispersion among blacks Because they have conflicting effects, covariances between spouses in their wage rates and labor supply are isolated Male and female wage functions are adjusted for sample censoring to fill out the true population variances and covariances in wages across all families Due to the larger positive correlation in wages of black spouses, black family earnings would be distributed more unequally even if all individuals worked the same amount Our labor supply analysis indicates that white families attempt to stabilize family earnings with some family members increasing their labor supply in response to a decline in participation of other family members This compensatory function of wives

New Estimates of the Incidence of the Payroll Tax

Abstract: The purpose of this study is to take a somewhat different look at the issue of the shifting of the payroll tax for Social Security (OASDHI) than has been done in the previous literature. The novel aspects are: 1) We concentrate only on the degree to which workers' earnings are affected by the share of the tax paid by employers; 2) We base the study on data describing the behavior of individuals rather than the more aggregated units (industries or entire economies) that have been used in other studies;' 3) Finally, the nature of our data allows us to study the dynamics of the process of tax shifting and thus discover how rapidly, as well as how much of, any payroll tax increase is shifted back onto workers.

Uncertainty and the Accumulation of Human Capital Over the Life Cycle

Abstract: Models of the accumulation of human capital over the life cycle have recently received widespread attention in the literature on labor economics The seminal work by Becker (1964) and Ben-Porath (1967) characterized optimal investments in education and the resulting lifetime profiles for both human capital and labor income More recent refinements by Ghez and Becker (1975), Blinder and Weiss (1976), and Heckman (1976) added consumption and leisure, thereby altering predicted patterns for labor supply and labor earnings Simultaneously, empirical stLudies by Mincer (1974), Haley (1976), Rosen (1976), and others used the current theory to estimate relevant parameters affecting labor earnings over the life cycle Despite this lengthy literature on human capital, existing research has largely ignored all significant sources of uncertainty affecting observed behavior over the life cycle' This is unfortunate if only because the introduction of uncertainty significantly alters predicted patterns for both labor supply and labor earnings For Existing models of the accumulation of human capital over the life cycle ignore uncertainty In this paper proper-ties of optimal allocations to labor, leisure, and education over the life cycle are developed in detail for the individual facing uncertainty from several soul-ces Results are reported for both a simple stochastic model and a more general adaptive model in which the individual, by investing in education, not only accumulates hUman capital but also gradually learns about his ability to acquire additional huLman capital

The North-South differential and the migration of heterogeneous labor

Abstract: The differential in median income or earnings between the North and South of the United States has persistently intrigued economists. The consensus view is that: (a) the North-South differential is substantial and has stubbornly persisted through time; and (b) while the labor force responds somewhat to regional pay differentials the response is not adequate enough to eliminate the differential within a reasonable period of time since outmigration from low- wage areas is frequently nearly cancelled out by simultaneous inmigration. The consensus view that the labor market is an inefficient allocator of the human resource has been questioned by Philip Coelho and Moheb Ghali in the only study investigating real wage differences. When controlling for industry mix at the two-digit level they found no significant difference between the North and South in average real wages of production works in manufacturing. However economists are not prone to discard firmly held conclusions on the basis of a single item of research. For example a study by Paul Lande and Peter Gordon ignores regional price level variations in finding at best very weak support for the neoclassical hypothesis of converging wage levels. Thus the purpose of this paper is to provide additional evidence on the real North-South differential. Specifically this paper examines an alternative source of data the 1970 Census in order to determine whether more recent and comprehensive data subjected to a different methodology will tend to support or contradict the findings of Coelho and Ghali. In Section I it is argued that analysis of the North-South differential and its migration consequences requires a recognition of the heterogeneous nature of labor. Section II analyzes the statistical findings on the ratio of southern to northern earnings both in the aggregate and in terms of relatively homogeneous subgroups. The migration patterns of the subgroups are also investigated. Conclusions are drawn in Section III. The results are consistent with a neoclassical model of heterogeneous labor. (excerpt)

Industry Influence on Dividend Policy

Abstract: * The relationship between dividend policy and firm valuation is a major unresolved issue in corporate finance. Both theoretically and empirically, research evidence proves to be contradictory. The seminal article by Miller and Modigliani [10] showed that dividend policy is irrelevant to investors, provided that each investor is rational and that dividends and capital gains are taxed at the same rate. Yet, dividend policy is an important concern of most financial managers (for example, see [6 and 16]). A plausible reason for the attention accorded dividend policy would be a relationship between the firm's dividend decision and the level and profitability of its investment decisions. Several studies have addressed this issue, yet the evidence to date has been contradictory. On the one hand, Baumol, Heim, Malkiel, and Quandt [1] conclude that the rate of return on internally-financed investment is significantly lower than on that financed externally. Pye [11] has observed that an abnormally small percentage of firms issued new stock and also paid dividends. Higgins [7] finds dividends to vary positively with earnings and negatively with investment. Existing owners, according to Mehta [9], are unlikely to be indifferent between additional stock issuance and financing through retained earnings (forgone dividends). Wallingford [15, p. 633] indicates that it has been "observed in practice" that "corporate managers view dividend policy as a trade-off against new investments." Each of these findings is consistent with the view that the dividend decision does affect the value of the firm.

Social Mobility in Industrial Labor Markets

Abstract: Labor market barriers can be defined as a preference by employers for people experienced either in their own firms, or in similar work in other firms. Such barriers follow industrial lines, especially in industries with skilled workers and high mobility. The employers' preferences in turn give the experienced workers extra returns. Mobility data from Norway, analyzed by a new industrial classification, show the effects of labor market barriers on mobility and earnings.

The Determinants of Teacher Supply

Abstract: In the economic literature, occupational choice has been interpreted as a decision which will be determined by the expected lifetime earnings associated with each of the available alternatives. Despite its apparent simplicity, it has been notoriously difficult to incorporate this idea into the analysis of occupational choice, the main reason being the inadequacy of empirical data on earnings. Given this difficulty, some models of occupational choice have from the outset formulated the problem as a one-period decision. All the work carried out in the US to investigate the factors determining the choice of a military career belongs to this class of models (cf. Fisher (1969), Altman (1969) and Altman and Barro (1971)). Other researchers have taken into account the effect of lifetime earnings in their theoretical analysis, but have focused their empirical work more on evaluating rates of return than on estimating supply elasticities (e.g. Weiss (1972)). Probably the most complete attempt to deal with this problem has been that of Freeman (1971). The bulk of his empirical analysis considers either starting or average salaries as the relevant variables of the occupational supply functions, and in this sense it is not substantially different from the studies on military manpower reported above. In his analysis of career decisions of doctorate manpower, however, he explicitly takes into account lifetime earnings as the explanatory variable of occupational choices. For each of the specialities considered, Freeman estimates discounted lifetime earnings on the basis of geometric mean incomes for graduates in several previous classes. However, he is faced with serious problems to arrive at a similar measure for alternative occupations. Although still consistent with theoretical expectations, his results are not as neat and convincing as those obtained with only starting or average salaries, and in subsequent work (Freeman (1975a) and (1975b)) he has abandoned this line of analysis, to come back to the simpler specifications. In our view, the analysis of occupational choice developed in this paper goes some way towards the solution of these persistent difficulties. The effect of lifetime earnings on occupational decisions is explicitly considered in a theoretical model from which we derive empirically testable hypotheses. The basic idea is to reduce the earnings profile to two dimensions: its level and the rate at which earnings progress over time. In this manner we achieve two results. First, by measuring the profile with two variables rather than one (as is in fact done when only average, or starting salaries, or even present values, are used), we are able to disentangle two different supply responses: the response to starting earnings, and the response to future earnings prospects. This procedure gives considerable insight into the behaviour of groups of individuals with different characteristics (e.g. men and women). Secondly, our model suggests an empirically convenient way of taking into account lifetime earnings which relies only on starting and average salaries. Given the inadequate data with which most occupational studies have to work, this procedure may prove a useful methodological advance in this area. The rest of the paper is as follows. In Section 2 we develop a simple model of occupational choice, which will help in organizing the discussion of the factors that determine the supply of teachers. Then, in Section 3, the model is applied to data on entry and wastage of teachers. Finally, Section 4 summarizes the main results obtained.

Occupational Licensing and the Interstate Mobility of Professionals

Abstract: This paper attempts to measure the effect of occupational licensing, restrictions on reciprocity, location specific investment in reputation and earnings on the interstate mobility of professionals. While 34 professional occupations are analyzed, special attention is focused on the legal profession. The comparatively low interstate mobility rate of lawyers may be due to state licensing and restrictions on reciprocity or to the investments made by lawyers to develop local reputations or to the investments made by lawyers in state specific law. Tests are conducted to distinguish among these three hypotheses.

Predicting annual net earnings with quarterly earnings time-series models

Abstract: The purpose of this paper is to provide additional evidence regarding the ability of quarterly time-series models to predict annual net earnings. The degree of accuracy of predictions of annual net earnings is of direct interest to researchers for such purposes as testing models of firm valuation, the relationship between unanticipated earnings and stock price changes, and the information content of voluntary disclosures of annual earnings forecasts by management. In this study, I examine the predictive ability of several different quarterly time-series models. These models include a set of five relatively simplistic ones, firm-specific BoxJenkins (BJ) models, and three parsimonious BJ models. The first section of the paper discusses time-series analysis with particular emphasis on quarterly earnings data. The next section discusses the research on parsimonious BJ models. Remaining sections provide a review of the methodology, including the data, the time-series prediction models, the error measures and hypotheses, the predictive ability results, and finally, a summary and conclusions.

SEC Line-of-Business Disclosure and Market Risk Adjustments

Abstract: One of the most pervasive and controversial disclosure requirements initiated by the SEC in recent years has been line-of-business (LOB) reporting for multisegment firms.' The stated objective of LOB disclosure was to provide investors with information useful in assessing the earnings potential and the risk of firms involved in several divergent areas of economic activity. Kinney [1971], Barefield and Comiskey [1975], and Collins [1976], among others, have provided evidence to suggest that disclosure of segmental data does enhance one's ability to predict the future earnings of multisegment firms. Horwitz and Kolodny [1977] have reported findings concerning the information content of segmental disclosure with respect to market risk assessments. They conclude that the initiation of SEC LOB reporting requirements had no effect on the market riskiness of multisegment firms.2 The primary purpose of this