Showing papers on "Earnings published in 1990"

Some Empirical Aspects of Entrepreneurship

Abstract: About 4.2 million men and women operate businesses on a full-time basis. Comprising more than a tenth of all workers, they run most of our nation’s firms and employ about a tenth of all wage workers. The fraction of the labor force that is self-employed has increased since the mid-1970s after a long period of decline.1 This paper examines the process of selection into self-employment over the life cycle and the determinants of self-employment earnings using data from the National Longitudinal Survey of Young Men (NLS) for 1966–1981 and the Current Population Surveys for 1968–1987.

Does School Quality Matter? Returns to Education and the Characteristics of Public Schools in the United States

Abstract: This paper estimates the effects of school quality - - measured by the pupil-teacher ratio, the average term length, and the relative pay of teachers -- on the rate of return to education for men born between 1920 and 1949. Using earnings data from the 1980 Census, we find that men who were educated in states with higher quality schools have a higher return to additional years of schooling, holding constant their current state of residence, their state of birth, the average return to education in the region where they currently reside, and other factors. A decrease in the pupil-teacher ratio from 30 to 25, for example, is associated with a 0.4 percentage point increase in the rate of return to education. The estimated relationship between the return to education and measures of school quality is similar for blacks and whites. Since improvements in school quality for black students were mainly driven by political and judicial pressures, we argue that the evidence for blacks reinforces a causal interpretation of the link between school quality and earnings. We also find that returns to schooling are higher for students educated in states with a higher fraction of female teachers, and in states with higher average teacher education. Holding constant school quality measures, however, we find no evidence that parental income or education affects state-level rates of return.

The empirical content of the roy model

Abstract: This paper clarifies and extends the classical Roy model of self selection and earnings inequality. The original Roy model, based on the assumption that log skills are normally distributed, is shown to imply that pursuit of comparative advantage in a free market reduces earnings inequality compared to the earnings distribution that would result if workers were randomly assigned to sectors. Aggregate log earnings are right skewed even if one sectoral distribution is left skewed. Most major implications of the log normal Roy model survive if differences in skills are log concave. However few implications of the model survive if skills are generated from more general distributions. We consider the identifiability of the Roy model from data on earnings distributions. The normal theory version is identifiable without regressors or exclusion restrictions. Sectoral distributions can be identified knowing only the aggregate earnings distribution. For general skill distributions, the model is not identified and has no empirical content. With sufficient price variation, the model can be identified from multimarket data. Cross-sectional variation in regressors can substitute for price variation in restoring empirical content to the Roy model.

Empirical Age-Earnings Profiles

Abstract: The "human capital earnings function," in which earnings are expressed as a quadratic in potential experience, is probably the most widely accepted empirical specification in economics. In spite of its widespread acceptance, the human capital earnings function provides a very poor approximation of the true empirical relationship between earnings and experience. The standard formulation understates early career earnings growth by about 30%-50% and overstates midcareer growth by 20%-50%. However, simple alternative specifications that fit the data are available.

Lifetime Earnings and the Vietnam Era Draft Lottery: Evidence from Social Security Administrative Records: Errata

Abstract: The randomly assigned risk of induction generated by the draft lottery is used to construct estimates of the effect of veteran status on civilian earnings. These estimates are not biased by the fact that certain types of men are more likely than others to service in the military. Social Security administrative records indicate that, in the early 1980s, long after their service in Vietnam had ended, the earnings of white veterans were approximately 15 percent less than the earnings of comparable nonveterans. Copyright 1990 by American Economic Association.

Voluntary Forecast Disclosure, Nondisclosure, and Stock Prices

Abstract: In this study we consider managerial earnings forecasts as voluntary information releases and compare their properties with predictions from a screening or signaling scenario. In such a scenario, earnings forecasts are used by managers of "good news" firms to screen themselves out from other firms.1 Managerial earnings forecasts are readily interpreted within a signaling or screening framework since they are voluntary disclosures

Stock Dividends, Stock Splits, and Signaling

Abstract: This paper provides evidence that firms signal their private information about future earnings by their choice of split factor. Split factors are increasing in earnings forecast errors, after controlling for differences in pre-split price and firm size. Furthermore, price changes at stock dividend and split announcements are significantly correlated with split factors, holding other factors constant, and with earnings forecast errors. These correlations suggest that management's choice of split factor signals private information about future earnings and that investors revise their beliefs about firm value accordingly. The analysis also suggests, however, that announcement returns are significantly correlated with split factors after controlling for earnings forecast errors. This suggests that earnings forecast errors measure management's private information about future earnings with error, that split factors signal other valuation-relevant attributes, or that a'signaling explanation is incomplete. RESEARCHERS HAVE LONG PUZZLED over the role of stock splits and stock dividends. A stock dividend or split increases the number of equity shares outstanding but has no effect on shareholders' proportional ownership of shares. It is therefore puzzling that firms engage in these transactions, and even more so that stock prices rise on average when these transactions are announced, as Grinblatt, Masulis, and Titman (1984) document. The significant positive announcement effects led Grinblatt, Masulis, and Titman (hereafter GMT) to hypothesize that firms signal information about their future earnings or equity values through their split decisions. To date, this hypothesis has met with limited support. GMT conclude that "the announcement returns cannot be explained by forecasts of imminent increases in cash dividends" because they observe similar stock price behavior in firms that do not pay dividends. Our study provides further evidence on the signaling hypothesis by testing whether stock dividends and splits convey information about future earnings, and by testing whether the split factor itself is the signal. The notion that the split factor may act as a signal has institutional as well as theoretical support. Practitioners have long contended that the purpose of stock splits is to move a firm's share price into an "optimal trading range." Baker and Gallagher (1980), who surveyed chief financial officers of firms that split their shares, report that 94% of their sample indicated their stock splits moved their

Heterogeneous Human Capital, Occupational Choice, and Male-Female Earnings Differences

Abstract: Human capital models have mainly focused on the rate of return to investment in a homogeneous stock of capital. Yet individuals have different initial attributes that determine comparative advantage in producing different types of human capital. We find that mathematical ability is an important determinant of field choice for college students and that differences in earnings across fields are largely explained as a return to the use of scarce quantitative abilities in the production of each type of human capital. The model successfully accounts for the observed male-female differences in earnings and occupational choices of recent college graduates.

The Role of Human Capital in Earnings Differences Between Black and White Men

Abstract: D uring the past 50 years, the earnings of black men have increased substantially both in absolute terms and relative to those of white men, as shown in Figure 1. In 1940 the black-white weekly earnings ratio among men ages 25-34 was 49 percent; by 1980 it had increased to 79 percent. During the 1980s, however, the overall black-white earnings gap did not narrow, and at younger ages the gap actually widened. Although the 1980s is not the first decade since 1940 in which black men made little or no gains in relative earnings-the 1950s was another-the lack of progress in the 1980s is nevertheless puzzling and a source of concern. This article examines the factors underlying the differential in earnings between black men and white men, with a focus on the role of human capital. Since 1940, successive generations of black men entering the labor force have been increasingly more educated relative to white men, both in terms of years of school completed and in the quality of schooling obtained. As the education and income levels of black parents increased, racial differences in the transmission of human capital in the home were also likely to have narrowed. This convergence in educational differences combined with the migration of blacks out of the South contributed to the narrowing in the racial gap in earnings over the 1940-80 period, particularly in the first half of the period. But human capital factors-education and migration-were not the only source of convergence in black-white differences in earnings. The patterns of change in the earnings gap support the contention that declining labor market discrimination against blacks has also contributed to the rise in the black-white earnings ratio. Moreover, the acquisition of human capital itself has been strongly affected by societal and governmental discrimination, since blacks were long provided with greatly inferior schooling resources.

Bequest behavior and the effect of heirs' earnings: testing the altruistic model of bequests

Abstract: That parents transfer resources to children because of altruistic concern is a reasonable a priori assumption. However, economic theories of altruistic transfers have produced many counterintuitive conclusions and, consequently, much debate. When applied to bequests, these theories predict that inheritances will compensate for earnings differences between siblings as well as between parents and children. This paper tests these implications. Using a new data set centered on federal estate tax returns, little support can be found for an altruistic theory of bequests. This finding has implications for macroeconomic policy, government transfer programs, and inequality. Copyright 1996 by American Economic Association.(This abstract was borrowed from another version of this item.)

Workers' Compensation and Injury Duration: Evidence from a Natural Experiment

Abstract: This paper examines the effect of workers' compensation on the time until an injured worker returns to work. Two large increases in the maximum weekly benefit amount in Kentucky am Michigan are examined. The increases raised the benefit amount for high earnings individuals by over sixty percent, while low earnings individuals, who did not earn enough to be eligible for the old maximum, did not experience a change in their incentives. A comparison of the behavior of pecp1e injured the year before the benefit increases to those injured the year after provides an estimate of the effect of higher benefits on injury duration. This use of a "natural experiment" allows us to separate the effect of the level of the benefits from the effect of previous earnings, which is a common difficulty in the analysis of social insurance programs. The analysis uses individual records from a large number of insurance companies. Time out of work increases dramatically for those groups eligible for the higher benefits, while those whose benefits do not change do not experience a change in duration. The estimates suggest large moral hazard effects of higher benefits, with the estimated elasticity of spell duration with respect to benefits of approximately .3 to .4.

Ownership, agency and wages: an examination of franchising in the fast food industry.

Abstract: This paper estimates the difference in compensation between company-owned and franchisee-owned fast food restaurants. The contrast is of interest because contractual arrangements give managers of company-owned outlets less of an incentive to monitor and supervise employees. Estimates based on two data sets suggest that employee compensation is slightly greater at company-owned outlets than at franchisee-owned outlets. The earnings gap is 9 percent for assistant and shift managers and 2 percent for full-time crew workers. Furthermore, the tenure-earnings profile is steeper at company-owned restaurants. These findings suggest that monitoring difficulties influence the timing and generosity of compensation.

Predicting Individual Analyst Earnings Forecasts

Abstract: In this study I propose and test a model that predicts individual analyst forecasts of corporate earnings per share (EPS) using the change in the mean consensus forecast of other analysts since the date of the analyst's current outstanding forecast; the deviation of the analyst's current forecast from the consensus forecast; and cumulative stock returns since the date of the analyst's current forecast. I find that these three variables explain about 38% of the variability in analyst forecast revisions. While there is evidence of a relation between changes in earnings expectations and price changes, virtually all of the explanatory power of my model arises from other analyst forecasts. Section 2 describes the data bases used and the sample selection process. Section 3 presents the model and method for predicting individual analyst forecasts. Section 4 reports the bias and accuracy of the predicted forecasts. Conclusions are in section 5.

Education, Productivity, and Inequality: The East African Natural Experiment

Abstract: Drawing on the experiences of Kenya and Tanzania, investigates how the expansion of the educational system affects productivity and the growth and distribution of income. Explains that Kenya and Tanzania, with their similar colonial background, natural resources, and economic structure, but markedly divergent educational policies, constitute a "natural experiment." Obtains measures of both reasoning ability and cognitive skill from surveys of representative samples of urban wage employees, allowing the development of a model to evaluate the human capital, screening, and credentialist interpretations of the link between educational attainment and earnings. Evaluates competing explanations for the steeper earnings-experience profile of the more educated. Estimates the effects of country differences in the quantity and quality education on output. Analyzes occupation as an important intermediary between education and earnings. Isolates the effect that institutional intervention by the government has on the wage structure. Measures the responsiveness of the wages of secondary and primary leavers to changes in their relative supply. Examines how levels of inequality change in response to changes in the composition of the workforce that result from educational expansion. Considers the equality of the distribution of school places in Kenya and Tanzania. Explores whether the expansion of secondary enrollment in Kenya, and the contrasting situation in Tanzania, have affected the degree of intergenerational mobility and the process of class formation. Examines methodological and policy issues in the cost-benefit analysis and in the financing of secondary education. Considers the implications of the findings for future research and the extent to which the results can be generalized to other countries and situations. A companion volume, Education, Work and Pay in East Africa, describes the economies and education systems of Kenya and Tanzania, and contains an annotated set of cross-tabulations and other summary statistics based on East African surveys. Knight is a Senior member of the research staff at the Institute of Economics and Statistics. Sabot is Professor of Economics at Williams College. Index.

The intergenerational correlation between children's adult earnings and their parents' income: results from the michigan panel survey of income dynamics

Abstract: Intergenerational correlations between parental income and child earnings reflect the extent of intergenerational economic mobility and equality of opportunity. Previous estimates are about 0.2, but these estimates suffer from a number of problems, including the use of but one year of observations and of nonrandom samples. We present new estimates based on the Panel Study of Income Dynamics. These estimates suggest correlations over 0.5 with longer-run income and earning measures, as well as some gender and race differences and some impact of liquidity constraints. They also suggest that the intergenerational elasticity is greater as parental income increases, the opposite of the Becker-Tomes conjecture.

Forecast accuracy of individual analysts in nine industries

Abstract: The purpose of this paper is to investigate whether financial analysts with superior earnings forecasting ability can be distinguished on the basis of ex post forecast accuracy. I explore the question by estimating and comparing average accuracy across individuals, and by considering whether the observed distribution of analyst forecast accuracies differs from the distribution expected if their relative performances each year were purely random. Overall, I do not find systematic differences in forecast accuracy across individuals. Financial press coverage suggests there are superior financial analysts. For example, Institutional Investor's annual "All American Research Team" includes analysts rated by money managers as superior on a variety of criteria, including earnings forecasting, ability to pick stocks, and the quality of written reports. Clearly, financial analyst services other than forecast accuracy are valued by their clients. I focus on only one activity, earnings forecasting, for two reasons. First, forecast data are available, quantitative, and can be evaluated against observable earnings outcomes. Services such as insightful, well-written research reports are harder to evaluate quantitatively. Second, academic use of analyst forecasts as earnings expectations data in capital markets empir-

The Social Organization of Work

Abstract: 1. The Evolution Of Work. 2. Studying The World Of Work. 3. Work And The Family. 4. Seeking Job Satisfaction. 5. Disruptions, Barriers, And Stress In Work. 6. Collective Responses To Work. 7. Technology And Organization. 8. Manufacturing. 9. The High-Technology Workplace. 10. Services. 11. Professions And Professionals. 12. Executives, Managers, And Administrators. 13. Clerical Workers And Sales Workers. 14. Marginal, Contingent, And Peripheral Jobs. 15. The World Of The Large Corporation. 16. Work In A Global Economy. 17. The Future Of Work. Appendix Tables: Employment And Earnings By Occupation And Gender.

Firm Size and Executive Compensation

Abstract: Using several data sets, the relationship between executive income and firm size is shown to be relatively stable over time and in different countries. The elasticity of executive earnings to firm size is about the same today as it was in the 1930s, with evidence of a decline in the earnings of top executives, controlling for firm size. In addition to the effects of size and other firm and industry characteristics, there are returns to age and experience. There is also substantial variability in the level of compensation among firms of comparable size, indicating that there may be impediments to mobility.

Can Capital Income Taxes Survive in an Open Economies

Abstract: Recent theoretical work has argued that a small open economy should use residence-based but not source-based taxes on capital income. Given the ease with which residents can evade domestic taxes on foreign earnings from capital, however, a residence-based tax may not be administratively feasible, leaving no taxes on capital income. The objective of this paper is to explore possible reasons why capital income taxes have survived in the past, in spite of the above pressures. Any bilateral approach, such as sharing of information among governments or direct coordination of tax rates, suffers from the problem that the coalition of countries is itself a small open economy, so subject to the same pressures. Capital controls, preventing capital outflows, may well be a sensible policy response and were in fact used by a number of countries. Such controls have many drawbacks, however, and a number of countries are now abandoning them. The final hypothesis explored is that the tax-crediting conventions, used to prevent the double taxation of international capital flows, served also to coordinate tax rates. The paper shows that while no Nash equilibrium in tax rates exists, given these tax-crediting conventions, a Stackelberg equilibrium does exist if there is either a dominant capital exporter or a dominant capital importer, in spite of the ease of tax evasion. While the U.S. , as the dominant capital exporter during much of the postwar period, may well have served as this Stackelberg leader, world capital markets are now more complicated. These tax-crediting conventions may no longer be sufficient to sustain capital-income taxation.

The Econometrics of Kinked Budget Constraints

Abstract: In the last several years a branch of applied econometrics has developed which is devoted to the development of techniques for the estimation of demand and other functions when the budget constraint is "piecewise-linear," or "kinky"-that is, when the constraint consists of a number of segments joined together at kink points. Such constraints most frequently arise from government tax and transfer programs. For example, the federal income tax imposes a piecewise-linear schedule by the use of constant marginal tax rates within brackets, a problem analyzed by Hausman (1981). The payroll tax in the Social Security system likewise generates a kinked schedule inasmuch as the marginal tax rate on earnings is zero above a certain earnings maximum. Federal and state transfer programs for the poor result in piecewise-linear constraints because transfer benefits are "taxed" (in the sense of a negative income tax) as income rises and because that "tax rate" falls to zero at the kink point where an individual or family loses eligibility for the benefit altogether. Many government transfer programs impose additional nonlinearities by altering this tax rate by discrete amounts over the range of positive benefits as well. But kinked constraints sometimes arise in nongovernment contexts, a well-known example being the block pricing schedule commonly set by utilities and volume discounting in general. Kinked budget constraints create two difficulties that have several interesting facets. One difficulty is that changes in tax and transfer schedules can have unexpected effects that can be exactly the opposite in sign to those expected from economic theory. Examples of this phenomenon are given below. The second difficulty, that with which this paper is mostly concerned, relates to the implications of kinked budget

Human Capital Theory: Implications for HR Managers

Abstract: This paper reviews some of the contributions of and challenges to human capital theory. It focuses on the alleged link between earings and education and experience and on competing explanations for observed earning differentis by race and by gender. The review concludes that while human capital theory provides some central insights about the supply side of the labor market, the challenges to this theory suggest that the demand side od the market, i.e., the actions of human resource managers, also play a key role in detemining earnings and employment. Moreover, these challenges suggest that government policies can be instrmental in effecting a more efficient and equitable use of human resources.

The Association between Interim Information and Security Returns Surrounding Earnings Announcements

Abstract: This paper analyzes cross-sectional differences in the information content of earnings announcements by selecting seven firm-specific variables to proxy for the level of a firm's interim information and testing the following predictions on a sample of firms whose securities trade over-the-counter (OTC): (1) the amount of information content of fourthquarter/annual earnings announcements is negatively associated with the level of interim information, while (2) the extent of preemption of that information content is positively associated with the level of interim information. This study differs in two ways from prior studies that document the explanatory power of firm size with respect to both announcement and preannouncement firm-specific security returns (see, for example, Atiase [1985], Collins, Kothari, and Rayburn [1987], Foster, Olsen, and Shevlin [1984], and Freeman [1987]). I examine firm-specific variables in addition to firm size in order to determine whether the additional proxies provide

Does Compulsory School Attendance Affect Schooling and Earnings

Abstract: This paper presents evidence showing that individuals' season of birth is related to their educational attainment because of the combined effects of school start age policy and compulsory school attendance laws In most school districts, individuals born in the beginning of the year start school at a slightly older age, and therefore are eligible to drop out of school after completing fewer years of schooling than individuals born near the end of the year Our estimates suggest that as many as 25 percent of potential dropouts remain in school because of compulsory schooling laws We estimate the impact of compulsory schooling on earnings by using quarter of birth as an instrumental variable for education in an earnings equation This provides a valid identification strategy because date of birth is unlikely to be correlated with omitted earnings determinants The instrumental variables estimate of the rate of return to education is remarkably close to the ordinary least squares estimate, suggesting that there is little ability bias in conventional estimates of the return to education The results also imply that individuals who are compelled to attend school longer than they desire by compulsory schooling laws reap a substantial return for their extra schooling

Unexpected Earnings and Intraindustry Information Transfers: Further Evidence

Abstract: This paper provides evidence on the association between unexpected quarterly earnings information and the contemporaneous stock price behavior of announcing and nonannouncing firms in the same industry. Prior research provides evidence consistent with a positive sign and magnitude relation between the unsystematic stock returns of announcing and nonannouncing firms at earnings release dates, i.e., information transfers (Foster [1981] and Clinch and Sinclair [1987]). As these studies emphasize, however, such an association may arise from misspecification of the stock-return-generating process. To address this issue, we use unexpected earnings, not announcing firms' unsystematic stock returns, in tests of information transfers. Evidence consistent with information transfers when unexpected earnings are used as a proxy for the informativeness of earnings would reduce the likelihood of information transfers attributable to returns model misspecification, and would support the hypothesis that unexpected earnings, and not some unspecified information item, drive information transfers at earnings release dates. We find a positive sign and magnitude relation between the contemporaneous unsystematic stock returns of announcing and nonannouncing firms at earnings release dates and between unexpected earnings of announcing firms and unsystematic stock returns of nonannouncing

Fiscal paradise: foreign tax havens and american business

Abstract: The offshore tax haven affiliates of American corporations account for more than a quarter of US foreign investment, an nearly a third of the foreign profits of US firms. This paper analyzes the origins of this tax haven activity and its implications for the US and foreign governments. Based on the behavior of US fins in 1982, it appears that American companies report extraordinarily high profit rates on both their real and their financial investments in tax havens. We calculate from this behavior that the tax rate that maximizes tax revenue for a typical haven is around 6%. The revenue implications for the US are more complicated, since tax havens may ultimately enhance the ability of the US government to tax the foreign earnings of American companies.