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«American Economic Association In Honor of David Card: Winner of the John Bates Clark Medal Author(s): Richard B. Freeman Source: The Journal of ...»

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The most important paper in this line of work, however, takes an entirely different tack. This is David's 1990 paper on employment determination in union contracts, referred to earlier. Here [16], he exploited the incomplete indexation of contracts across bargaining pairs to estimate the effect on employment of an exogenous shock in real wages due to inflation. Note the twist in the research strategy: you start off trying to explain the pattern of indexation, find that incomplete indexation differs among bargaining pairs, which implies that inflation has different effects on real wages in different union contracts, then shift focus to exploit the unanticipated change in real wages due to inflation to learn something about the labor demand curve. An ordinary least squares regression of the change in employment on the change in real wage in contracts gives slight and rarely significant coefficients. But an instrumental variable estimate based on the unanticipated change in real wages due to inflation has an elasticity of -.40 to -.60.

In 1978, the United States deregulated its airline industry, which provided an opportunity to learn how collective bargaining responds to an erosion in the market power of firms and unions. David studied the employment and wages of airline employees, particularly mechanics, in the wake of deregulation. Some economists may find it strange to focus on such a small group of workers rather than studying the forces that affect employment and wages in the economy writ large. But the 168 Journal of EconomicPerspectives micro-empiricists' view is that there is much to be learned in the small: analyzing how markets for well-defined groups react to exogenous shocks-be they hamburger flippers in NewJersey, airline mechanics at United, residents in Miami, or California teenagers (to pick some of the groups David has examined)-can illuminate how the economy operates. If economists cannot provide insights into such well-defined economic situations, we are in grave trouble.

David's first airline employees paper [7] tracked the wages and employment of mechanics at nine different trunk lines from 1966 to 1985. He found declines in the employment of mechanics at the major trunk lines consonant with the decline in their company's share of industry output, but found only modest declines in the wages of mechanics. In a second paper [8] examining the timing between the change in output and employment and relation between employment changes and wage changes, he found litfie evidence for an efficient contract model (in which wages at a firm have no effect on employment) or for a standard labor demand curve and reported, "The covariation of employment and wages in this data remains largely unexplained." The most recent paper in this area [45] used microdata from the 1980 and 1990 Censuses of Population, union contract data and displaced worker surveys to see how deregulation affected the labor earnings of various groups of airline workers, including mechanics. The results show that airline employees, union as well as nonunion, earned about 10 percent above market rates when the industry was regulated, which disappeared with deregulation. Most economists would expect a drop in the relative pay of organized workers with a loss of market power, but not a fall in the pay of nonorganized groups. The similarity in the relative wage decline across groups after deregulation is consistent with a rentsharing view of the industrial wage structure in which large industry pay differentials are due in part to profitable sectors or firms rewarding employees for reasons that remain unclear in standard models.

Strikes If workers and firms have identical information about the world, they should have the same expectations about the outcome of a strike, obviating the need to strike. Strikes would then show litfie or no pattern and be caused largely by random error. But in fact strikes show patterns that cry out for explanation, implying that some form of imperfect information or irrationality is a necessary ingredient for an explanation. David's first work in this area [10] adds to the strike puzzle. He confirmed a strong seasonal effect in strikes between the same bargaining pairs-strikes are more likely in the summer and fall than in the winter and spring-which raises the question of why negotiators schedule expirations in months where the strike probability is high.

He found other characteristics of contracts that also affect strikes: time since the last negotiation and limited reopening clauses. He documented that short strikes increase the probability of future strikes, while long strikes reduce the probability of future strikes. One interpretation of this is that unions are more likely to win short strikes, while long strikes are more often disastrous for them, altering In Honor of David Card:Winnerof theJohn Bates ClarkMedal worker perceptions of the value of strikes. In a 1995 paper [38], David and Craig Olson exploited the fact that in the 1880s the Bureau of Labor Statistics denoted winners and losers in strikes to show that in fact unions won significant wage gains or hours cuts after short strikes but suffered losses in long strikes.

Efforts to explain the observed patterns in strikes focus on asymmetric information models that assume the firm knows its own profitability but that the union does not. In such models, the strike is a way for the union to obtain information about profitability and thus win a share of an uncertain surplus. David's 1990 paper on strikes and wages [15] tests this theory by examining changes in wages and in the probability of strikes using Canadian collective bargaining contract and strike data. As in his other "test theory" papers, David develops the theory in ways that highlight testable implications: in this case, that the expected profitability in a sector raises wages and reduces the chance of a strike; that better employment opportunities for workers raise wages and the chance of a strike; and that longer strikes are associated with lower wage settlements. By looking at how changes in industry prices or area unemployment (which presumably underlie expected profitability and employment opportunities) affect wages and strikes together, David gives a more complete test of theory than if he had focused on a single outcome variable. In addition, he examines changes in wages or strike probabilities for specific bargaining pairs, thereby differencing out any permanent wage or strike effect for a particular firmunion pair. This eliminates the danger that any observed empirical relation reflects heterogeneity in the underlying population. He finds that unemployment lowers pay and reduces strike probabilities and that higher industry prices raise pay, as expected, but also that higher prices are associated with more rather than fewer strikes; and that strike incidence and duration are connected to wages in ways inconsistent with the theory. Since the notion that increased surpluses (measured by increased industry prices) should lead to fewer strikes is common to any joint-cost model of strikes, finding the opposite makes it clear that our best strike models fall short in an important way. David suggests that a model that assumes asymmetries in information on both sides of the bargaining table might better fit the evidence.





Unemployment There are several ways to investigate unemployment, ranging from abstract theory about whether it does or does not "really" exist to time series analyses of "natural" rates to studies of the characteristics of the unemployed. David has focused on a particular fact about unemployment rates-the increase in rates in Canada relative to the United States-and sought an explanation for this puzzle.

His 1986 paper with Ashenfelter [6] on why Canadian and U.S. unemployment rates diverged came up with largely negative findings. The time series evidence rejects simple explanations of the difference in unemployment rates in terms of minimum wages, unionization, output gaps, unemployment benefits, or divergent real wage trends. However, ensuing papers with Craig Riddell [26; 39] use micro data to go a long way toward answering the question in a surprising way. The first Card-Riddell paper [26] was delivered at an NBER Conference on differences 170 Journal of EconomicPerspectives between the U.S. and Canadian economies in Ottowa, which David and I jointly organized. It was, I recall, the last paper to arrive at the conference, with coffeestained computer prints dated a night or two before.' Card and Riddell [26] show that much of the rise in Canadian unemployment is due to an increase in the proportion of persons without jobs who report themselves unemployed rather than to a decrease in employment. They attribute much of this to Canada's unemployment insurance system. Because Canadians become eligible for unemployment insurance with only 10-14 weeks of work, a sizable number of workers work the 10-14 weeks necessary for eligibility and then become unemployed for part of the year. During the period when U.S. and Canadian unemployment rates diverged, the relative number of Canadian unemployed workers on unemployment insurance increased to approximately 100 percent in Canada while the comparable ratio fell to 29 percent in the United States. The literature on unemployment insurance is dominated by studies that estimate the extent to which such insurance lengthens spells of unemployment (which it surely does).

Card and Riddell show that unemployment insurance also has an important "entitlement effect," which leads to increased labor force attachment and employment.

This effect, not the duration effect, accounts for much of the U.S.-Canadian difference in unemployment.

If the primary difference between U.S. and Canadian unemployment rates is that Canadians make greater use of unemployment insurance, the question arises next as to why they do that. One reason is that more of the unemployed are eligible for unemployment insurance under the Canadian system. But another reason is that in the United States, the proportion of unemployed Americans eligible for unemployment insurance who take up their benefits has trended downward, a development that David and Rebecca Blank explored in a 1991 paper [21]. About 75 percent of the eligible insured unemployed took unemployment insurance benefits in 1977, but only 66 percent of the eligible unemployed took such insurance in 1987. Part of this decline is due to the shift of employment and unemployment to southern and western states, where for various reasons (low unemployment insurance benefits, low unionization), take-up rates are low. Part of the decline, however, remains unexplained.

Immigration David has focused on the responsiveness of the wages and employment of the existing workforce when an exogenous flow of immigrants augments the labor supply.

David's first analysis of this issue (written with Joseph Altonji) [19] contrasted 'Ever since, I have opposed penalties for late papers on the thought that if someone works long into the night pursuing an important finding, as in this case, they should be rewarded for failing to meet a grade-school type deadline, not penalized. Better to push on the frontier of knowledge until the last conceivable moment than to stop before you feel you've got the answer. Of course, not every late paper contains new nuggets of insight!

Richard B. Freeman change in wages among metropolitan areas subject to more or less immigration using the 1970 and 1980 Censuses of Population. This paper delineates the market model for linking immigration to wages and employment in a particularly incisive way that has made the paper a favorite on graduate reading lists. As with most other studies that use cross-area variation in immigrant supplies to examine effects on natives, this study found little adverse effect of immigrants on potential native substitutes.2 David's second paper on immigration (which was published before [19]) was the Mariel boat lift paper [13], which is an exemplar of how to illuminate an issue by finding an appropriate "natural experiment." From May to September 1980, some 125,000 Cubans arrived in Miami in a flotilla of private boats, augmenting the area's labor force by roughly 7 percent. Using CPS files for the Miami area, David compared wages and employment of the low-skilled Miami workers likely to be most harmed by this change in supply before and after the boat lift, relative to changes in wages and employment for similar workers in four comparison cities. He found that the Mariel immigration had essentially no effect on the wages or employment of other workers in the labor market. Why? One possibility is that the new immigrants displaced other workers who would have migrated to Miami absent the boatlift; in fact, the population of Miami did not increase any more than was expected prior to the boatlift. Another possibility is that the jobs the immigrants filled complemented the work of even low-skilled Americans: Miami has an industry structure well suited to make use of unskilled labor, for instance in the apparel industry. Perhaps the relevant demand curves in those open economy sectors are highly elastic, requiring virtually no change in wages to absorb the influx of workers. The third paper (with Kristin Butcher) on immigration [20] used CPS data to examine the effect of immigration flows on the change in wages of persons in the lowest decile of earnings among major cities. Here, also, the analysis did not find a large or statistically significant effect of immigrant flows on the economic position of natives.

Overall, David's work on the effects of immigration on the labor market confirms that there is little or no difference in native wages or employment across areas subject to greater or lesser immigration flows. The Mariel study makes the point in an especially memorable way.

Minimum Wage The issue of how much increases in the minimum wage affect employment is

a long-standing one in economic analysis. Professional priors on the issue are clear:

nearly everyone expects some adverse effect, though there is no consensus prior This is true, except in some instrumental variable calculations that Card and Altonji present but do not stress much, presumably because they had no really good "exogenous" immigration shock on which to base their instrumental variable estimates.

172 Journal of Economic Perspectives on the magnitude of the effects. Few economists put much faith in the possibility that increases in the minimum raise employment, though we have monopsony models that predict such an outcome for certain imposed wage increases, which can be grounded on recruitment costs and turnover that many believe to be important.



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