Fourth Quarter 1998
Federal Reserve Bank of Dallas

Economic Review is no longer published in hard copy. It has been replaced by the all-electronic Economic and Financial Policy Review. Subscribe now and read the latest issue by visiting www.dallasfedreview.org.

How Increased Product Market Competition May Be Reshaping America's Labor Markets
John V. Duca

In this article, John Duca discusses how and why compensation has become more market sensitive in the United States. Specifically, he illustrates how fiercer product market competition can theoretically reduce the prevalence of nominal wage contracts and of indexation in such contracts, while boosting the use of profit sharing. He also summarizes empirical findings supporting the view that increased competition has reduced the use of nominal contracts and the indexation of contract wages, and presents limited, inconclusive data supporting the view that greater product market competition has boosted the overall use of profit sharing. Consistent with aggregate movements in labor practices and a measure of the degree of goods market competition, industry-level data are presented that indicate these changes in labor practices are most evident in sectors that have experienced either deregulation or increased foreign competition since the late 1970s. While more research needs to be done, particularly using industry-level data, new theoretical arguments and empirical evidence support, but do not conclusively prove, the view that increased product market competition has been reshaping America’s labor markets.

Privatization and the Transition to a Market Economy
Jason L. Saving

The Chinese government has announced its intention to privatize thousands of state-owned enterprises. Such an effort would dwarf recent privatizations in the industrialized West and be comparable only to the Eastern European experience following the fall of the Soviet Union. As such, an examination of the Eastern European privatization may provide valuable lessons for China and any other developing economy that embarks upon a large-scale privatization program.

In this article, Jason Saving considers three problems with which Eastern European privatizations have had to contend: a scarcity of information, an inability to exercise managerial oversight, and the absence of competitive markets. He suggests that a lack of information need not prevent privatization. He explores the holding company as a potential solution to the managerial-oversight problem. And he suggests that effective privatization requires both managerial oversight and a legal framework that permits freedom of entry for competing firms.

Global Warming Policy: Some Economic Implications
Stephen P. A. Brown

Many analysts believe that the emissions of greenhouse gases resulting from human activity are contributing to global warming, but the linkage is highly uncertain. The largest such source of these gases is carbon dioxide (CO2) from the growing consumption of fossil fuels. Consequently, the conservation of fossil fuels figures prominently in any strategy to reduce the threat of global warming.

Because there is considerable uncertainty about the benefits of reducing CO2 emissions but the costs of conservation can be readily quantified, some analysts have suggested that reducing the emissions is like insurance. In this article, Stephen Brown integrates a growing literature on the damage caused by global warming with a world energy model to do a cost–benefit analysis of U.S. compliance with the accord adopted at the United Nations conference on global warming held in late 1997. His analysis shows that reducing U.S. emissions to comply with the accord would represent too much insurance against global warming.