Response or Comment
Journal or Book Title
The American Economic Review
First Page or Article ID Number
Edward Ray, in his comment on my 1976 paper, analyzes a slightly different model than the one I presented, and thus reaches different conclusions. His principal conclusions are that: (i) given wage rigidities, a wage subsidy to producers is needed, and this subsidy is equivalent to the optimal static subsidy that ensures full employment in each sector; and (ii) given the forced equilization of wages across sectors, a subsidy to workers is needed to encourage labor transfers between sectors. Thus, Ray finds that full employment is always desirable, whereas I find that some unemployment is (usually) present along the optimum path.
American Economic Association
Lapan, Harvey E., "Factor-Market Distortions and Dynamic Optimal Intervention: Reply" (1979). Economics Publications. 154.