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September 3, 1976
Professor Lester G. Thurow,
Alfred P. Sloan School of Management,
50, liemorial Drive,
Cambridge. I-Iass. 02139. USA

Dear Professor Thuroir,
Thanic you for yours of \u^st 20, 1976.
I an going to study the literature you mention.
I had the good luck of receiving simultaneously your chapter in
Eckstein's "Parameters and Policies in the U.S. Economy" (1976) and
read it very carefully, since I am highly interested in your -'ork. The
very least I can say is that, in any case, its imaginative a- iroach anneals
to me; as, I take it, it did to many others.'
Although you see your theory as distincijry different from 7:hat you
call the -age competition theory, and j-robably '.rould subsume "my" theory
under the latter category, I agree with almost everything you say - and I
don't see the difference so pointedly. In my earlier theoretical model
(Selected Papers, 1959, p. 243) I assumed, like you, that ^vages are
determined by the job characteristics only (the s. in my notation). Today
I assume the personality traits (my t. in that 191;9 article) to come in
also, but with a negative sign. In your terms - and you express that view
also, on p. 47 - that could be interpreted to mean that an individual's
training-on-the-job costs are determined by the deviations betireen the job
characteristics and the person's background characteristics, 'o here we meet,
I thinJc. I am coming back to this at the end of this letter.
I must confess that I don't really see the difference between wage
competition and job competition - although your description of the process
of finding a job and the way the employer selects are clearly superior to
other descriptions. I see a similarityrfiththe well-known contrast made
between "price competition" and "quality comi etition" on markets of industrial
iroducts. There it means - I guess - that producer B sup lies at a price p ,
a product of quality q^ > q^ of i^roducer A's product and not an identical
product of 'juality g. at a price p' <. p.. A's price. Now to me it seems that

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- 2 September 3, 1 976
Professor Lester G. Thurow,
Cambridge. USA

the buyer simply compares which combination, (p , q.) or (p , q ) he prefers,
or alternatively (p^, q^) or (p^, q^). And that to me means that there is no
difference betv^een price competition and quality competition in that the
usual theory of demand and sup_ly can be tailored to both.
Tlien, you make the point, on p. 46, that déseconomies or economies
of scale invalidate the theory that prices of production factors are equal
to their marginal product. My preference is to add in the case of diseconomies the more efficient production units receive a rent (and here some
question arises of the sort you mention); in the case of economies of scale
free competition is eliminated. Moreover, you correctly state that for the
economy as a w-hole there are hardly diseconomies or economies of scale, as
D. Jorgenson does in Harvard Reprint No. 49, "Investment Beliavior and the
Production Function" (Bell Jl. of r.con. and Ifen. Sc. 3 (1972) 220).
I do agree with j'our vie^-rs on technology, including (,o. 45) that "a
conscious effort to alter .... technological i^rofress might be successful";
but I do consider (for the tast) technology to have been the inequality
creator.
But is it really true that Break's findings for accountants are
generally ap. licable (p. I5)? German colleagues maintain that taxes do
reduce -workers' willingness to -„-ork longer; Germany even introduced a special
tax reduction for this case.
Your Tables 1.12 and 1.13 are a challenge, it seems to me, only as far
as the bottom rows of Table 1.12 are concerned. The top ro-; seems to me to
behave according to (my) expectations. College-educated '.workers v/ere scarcer
in 1950 than in 1970 and so they were paid relatively higher incomes in 1950
than in 1970. Looking at Table 1.13 one might say: in 1970 college workers
were more abundant: small wonder that you find more of them in all percentiles.
Grade school workers were relatively scarcer in 1970 than in 1950, so you find
less of them all over the place. But in Table 1.12 I have to admit that the
higher percentages of grade school workers, in the last three tows, in 1970
than in 1950, is in need of an explanation. My suggestion is (if I want to
defend "my" scarcity theory) that not only schooling explains income, but

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Septenber, 3, 1976
Professor Lester C. Thurow,
Cambrid^. USA

several other traits as uell. Moreover, due to technological develoimentf
demand for grade school 'workers may have fallen.
Your Table 1.17 is extremely interesting. I don't understand hoi.'
2
large its K is, since I don't understand your symbols E09 etc. Quite a few
of the negative prices can indeed, it seems to me, be inter-'-reted as
psychic income. But «hat about working in col wheather? Could this be a
reflection of an immediate comietition -.fith non-whites against '/home is
discriminated? Or do you liave other ex .lanations?
Ily main line of a^'i'roach at the moment is to try to "explain", in
a regression equation, earnings by Uio sets of variables, the required
degree of various capabilities (or traits) and the degrees available or
present in the person, of the same capabilities. It is this sjtmmetry
which I try out. 'o liave material from a large enterprise in u'hich for tiro
capabilities only these required vs available capabilities -./ere administered.
My expectation about algebraic signs (-i for required and - for available,
since they represent "demand" and "supply" factors) .xas confirmed in this
one case, (R =I C.76, ca 40r observations). It is this symmetry vhich I
would have liked to find in a table like your Table 1.17.
Thanking you again for your possible reaction, I an,

Yours sincerely

(J, tinbergen)

c c . Prof. Robert H. Haverman, RlilS, I'leyboomlaan 1, s/assenaar
Drs. Jooi Hartog, EUR

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