THE CONCEPT of a natural unemployment rate has been central to most modern models of inflation and stabilization. According to these models, inflation will accelerate or decelerate depending on whether unemployment is below or above the natural rate, while any existing rate of inflation will continue if unemployment is at the natural rate. The natural rate is thus the minimum, and only, sustainable rate of unemployment, but the inflation rate is left as a choice variable for policymakers. Since complete price stability has attractive features, many economists and policymakers who accept the natural rate hypothesis believe that central banks should target zero inflation. We question the standard version of the natural rate model and each of these implications. Central to our analysis is the effect of downward nominal wage rigidity in an economy in which individual firms experience stochastic shocks in the demand for their output. We embed these features in a model that otherwise resembles a standard natural rate model and show there is no unique natural unemployment rate. Rather, the rate of unemployment that is consistent with steady inflation We would especially like to thank Neil Siegel, Justin Smith, and Jennifer Eichberger for invaluable research assistance. We are also grateful to Pierre Fortin, Harry Holzer, and Christina Romer for providing us with data, and to

We review new findings and new theoretical developments in the field of intelligence. New findings include the following: (a) Heritability of IQ varies significantly by social class. (b) Almost no genetic polymorphisms have been discovered that are consistently associated with variation in IQ in the normal range. (c) Much has been learned about the biological underpinnings of intelligence. (d) "Crystallized" and "fluid" IQ are quite different aspects of intelligence at both the behavioral and biological levels. (e) The importance of the environment for IQ is established by the 12-point to 18-point increase in IQ when children are adopted from working-class to middle-class homes. (f) Even when improvements in IQ produced by the most effective early childhood interventions fail to persist, there can be very marked effects on academic achievement and life outcomes. (g) In most developed countries studied, gains on IQ tests have continued, and they are beginning in the developing world. (h) Sex differences in aspects of intelligence are due partly to identifiable biological factors and partly to socialization factors. (i) The IQ gap between Blacks and Whites has been reduced by 0.33 SD in recent years. We report theorizing concerning (a) the relationship between working memory and intelligence, (b) the apparent contradiction between strong heritability effects on IQ and strong secular effects on IQ, (c) whether a general intelligence factor could arise from initially largely independent cognitive skills, (d) the relation between self-regulation and cognitive skills, and (e) the effects of stress on intelligence.

1970s and 1980s has been one of the most remarkable shifts in the structure of labor compensation in recent history-the last major shift in this distribution having occurred during the 1940s.I In the postwar period, earnings and income distributions have been regarded as stable bedrock-that is, until recently-with a common theme being the stability of those distributions in light of massive changes in labor markets and public spending on redistributive programs. Entire books were written on the subject.2 This view of long-term stability has been dramatically altered by an enormous, and still growing, series of investigations showing a widening of the income and wage distributions.3 As documented in an article by Frank Levy and Richard Murnane, the widening of the earnings distribution began gradually in the 1970s and accelerated in the 1980s.4 Earnings differentials by education and experience grew rapidly in the 1980s. A debate has now ensued concerning the causes of these trendswhether they are the result of general shifts in supply or demand caused by skill-biased technological change, shifts in the pattern of interna-1. See Williamson and Lindert (1980) and Goldin and Margo (1992). 2. See, for example, Reynolds and Smolensky (1976). 3. Two of the earliest studies were Dooley and Gottschalk (1984) and Lawrence (1984). 4. Levy and Murnane (1992). 217 218 Brookings Papers on Economic Activity, 2:1994 tional trade, changes in union rents or the minimum wage, or other factors-. Our study suggests that this literature has missed a critical aspect of the widening wage distribution: a growing instability in wages has caused a major part of the trend. The fact that annual cross-sectional "snapshots" of the work force over the 1970s and 1980s reveal an increase in the variance, and other measures of dispersion, of the wage distribution has been interpreted as reflecting solely an increase in the dispersion of average-or what we call "permanent"-wages. We show, instead, that part of the increase in the annual variance of wages for white men has resulted from an increase in the variance of short-term changes in earnings-or "transitory" movements in earnings. We show that an increase in earnings instability has effected a full one-third to one-half of the widely noted increase in the variance of earnings from the 1970s to the 1980s. The recognition of a major upturn in earnings instability prompts many further questions. Does it reflect a true increase in the instability of wage rates, or just an increase in employment turnover orjob mobility? Does it reflect an increase in "voluntary" or"involuntary" movements between jobs? Is it concentrated in particular sectors of the economy? Is it associated with aggregate shocks or sectoral shocks, or is it entirely idiosyncratic on an individual level? We shall provide partial and suggestive answers to these and other questions and present an exploratory investigation of causes. Despite the limited nature of our inquiry, it is unambiguously clear that this search for the causes of...

Some argue that the high heritability of IQ renders purely environmental explanations for large IQ differences between groups implausible. Yet, large environmentally induced IQ gains between generations suggest an important role for environment in shaping IQ. The authors present a formal model of the process determining IQ in which people's IQs are affected by both environment and genes, but in which their environments are matched to their IQs. The authors show how such a model allows very large effects for environment, even incorporating the highest estimates of heritability. Besides resolving the paradox, the authors show that the model can account for a number of other phenomena, some of which are anomalous when viewed from the standard perspective.

Workers' wages are not set in a spot market. Instead, the wages of most workers-at least those who do not switch jobs-typically change only annually and are mediated by a complex set of institutions and factors such as contracts, unions, standards of fairness, minimum wage policy, transfers of risk, and incomplete information. The goal of the International Wage Flexibility Project (IWFP)-a consortium of over 40 researchers with access to individual workers' earnings data for 16 countries-is to provide new microeconomic evidence on how wages change for continuing workers. Wage changes due to worker mobility are governed by different processes and are beyond the scope of this study.A key question in the theoretical and empirical literature, as reviewed in