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.

James Cassing and Jack Ochs' comment is, I believe, a very interesting extension of the analysis of my paper. Their two basic results are: (i) that congestion will occur in the search for jobs; and (ii) that given costly labor mobility, private decisions regarding voluntary quits will yield a socially optimal adjustment path if individuals have perfect foresight and if there is no congestion (externality) in the search process. Thus, they argue that even if factor prices are not rigid, the presence of congestion in the search process implies private decisions will not be socially optimal, and therefore that a subsidy will be needed to support the optimal plan.