Chapter 1

Introduction to Labor Economics

McGraw-Hill/Irwin Labor Economics, 4th edition

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

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Why study Labor Economics?

Human resources allocate substantial time and energy to labor markets

Labor economics studies how labor markets work

Labor economics helps us understand and address many social and economic problems facing modern societies

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Basics of the Labor Market

Participants are assigned motives:
- Workers look for the best job - Firms look for profits - Government uses regulation to achieve goals of public policy
Minimum wages Occupational safety

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Three Actors
Workers
- The most important actor; without workers, there is no labor

- Desire to optimize (to select the best option from available choices) to maximize well-being
- Will want to supply more time and effort for higher payoffs, causing an upward sloping labor supply curve

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Three Actors
Firms
- Decide who to hire and fire - Motivated to maximize profits - Relationship between price of labor and the number of workers a firm is willing to hire generates the labor demand curve

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Three Actors
Government
- Imposes taxes, regulations - Provides ground rules that guide exchanges made in labor markets

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Summary: the Three Actors

Three Actors in the Labor Market

Labor Market

Workers Supply labor for payoff

Firms Demand labor given price of labor and desire for profits

Government Taxes Regulations Rules of exchange

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Why Do We Need a Theory?

Explain and understand how labor markets work Focus on the essential variables while leaving out other, less crucial, factors Create a model that helps explain the theory

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Positive vs. Normative Economics

Positive economics - Addresses the facts - Focus on what is - Questions answered with the tools of economists Normative economics - Addresses values - Focus on what should be - Requires judgments

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Supply and Demand in the Engineering Market

Earnings ($) Labor Supply Curve
50,000

Equilibrium
40,000

30,000

Labor Demand Curve

10,000

20,000

30,000

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The Alaskan Labor Market and Construction of the Oil Pipeline

Earnings ($) S0

w1

w0

D1

D0

Employment E0 E1

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Wages and Employment in the Alaskan Labor Market, 1968-1983

Employment 250,000 230,000 210,000 190,000 170,000 150,000 130,000 110,000 90,000 70,000 50,000 1968
Employment

Monthly Salary ($) 4,500

4,000

3,500

3,000

2,500
Wage

2,000

1970

1972

1974

1976

1978

1980

1982

1,500 1984

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The Regression Line

Log Wage

Change in log wage

Slope = b a

Change in schooling

Years of Schooling

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Scatter Diagram: Wages and Schooling by Occupation, 2001

4

3.5

Log wage

2.5

2 8 10 12 14 16 18 20 Years of schooling

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Choosing Among Lines Summarizing Trends in the Data

4

B
3.5

Log wage

A C

2.5

2 8 10 12 14 16 18 20 Years of schooling

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The Scatter Diagram and the Regression Line

4

3.5

Log wage

2.5

2 8 10 12 14 16 18 20 Years of schooling

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End of Chapter 1