LABOR ECONOMICS

JAKUB GROSSMANN WEEK 1, FALL 2023

1
Lecturer
JAKUB GROSSMANN
• PhD from CERGE-EI
• Economist Analyst at Czech National Bank
• Researcher at IDEA think tank
• External member of the National Economic Council of the Government

Fields of interest
• Labor economics
• Empirical econometrics
• Applied econometrics
• Policy changes

2
Labor economics: Overview
This course will cover selected topics in labor economics.
You will learn:
• basic definitions and relations necessary to describe a labor market
• how the demand for labor is determined
• what affects the decision to supply labor.
Additionally, we will discuss wage-setting mechanisms, labor productivity, and
discrimination in the labor market.
The course will also cover an introduction to unemployment and labor mobility
issues.

3
Course Organization
Monday lectures (8:00am-9:30am CET)
presentation by the teacher, short tasks, discussion
Wednesday lectures (8:00am-8:45am CET)
weekly quiz, presentation by the teacher, introduction to a case study
Wednesday exercise session (8:45am-9:30am CET)
discussion of a case study, practical application of concepts introduced during
lectures
Work at home:
two home assignments (due in week 4 and in week 6)
Materials:
Accessible at the moodle webpage:
https://moodle.cerge-ei-foundation.org/course/view.php?id=61

4
SYLLABUS
Week 1: Introduction to labor economics: basic concepts (based on
Chapters 1 & 2 of the textbook)
Week 2: Labor demand: profit maximization, short-run and long-run
demand for labor, labor demand elasticity
Week 3: Labor supply: budget constraint, decision to work, household
production
Week 4: Equilibrium wage, compensating wage differentials, and hedonic
wage theory
Week 5: Human capital, gender, and race in the labor market
Week 6: Unemployment and labor mobility

5
Sources
• Your notes from the lectures and exercise sessions
• The slides will be posted in the moodle after the class
• Main textbook: “Modern Labor Economics: theory and public policy”
• Feel free to explore other textbooks on labor economics
• Additional materials
• Research articles (check out https://www.iza.org/)
• The Economist articles
• News etc.
• Books (Freakonomics by Levitt, The Economic Naturalist by Frank etc.)

6
 Grading
During the course you will collect points (maximum 100).
Points can be earned in the following way:
1. Weekly quizzes – 20 points max
• (5 points each, considering the best five quizzes)

2. Home assignments – 30 points max

• (15 points each)

3. Final exam – 40 points max.

4. Extra – 10 points
Important!: To pass this course, you have to get at least 50% on the final exam (i.e. 20 points)
and 50% of 100 points in total.
7
Academic integrity
You are welcome to discuss class materials and problem sets with your
classmates (actually, it is a good way to practice), however, you are asked to carry
out homework assignments on your own.

No cheating or copying answers is allowed and will not be tolerated.

This kind of behavior will be reported to the course administration and may lead
to expulsion from the course!
• no matter who copied and who provided answers, both persons will be
treated in the same way

8
Questions?
Do you have any questions?
• Ask now
• Ask your local teacher
• Ask me here: jakub.grossmann@cerge-ei.cz

9
Time to get to know you a bit….
Please take a minute to answer the zoom survey (select the answers that represents
your status)
• I am (first year, second, third BA vs MA) student
• I can read an econ newspaper article (in English), summarize it and formulate main
takeaway points
• I can read an econ research article (in English), summarize it and formulate main
takeaway points
• I am familiar with calculus enough to solve optimization problems (i.e., take the first
derivation)
• I understand the basics of linear regressions (how to run estimation, read the output
tables, interpret the results)

10
What you should already know
Basics of microeconomic theory in general
• Rationality
• Utility maximization (individuals)
• Profit maximization (firms)
• Consistency

11
What you should already know
Basics of microeconomic theory in general
• Rationality
• Utility maximization (individuals)
• Profit maximization (firms)
• Consistency
• Scarcity of resources
• To afford one thing, one has to resign from another

12
What you should already know
Basics of microeconomic theory in general
• Rationality
• Utility maximization (individuals)
• Profit maximization (firms)
• Consistency
• Scarcity of resources
• To afford one thing, one has to resign from another
• Economic modelling
• What does it mean to build an economic model?
• Assumptions
• Predictions

13
Goals of this lecture
By the end of this class, you should be able to:
• Understand and apply the basic concepts in LE
• Be able to define the labor market and measure its condition
• Use different means to measure the price of labor

14
What is Labor economics?
• Application of economic theory to analyze behavior of, and relationships
between employers and employees.

• It is very useful in public policy analysis, because many public policies directly
or indirectly affect participants of the labor market.

15
Example
A government considers increasing state-funded pensions
• How to finance this step:
• Increase payroll tax?
• Increase retirement age?
• How will employees and employers react when one of these policies is
introduced?

16
Labor market
Who are the sellers?
• Workers
Who are the buyers?
• Employers (Firms)
What is the market?
• Mechanism through which workers and jobs are matched

17
Labor market
How large is a labor market?
• National labor market
• Local labor market
• Actors (workers, employers) can operate in several markets, can switch
between markets

18
Labor market
How large is a labor market?
• National labor market
• Local labor market
• Actors (workers, employers) can operate in several markets, can switch
between markets

• Think about a taxi driver job other jobs can he do (i.e., at what labor markets
can he operate)?

19
LM: Basic concepts

US labor market in 2010.

20
Unemployment rate
Most widely cited measure of labor market conditions
• share of unemployed in the labor force.

21
Unemployment rate
Most widely cited measure of labor market conditions
• share of unemployed in the labor force.
When the unemployment rate is low, we say that the labor market is tight
• jobs are plentiful
• it is hard for employers to find workers
• most of those who are unemployed will find other work quickly.

22
Unemployment rate
Most widely cited measure of labor market conditions
• share of unemployed in the labor force.
When the unemployment rate is low, we say that the labor market is tight
• jobs are plentiful
• it is hard for employers to find workers
• most of those who are unemployed will find other work quickly.
When the unemployment rate is high, we say that the labor market is loose
• workers are abundant
• jobs are relatively easy for employers to fill
• unemployed find it difficult to find employment.

23
Unemployment rate
Your turn:
How does it look now, during the economic crisis, and before the
economic crisis?

24
LM: Basic concepts
What was the unemployment rate in the US in 2010?
• Is it high/low?
• Why?

US labor market in 2010.

25
Labor Force Participation
• Another measure of labor market conditions
• share of labor force participants in the whole working-age population.
• When people resign from a job and do not look for new employment, we say
that they leave the labor force.
• Example: labor force participation of women:
Unemployment Labor Force Participation rate
rate
Romania 2.6 74.6
Bulgaria 3.7 81.4
Lithuania 5.0 89.2
Latvia 5.2 85.5

26
Price of labor
The actions of buyers and sellers in the labor market serve both to allocate and
to set prices for various kinds of labor

27
Price of labor
The actions of buyers and sellers in the labor market serve both to allocate and
to set prices for various kinds of labor
The wage rate is the price of labor per working hour
• Nominal wage – what workers get paid per hour in current euros (or other currency)
• Real wage – is nominal wage expressed in terms of how much can be bought for it

28
Price of labor
The actions of buyers and sellers in the labor market serve both to allocate and
to set prices for various kinds of labor
The wage rate is the price of labor per working hour
• Nominal wage – what workers get paid per hour in current euros (or other currency)
• Real wage – is nominal wage expressed in terms of how much can be bought for it
Earnings is the wage rate multiplied by hours worked

29
Price of labor
The actions of buyers and sellers in the labor market serve both to allocate and
to set prices for various kinds of labor
The wage rate is the price of labor per working hour
• Nominal wage – what workers get paid per hour in current euros (or other currency)
• Real wage – is nominal wage expressed in terms of how much can be bought for it
Earnings is the wage rate multiplied by hours worked
Income is earnings plus employee benefits plus unearned income

30
Comparing price of labor
We observe that average hourly wage in the US was $10.20in 1990 and $21.04 in
2015
• Does it mean that workers were twice as rich in 2015 than in 1990?
• Other prices also rose!

31
Comparing price of labor
We observe that average hourly wage in the US was $10.20in 1990 and $21.04 in
2015
• Does it mean that workers were twice as rich in 2015 than in 1990?
• Other prices also rose!
How to compare wages over time?
• Use real wages

32
Comparing price of labor
We observe that average hourly wage in the US was $10.20in 1990 and $21.04 in
2015
• Does it mean that workers were twice as rich in 2015 than in 1990?
• Other prices also rose!
How to compare wages over time?
• Use real wages
How to compare wages across countries?
• We can compare how much of a globally comparable good can be bought for wage

33
Price of labor - Example
1980 1990 2000 2015
Average hourly wage (nominal) 6.85 10.20 14.02 21.04
CPI (1982-1984 as a base) 82.9 129.0 168.9 231.8
Average hourly wage (real, in 8.26 7.91 8.30 9.08
1982-1984 prices)
CPI (2015 as a base) 35.8 55.7 72.9 100.0
Average hourly wage (real, in 19.15 18.33 19.24 21.04
2015 prices)

= (nominal wage/CPI)*100

34
Price of labor - Example
0,5 l mean Currency mean wage in Coca- Colas
Coca-Cola wage USD per wage

Georgia 1.40 1204 Lari 387 860

Kosovo 0.55 378 Euro 446 687
Kyrgyzstan 27.00 17799 Som 226 659
Russia 37.00 48030 Rubel 640 1298
Uzbekistan 4.00 2575 Soum 250 644

= Mean wage/ Coca-cola price

35
Price of labor
Check the McWages:
https://www.economist.com/graphic-detail/2012/06/08/mcwages
• (the article is also at moodle)
• Big Macs per hour – real wage at purchasing power parity

https://www.nber.org/system/files/working_papers/w18006/w18006.pdf

A concept closely related to the Big Mac index:

https://www.economist.com/big-mac-index

36
Reading
Read the “crime rates” introduction to the Freakonomics book (posted on
Moodle).
• Notice how seemingly unrelated things interact
• And why it might be useful to study labor economics carefully

• By the words of the authors:

• “Knowing what to measure and how to measure it makes a complicated world much less so.” In
Freakonomics p.27.

37
Summary
Why is studying labor economics important?

38
Summary
Why is studying labor economics important?
• Great tool to analyze the impacts of policy changes
How would you define a labor market?

39
Summary
Why is studying labor economics important?
• Great tool to analyze the impacts of policy changes
How would you define a labor market?
• Place where sellers (workers) and buyers (employers) match
How to measure the condition of the labor market?

40
Summary
Why is studying labor economics important?
• Great tool to analyze the impacts of policy changes
How would you define a labor market?
• Place where sellers (workers) and buyers (employers) match
How to measure the condition of the labor market?
• Unemployment rate (unemployed/labor force), labor force participation (labor
force / working age population)
Price of labor can be measured using

41
Summary
Why is studying labor economics important?
• Great tool to analyze the impacts of policy changes
How would you define a labor market?
• Place where sellers (workers) and buyers (employers) match
How to measure the condition of the labor market?
• Unemployment rate (unemployed/labor force), labor force participation (labor force /
working age population)
Price of labor can be measured using
• Real and nominal wages

42
Thank you!
• Next lecture on September 13, 2023
• Next lecture will start with a 10-min quiz (mockup, not graded)
• After a 45-min lecture there will be a seminar session leaded by your Local
Teacher
• In case of any questions:
• Write me an e-mail (jakub.grossmann@cerge-ei.cz)
• Or contact your LT

• See you on Wednesday!!!

43