Labour Economics

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 Course details
– Introduction. Borjas - Chapter 1
– Labour supply. Borjas - Chapter 2
– Labour demand. Borjas - Chapter 3
– Labour market equilibrium. Borjas - Chapter 4
– Matching theory and applications
– Labour Markets flows and equilibrium
unemployment
– Search, Matching and Unemployment
– Discrimination

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 Module Learning Outcomes
• The conventional neoclassical labour supply
and demand analysis.
• The role of search and matching frictions
explaining the labour market behaviour.
• How these models can be used to understand
particular features of the labour market.

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 Module Learning Outcomes
• The features of unemployment.
• The role of labour market institutions in
determining labour market outcomes.
• The main differences in labour markets
institutions across OECD countries.
• Be able to carry out practical work on relevant
labour market topics, using Gretl and EXCEL.

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Introduction to Labor
Economics

Chapter 1
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“Observations always involve theory.”
-Edwin Hubble

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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 maximize utility (i.e., to optimize by selecting the
best option from available choices).
– Supplies 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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 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 Labor Market
Earnings ($) –
wages Labor Supply
Curve

50,000

Equilibrium
40,000

Labor Demand
Curve
30,000

10,000 20,000 30,000 Employment (number

of employees)

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The Alaskan Labor Market and
Construction of the Oil Pipeline
Earnings ($)
S 0

w1

w0 D 1

D 0

Employment
E 0
E 1

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 Wages and Employment in the
Alaskan Labor Market, 1968-1984

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 Summary
• Labor economics studies how labor markets
work.
• Models in labor economics typically contain
three actors: workers, firms, and governments.
• A good theory should have realistic assumptions
and can be tested with real-world data.
• The tools of economics are helpful in answering
positive questions.

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Appendix: Regression Analysis
Log Wage

Change in log
wage

Slope = b

Years of Schooling
Change in
schooling

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 Scatter Diagram: Wages and
Schooling by Occupation, 2001

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Choosing Among Lines Summarizing
Trends in Data

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The Best-Fit Regression Line

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