Labor Economics

Xiaomin Gai

Textbooks and References

George J. Borjas, Labor Economics, 5th edition.

Handbook of Labor Economics, various volumes.

Course Outline

Part I: Introduction Part II: Labor Demand Part III: Labor Supply Part IV: Labor Market Equilibrium Part V: Special Topics –Compensating Wage Differentials –Human capital –The wage structure –Labor mobility –Labor market discrimination –Labor unions –Incentive pay –Unemployment

Chapter 1 Introduction

Science is built up with facts, as a house is with stones. But a collection of facts is no more a science than a heap of stones is a house.—Jules Henri Poincare

1.1 Why We Study Labor Economics?

Most of us will allocate a substantial fraction of time to the labor market.

–Our wealth

–Types of goods that we can afford to consume

–School choices

–Fertility

–Migration

……

1.1 Why We Study Labor Economics?

More important, public policy issues also need sophisticated analyses of the labor market. The policy issues include but not limited to the following

–The change of labor force participation over time in many industrialized countries and China

–The impact of immigration on the wage and employment opportunities of local/native workers

–The rising wage inequality–The impact of union on the welfare of both members an

d non-members

1.1 Why We Study Labor Economics?

–Minimum wage versus unemployment rate of unskilled workers

–Should governments subsidize the behaviors of human capital investment?

–Does unemployment insurance lengthen the duration of unemployment?

–Does technical change increase unemployment rate?

–Why did labor compensation share (in GDP) decrease over the past decades in China?

……

1.2 What does Labor Economics Study?

Labor economics studies how labor markets work.

Such as labor force participation, the firm’s demand for the high-skill workers, wage determination, the human capital investment, the labor mobility, the labor market discrimination, trade Unions and unemployment.

1.2 What does Labor Economics Study?

The actors in the labor market: Workers (utility maximum), firms (profit

maximum) and government (influence the supply and demand or change the rules of the game)

Learning labor economics can help you have a better understanding of the real labor economics problems and predict the labor market outcomes.

1.3 Theory and facts

The theory helps us understand how the facts are generated, and where the facts can help shape our thinking about the way labor markets work.

Model: simplify; The realism of assumption to the extent to which it helps us understand and predict how labor markets work.

Summary

Labor economics studies how labor markets work. Important topics addressed by labor economics include the determination of the income distribution, the economic impact of unions, the allocation of a worker’s time to the labor market, the hiring and firing decisions of firms, labor market discrimination, the determinants of unemployment, and the worker’s decision to invest in human capital.

Summary

Models in labor economics typically contain three actors: workers, firms, and the government. It is typically assumed that workers maximize their well-being and that firms maximize profits. Governments influence the decisions of workers and firms by imposing taxes, granting subsidies, and regulating the “rules of the game” in the labor market.

Summary

A good theory of the labor market should have realistic assumptions, should not be clumsy or overly complex, and should provide empirical implications that can be tested with real-world data.

The tools of economics are helpful for answering positive questions. The information thus generated may help in making policy decisions. The answer to a normative question, however, typically requires that we impose a value judgment on the desirability of particular economic outcomes.