Introduction To Labor Economics

This chapter introduces labor economics and the key participants in labor markets - workers, firms, and the government. It discusses how labor economics studies how labor markets work and tries to explain outcomes related to topics like female labor force participation, immigration, minimum wages, unemployment benefits, and more. The appendix provides an overview of regression analysis, which is used to answer both positive and normative economic questions by manipulating available data.

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Introduction To Labor Economics

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qulb abbas

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Introduction to Labor Economics

Chapter 1
Labor Economics
• Goals: Study how labor markets work and explain why
some outcomes are more likely to occur than others
– Why did female LFP increase in the 1900s?
– How does immigration affect wages, labor supply,
opportunities, etc of native workers?
– How do minimum wages affect the unemployment rate?
– Do wage and tax subsidies affect the demand for labor?
– What impact do occupational and health regulations have on
hiring, wages, etc.?

2
Labor Economics, cont.
– Do human capital investment subsidies improve the well-
being of disadvantaged workers?
– Why does wage inequality exist?
– What impact does affirmative action have on earnings, the
number of minorities a firm hires, etc?
– How do unions affect labor markets?
– How do unemployment benefits affect the incidence of and
length of spells?

3
Labor Market Participants
• Workers
• Firms Together (supply and demand)
determine E* and w*
• The Government

4
Labor Market Participants: Workers

• Suppliers of labor • Determine:

(aggregate individual – Whether or not to work
decisions to derive an – How many hours to work
upward-sloping labor – Which skills to acquire
supply curve) – Whether or not to quit a job
• Goal: Strive to maximize – Which occupation to work in
well-being (utility) subject – Whether to join a union
to constraints – How much effort to put forth
at work

5
Labor Market Participants: Firms

• Demanders of labor • Determine:

(aggregate individual – How many workers to employ
decisions to derive a – Which workers to hire
downward-sloping labor – How much to pay each worker
demand curve) – Whether to hire additional
• Goal: Strive to workers
maximize profits subject – Whether to fire workers
to constraints – How much capital to employ
– Working conditions
– Length of the workweek

6
Labor Market Participants:
The Government
• Regulations determine ground rules in the labor market
– Taxes on earnings
– Training subsidies
– Payroll taxes
– Affirmative action laws
– Minimum wages
– Worker condition regulations
– Immigration laws

7
Appendix: Econometrics

• Regression analysis: the y  mx  b

manipulation of
available data to answer y = dependent variable
positive (what is) and x = independent
normative (what should (explanatory) variable(s)
be) questions Δy
m = slope =
Δx
interpretation: for a 1-unit
change in x, by how much
does y change?
8
Regression Example: GPA

GPA  α  β  Hours
• Hours = number of
hours spent studying
ΔGPA
β
ΔHours
α  GPA if hours  0
Regression analysis attempts to fit the data with a
line by minimizing the sum of squared errors
 GPA  α̂  β̂  Hours 9