Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 1

Labor Economics: Introduction and Overview

1-2

1.Labor Economics as a Discipline

1-3

What is Labor Economics?

o Labour economics seeks to understand the functioning of the market and dynamics for labour.

o Labour markets function through the interaction of workers and employers.

o Labour economics looks at the suppliers of labour services (workers), the demanders of labour services (employers), and attempts to understand the resulting pattern of wages, employment, and income.

o It is an important subject because unemployment is a problem that affects the public most directly and severely.

o Full employment (or reduced unemployment) is a goal of many modern governments.

o

1-4

o There are two sides to labor economics. Labor economics can generally be seen as the application of microeconomic or macroeconomic techniques to the labor market.

o Microeconomic techniques study the role of individuals and individual firms in the labor market.

o Macroeconomic techniques look at the interrelations between the labor market, the goods market, the money market, and the foreign trade market. It looks at how these interactions influence macro variables such as employment levels, participation rates, aggregate income and Gross Domestic Product.

1-5

Importance of Labor Economics

o Socioeconomic Issues• Gender and race discrimination• Legal and illegal immigration• Fall in unionization• Free trade

o Quantitative Importance • 75% of national income goes to

labor.

1-6

Importance of Labor Economics

o Unique Characteristics• Labor is rented and not

bought/sold• Non-monetary aspects• Institutional factors

∞Unions, licensing, minimum wage, discrimination

• Labor demand is a derived demand

1-7

2. The “Old” and the “New”

1-8

Change in Labor Economics

o Old Approach• Highly descriptive and historical• Little economic analysis• The complexities of labor markets seemed to

make more or less immune to economic analysis.

o New Approach• Uses applied micro and macro theory

1-9

3. Economic Perspective

1-10

Choice

o Labor economics uses theories of choice to explain behavior of labor market participants and resulting outcomes.

o Theories rest on three assumptions…

1-11

Choice

1. Relative scarcity- Society must choose how and for what purpose labor and other resources (land, capital, entrepreneur) should be allocated since this resources are scarce.

1-12

- Example of choices:- I. How much time to devote to jobs, to work in the home, and to leisure. II. How much present income to forgo for the prospects of obtaining higher future earnings. III. Which g&s to buy and which to forgo.

-Relative scarcity of time, personal income. And societal resources is basic element of economics perspective.

1-13

2. Purposeful behavior∞Choices involve giving something up -an

opportunity cost.∞Examples: forgone leisure, forgone private sector

output.∞Individuals make choices purposefully with an

expected net gain.∞Examples: a worker will compare the extra utility

(income) gained from an added hour of work with the values of the lost leisure.

∞A firm will compare the added revenue from hiring a worker with the extra wage cost.

∞ It not easy to achieve intended goals due to imperfect information.

1-14

3. Adaptability∞Workers and firms adapt to changes in expected

costs and benefits.∞Examples: some workers will adjust the number of

hours they desire to work when the wage rate they receive changes.

∞ Fewer people will decide to obtain a specific skills when the training cost rises or when the wage paid to those already possessing the skills falls.

∞Firms will adjust their hiring when the demand for their product changes.

∞Union officials will lower their wage demands when the economy encounters recessions and unemployment among union workers is high.

1-15

o Economic perspectives assumes that workers, employers and other labor market participants adapt, adjust, or alter their behaviors in responses to changes in expected costs and expected gains.

1-16

4. Overview

1-17

Overview

o Microeconomics• Individual economic units or

markets

o Macroeconomics• Economy as a whole

1-18

1. Why must the concepts of supply and demand as they pertain to products be modified when applied to labor markets?

Questions for Thought

2. Indicate whether each of the following statements pertains to microeconomics or macroeconomics:

(a) The unemployment rate in the United States was 4.6 percent in 2006.

(b) Bartenders at Andrew’s Capital Bar and Grill earn $9.25 per hour.

(c) The productivity of American workers as a whole has increased by more than 2 percent per year in the last 4 years.