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.?

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 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?

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

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 Labor Market Participants: Workers

• Suppliers of labor • Determine:

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

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 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

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 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

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 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?
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 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