LABOR ECONOMICS

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LABOR ECONOMICS

• Ning Guangjie
• Tel [phone]
• E-mailseanning_at_eyou.com

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Chapter 1 INTRODUCTION

• 1.1 What does labor economics study?
• Labor economics studies how labor markets work.
• Such as labor force participation, the firms
  demand for the high-skill workers, wage
  determination, the human capital investment, the
  labor mobility, the labor market discrimination,
  trade Unions and unemployment.

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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 economic problems
and predict the labor market outcomes.
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1.2 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.
•  

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1.3 The organization of the course 

• Chapter 2 Labor supply
• Chapter 3 Labor Demand
• Chapter 4 Labor Market Equilibrium
• Chapter 5 Human Capital
• Chapter 6 Contract and Work Incentive
• Chapter 7 Trade Union
• Chapter 8 Labor Mobility
• Chapter 9 Unemployment
• Appendix An introduction to Regression Analysis

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Chapter 2 Labor SupplyWhether to work and how
many hours to workLabor supply in short run,
static labor supply decision, in long run

• 2.1 Some stylized facts about labor supply
• Measuring the labor force(LF) BLS CPS
• The employed(E, a worker must have been at a job
  with pay for at least 1 hours, or worked at least
  15 hours on a non-paid job such as the family
  farm ), the unemployed(U, a worker must either be
  on a temporary layoff from a job, or have no job
  but be actively looking for work in the 4-week
  period prior to the reference week) , out of the
  labor force, the population(P)

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LFEU, Labor force participation
rateLF/P Unemployment rateU/LF The official
unemployment rate understated the real condition
of unemployment. Discouraged workers, hidden
unemployed.   Labor force participation rate,
Hours of work in the U.S. The participation
rate of men declined from nearly 90 percent in
1900 to 76 percent by 1990. An ever-larger
fraction of men choose to retire earlier.
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• The huge increase in the labor force
  participation rate of women.
• A sizable decline in average hours of work per
  week prior to 1940.

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???????????????????????,?107??
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2.2 The workers preferences and budget
constraints

• Utility function UU(C, L) C, consumption of
  goods. L, consumption of leisure. UCL
• Indifference curve
• Marginal utility
• Marginal rate of substitution in consumption
• Time constraints TLh L leisure time h
  work time
• Budget constraint CwhV V non-labor income
• C(wTV)-wL budget line the boundary of the
  workers opportunity set
• Slope -w

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2.3 To work or not to work? The hours of work
decision

• Reservation wage which makes her indifferent
  between working and not working
• A higher reservation wage makes it less likely
  that a person will enter the labor force. In
  addition, for given tastes and non-labor
  income(that is , for given reservation wage), a
  person with a higher market wage is more likely
  to work.
• Figure p31
• Commuting costs increase the reservation wage

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Tangency condition the slope of the indifference
curve equals the slope of the budget line.

• Labor supply function hh(w, V)
• Leisure is a normal good Non-labor income
  increase and hours of work(fall), reservation
  wage(rise)
• Income effect

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An interior Solution to the labor-leisure Decision
Consumption
12 8 3
U2
P
U1
U0
50 100
Hours of leisure
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Hours of work when the wage changes An increase
in the wage rate generates both income effect and
substitution effect. The income effect reduces
hours of work, while the substitution effect
increases hours of work. Substitution effect
illustrates what happens to the optimal
consumption bundle as the wage increases, holding
utility constant. 
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The labor supply curve gives the relationship
between the wage rate and hours of work. The
upward-sloping segment of the curve implies that
substitution effects are stronger initially the
backward-bending segment implies that income
effects dominate eventually. The relationship
between hours of work and wage rates for women in
U.S has a classic backward-bending shape. Labor
supply elasticity Commuting costs and hours of
work. It is unlikely that a person will want to
work for just a few hours.
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2.4 Welfare programs and work incentives

• A take-it-or-leave it cash grant
• The newer programs often permit the welfare
  recipient to work, but reduce the amount of the
  grant by some specified amount for every dollars
  earned in the labor market. Taxing the welfare
  recipient Figure pp50
• Welfare programs reduce labor supply, both in
  terms of employment probabilities and in terms of
  hours worked.

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2.5 The non-market sector household production

• Much of what we call leisure is really a form
  of work.
• Women allocate more hours to the non-market
  sector than men.
• Household production function
• The households opportunity frontier Figure
  pp54
• A division of labor in a household pp56

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• Difference in the market wage rate and marginal
  product in the household sector
• The increase in the real wage of women,
  technological changes in household production
  also reduce the difference in marginal products
  between husband and wife.
•  
• 2.6 Estimates of the labor supply elasticity
• hawbVcwelfareother variable

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• a -0.1 (men) inelastic (annual hours of work)
  the labor supply becomes more elastic the longer
  the time period over which the hours-of-work
  variable is defined.
• PwomenawbVcwelfaredchilddWhusbandother
  variable
• Other variable includes culture factors and the
  institutional framework.

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• Women participate more not because they have
  fewer children rather, they have fewer children
  because the rising wage induces them to reduce
  their time in the household sector and enter the
  labor market.
• Participation rates are very responsive to
  changes in the wage. Hours of work not
• Most studies of female labor supply find a
  positive relationship between a womans hours of
  work and her wage rate. 0.2
•  

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• 2.7 Labor supply over the life cycle
• Present value
• Lifetime utility
• Marginal utility of hour of leisure in second
  year

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• The ratio of marginal utilities equals the ratio
  of prices(wage)
• Figure pp75
• A person will work few hours in those periods of
  the life cycle when the wage is low and will work
  many hours in those periods when the wage is
  high.
• Wage is relatively low for young workers,
  increases as the worker matures and accumulates
  human capital, and then may decline slightly for
  older workers.
•  

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• Participation rates are likely to be low for
  young workers, high for workers in their prime
  working years, and low again for older workers.
•  
• The inter-temporal substitution hypothesis
• Evolutionary wage change is not to an expansion
  in the lifetime opportunity set. The present
  value of the workers lifetime income unchanged,
  there are no income effects associated with the
  process of aging.

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• Compare two workers with different wage profiles,
  the difference in hours of work between the two
  workers would be affected by both income and
  substitution effects.
•  
• Elasticity of inter-temporal substitutionchange
  rates in hours as worker ages/change rates in
  wage as worker ages
• 0.1 is not very responsive

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• Retirement
• Pension
• Figure pp85
• Early retirement
• Increase in the wage income( retire earlier) and
  substitution effects( retire later).
• Increase in the pension benefits both effects
  encourage the worker to retire earlier.
• Mandatory retirement

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• Privately provided pension has had a much greater
  impact on the work attachment of older workers.
• Earning test(taxes retirees when they earn more
  than 11160 per year)
• Nearly 20 percent of retired persons also hold
  a job. (Burtless, Moffitt 1985)
• The repeal of the Social Security earning test is
  not likely to substantially increase labor supply
  among retirees.

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2.8 Labor supply over the business cycle Added
worker effect the participation rate of
secondary workers has a counter-cyclical trend.
Make up the loss. Discouraged worker
effect LFPRt aURt other variables alt0,
discouraged worker effect dominates. Hidden
unemployed some of these discouraged workers are,
in effect, taking advantage of the relatively
poor labor market condition to engage in the
consumption of leisure activities. Some of the
discouraged workers(hidden unemployed) should not
be part of the unemployment statistics.  
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• 2.9 Fertility
• The fertility decisions made by households play a
  key role in determining long-run labor supply.
  Also influences women participation rate. Or vice
  verse.
• Malthusian model
• As per-capita incomes rose, fertility rates did
  not rise they declined.
• Gary Becker Fertility responds not only to
  changes in income but also to changes in prices.
•  

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• Figure pp94
• The impact of income and prices on he households
  fertility Figure pp95
• Nchild aPchild ßI other variables
• Mothers wage __forgone earning
• Cost of raising child rises with the increase of
  income. High quality. 
• Benefits and revenue of raising children

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• Chapter 3 Labor Demand
• Derived demand
•  
• 3.1 The production function Qf(L, K)
• Marginal product and average product of labor
  holding capital constant
• Law of diminishing returns
• Profit maximization?pf(K,L)-wL-rK

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• 3.2 The employment decision in the short run
• value of the marginal product VMPL p. MPL
• VMPL w MRMC MRL MCL
• Figure p107
• Law of diminishing returns sets limits on the
  size of the firm.
• The competitive firm sets its employment level
  such that the value of marginal product of labor
  equals the predetermined wage.

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• The only points that are relevant for the firms
  hiring decision are the ones that lie on the
  downward-sloping portion of the curve below the
  point where the VAPE curve intersects the VMPE
  curve.
• The demand curve for labor DSLg(w, p, K0)
• Elasticity of labor demand the percentage
  change in short-run employment resulting from a 1
  percent change in the wage.

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• 3.3 The employment decision in the long run
• Isoquants and isocosts
• The firms optimal combination of inputs
  MPL/MPKw/r
• Figure p114
• The cost-minimizing condition stating that the
  ratio of prices equals the ratio of marginal
  products, however, does not imply that the firm
  is maximizing profits. ps role

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A profit-maximizing firm will not generally want
to hold the cost outlay constant when the wage
changes. Change of isocost line. A decrease in
the wage rate lowers marginal cost of production.
Figure p118 Substitution and scale effects.
Figure p 121 DLLg(w, p, K) In the long run, the
firm can take full advantage of the economic
opportunities introduced by a change in the wage.
As a result, the long-run demand curve is more
elastic (-1)than the short-run demand curve(-0.4
and 0.5).
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• 3.4 The substitution and complements
• perfect substitutes and perfect complements
• elasticity of substitution d?(K/L)/ ?(w/r)q
  positive
• The size of the substitution effect depends on
  the magnitude of the elasticity of substitution.
•  

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• Cross-elasticity of factor demanddxy?Dx/ ?Py
• Positive--substitutes negativecomplements
• In addition, the sign of the cross-elasticity
  depends on the relative strengths of the scale
  and substitution effects resulting from a change
  in an input price. Pp129. increase in minimum
  wage, the number of skilled workers
  decreased(dxylt0), because that the scale effect
  dominates, not because skilled workers and
  unskilled workers are complements.
• Unskilled labor and capital are substitutes and
  skilled labor and capital are complements.  

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• Marshalls rules of derived demand
• Labor demand is more elastic the greater the
  elasticity of substitution.
• Labor demand is more elastic the greater the
  elasticity of demand for the output.
• Labor demand is more elastic the greater labors
  share in total costs.
• Labor demand is more elastic the greater the
  supply elasticity of other factors of production,
  such as capital.

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• Unions and Marshalls rules. Pp126-127.
• Unions have a greater chance of being successful
  when the demand curve for labor is inelastic.
• What happens to the wage of input x when the
  number of workers in group y changes.
• ?xy?Wx/ ?Qy
• gt0, complements lt0, substitutes.

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• 3.5 Adjustment costs and labor demand
• The cost that firms incur as they adjust the size
  of their work force are called adjustment costs.
• Asymmetric variable adjustment costs Figure p139
• This asymmetry might arise because of government
  policies which mandate employers to provide
  severance pay for workers who are laid off.

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• The costs of adjustment rise at an increasing
  rate, regardless of whether the firm is
  contracting or expanding. Marginal cost of
  adjustment are higher.
• Hiring a large number of workers at the same time
  exceed the costs incurred when hiring just a few
  workers at a time.
• It does not pay for the firm to adjust its
  employment slowly because the fixed adjustment
  costs are incurred regardless of how many
  additional workers the firm actually hires. When
  fixed adjustment costs are sizable, therefore,
  employment changes in the firm will be relatively
  sudden and large, if they occur at all.

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If variable adjustment costs are important,
employment changes occur slowly. The impact of
Job Security Legislation European countries
which impose higher costs on layoffs (such as
severance pay)have smaller fluctuations in
employment over the business cycle.   Job
creation and job destruction Small firms would
have an advantage in creating jobs if they could
respond to favorable changes in the marketplace
much faster than bigger firms(that is, if small
firms face lower adjustment costs when creating
new jobs.) Instead, large firms account for most
newly created and newly destroyed manufacturing
jobs.  
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3.6 The distinction between workers and
hours An increase in health insurance premiums
would then discourage the firm from adding to its
work force. In contract, legislation mandating
employers to pay an overtime premium mainly
affects the cost of lengthening the
workweek.   The substitution effect arising from
an increase in the fixed costs of hiring. Figure
p147 Employing fewer workers and lengthening the
workweek.  
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• Chapter4 Labor Market Equilibrium
•  
• 4.1 Equilibrium in a single competitive labor
  market
• efficient allocation
• competitive equilibrium across labor markets
  linked by migration. As a result, a single wage
  is formed.

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• As long as either workers or firms are free to
  enter and exit labor markets, therefore, a
  competitive economy will be characterized by a
  single wage.
• Convergence of regional wage levels. The states
  with the lowest wages in 1950 experienced the
  fastest wage growth subsequently.
• Two countries which have roughly similar
  endowments of human capital, the wage gap between
  these countries narrows over time.  

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• 4.2 The cobweb model
• figure p163
• Because new engineers are not produced
  instantaneously and because students might
  misforecast future opportunities in the market, a
  cobweb is created as the labor market adjusts to
  the increase in demand.

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• Students choose an engineering career based
  entirely on the wage they currently observe in
  the engineering market, and do not attempt to
  look into the future. Irrational expectations.
• If students have rational expectations, they
  would be much more hesitant to enter the
  engineering labor market when current wages are
  high and much more willing to enter when current
  wages are low.

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• 4.3 Policy application
• Payroll taxes assessed on employers shifts down
  the demand curve and reduces the equilibrium
  wage. If the supply curve of labor is perfectly
  inelastic, the tax is paid entirely out of
  workers wages.
• Employment subsidies
• The impact of minimum wages
• In 1991, the wage floor was set at 4.25.
• It is easy to verify that the unemployment rate
  is larger the higher the minimum wage and the
  more elastic the demand and supply curves.

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However, there is a great deal of noncompliance
with the minimum wage law. Firms caught breaking
the law face only trivial penalties. Only 43
percent of non-supervisory workers in the economy
were in the covered sector when the FLAS was
first enacted. Covered about 88 percent of all
workers by 1990. Figure p 168 If workers
migrate to uncovered sector, if workers migrate
to covered sector. Free entry and exit of
workers in and out labor markets can equilibrate
real wages in an economy despite the best
intentions of governments.
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• ?WminWu, ?is the probability that a worker who
  enters the covered sector gets a job there, Wu is
  the wage in the uncovered sector.
• Do minimum wages really displace workers?
•  
• 4.4 Noncompetitive labor markets Monopsony and
  Monopoly

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• A monopsony is a firm that faces an
  upward-sloping supply curve of labor. In contrast
  to a competitive firm that can hire as much labor
  as it wants at the going price, a monopsonist
  must pay higher wages in order to attract more
  workers.
• Perfectly discriminating monopsonist can hire
  different workers at different wages.

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• Figure p175
• VMP equals the marginal cost of labor(supply
  curve of labor), The monopsonist hires the same
  number of workers as a competitive market, but
  the wage is not the competitive wage. Only the
  last worker receive that wage, all others receive
  lower wages, with each worker receiving his or
  her reservation wage.
• Non-discriminating monopsonist must pay all
  workers the same wage, regardless of the workers
  reservation wage.

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• Marginal cost of labor curve is upward sloping
  and lies above the supply curve.
• Figure p177 Workers are paid less than their
  marginal product and are, in this sense,
  exploited.
• A well-designed minimum wage can increase both
  wages and employment when imposed on a
  monopsonist. Figure 178

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Monopsony, professional sports and the Coase
theorem. A Player cannot become a free agent
until he has played in the major leagues for a
number of years. The allocation of players to
teams in a world where all players have free
agency is identical to the allocation that would
be observed when the team owns the rights to the
players(monopsony, pay salaries below the
competitive wage). As long as the relevant
parties can bargain easily, the allocation of
resources is independent of the allocation of
property rights. (Coase theorem) Free agency led
to a significant transfer in income from the
owners to the players(keep the rewards of their
productivity).  
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• Monopoly in output market, MRltAR, Marginal
  revenue product(MRP)ltVMP
• The monopolist hires fewer workers than would be
  hired in a competitive market.
• Figure p182
•  
• 4.5 Wage and employment in the public sector
• By 1992, Nearly 1 in 7 workers in U.S. was
  employed directly by the government.
• Are they over-paid?

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• The workers employed in the federal government
  earned approximately 10-15 percent more than
  equally skilled private sector workers during the
  1970s.
• The wage gap between workers in the competitive
  sector and workers in state and local government
  is much smaller.