chapter 1 introduction to labor economics copyright © 2008 the mcgraw-hill companies, inc. all...
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Chapter 1
Introduction to Labor Economics
Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Labor Economics, 4th edition
1 - 3
Why study Labor Economics?
• Human resources allocate substantial time and energy to labor markets
• Labor economics studies how labor markets work
• Labor economics helps us understand and address many social and economic problems facing modern societies
1 - 4
Basics of the Labor Market
• Participants are assigned motives:
- Workers look for the best job
- Firms look for profits
- Government uses regulation to achieve goals of public policy• Minimum wages• Occupational safety
1 - 5
Three “Actors”
• Workers
- The most important actor; without workers, there is no “labor”
- Desire to optimize (to select the best option from available choices) to maximize well-being
- Will want to supply more time and effort for higher payoffs, causing an upward sloping labor supply curve
1 - 6
Three “Actors”
• Firms
- Decide who to hire and fire
- Motivated to maximize profits
- Relationship between price of labor and the number of workers a firm is willing to hire generates the labor demand curve
1 - 7
Three “Actors”
• Government
- Imposes taxes, regulations
- Provides ground rules that guide exchanges made in labor markets
1 - 8
Summary: the Three “Actors”
T h re e A c to rs in th e L a bo r M a rke t
W o rke rsS u p p ly lab o r fo r pa yo ff
F irm sD e m a n d la b or g ive n p rice o f la b or
a n d d e sire fo r p ro fits
G o ve rn m e ntT a xes
R e g u la tio nsR u les o f e xch an ge
L a b or M arke t
1 - 9
Why Do We Need a Theory?
• Explain and understand how labor markets work
• Focus on the essential variables while leaving out other, less crucial, factors
• Create a model that helps explain the theory
1 - 10
Positive vs. Normative Economics
• Positive economics- Addresses the facts- Focus on “what is”- Questions answered with the tools of economists
• Normative economics- Addresses values- Focus on “what should be”- Requires judgments
1 - 11
Supply and Demand in the Engineering Market
Equilibrium
50,000
40,000
30,000
20,00010,000 30,000
Labor Supply Curve
Labor DemandCurve
Earnings ($)
1 - 12
The Alaskan Labor Market and Construction of the Oil Pipeline
D0
D1
S0
Earnings ($)
Employment
w1
w0
E1E0
1 - 13
Wages and Employment in the Alaskan Labor Market, 1968-1983
50,000
70,000
90,000
110,000
130,000
150,000
170,000
190,000
210,000
230,000
250,000
1968 1970 1972 1974 1976 1978 1980 1982 1984
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Employment Monthly Salary ($)
Employment
Wage
1 - 14
The Regression Line
Log Wage
Slope =
Change in log wage
Years of SchoolingChange in schooling
1 - 15
Scatter Diagram: Wages and Schooling by Occupation, 2001
2
2.5
3
3.5
4
8 10 12 14 16 18 20
Years of schooling
Lo
g w
ag
e
1 - 16
Choosing Among Lines Summarizing Trends in the Data
2
2.5
3
3.5
4
8 10 12 14 16 18 20
Years of schooling
Lo
g w
age
A
B
C
1 - 17
The Scatter Diagram and the Regression Line
2
2.5
3
3.5
4
8 10 12 14 16 18 20
Years of schooling
Lo
g w
age
1 - 18
End of Chapter 1