The document summarizes key concepts in labor economics. It outlines three main actors in the labor market: workers who supply labor and seek the best payoffs; firms that demand labor to maximize profits; and government that regulates markets through taxes and policies. It describes labor supply and demand curves representing the relationship between wages and quantity of labor from each actor's perspective. Equilibrium in the labor market results from the intersection of these curves. The document also discusses factors like human capital theory and working conditions that influence wages.

1. INTRODUCTION
Labor Economics
Second Term, AY 2014-2015

2. 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

3. 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

4. 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

5. 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

6. Three “Actors”
• Government
• Imposes taxes, regulations
• Provides ground rules that guide exchanges made in labor markets

7. Summary: the Three “Actors”
T h re e A c to rs in th e L a b o r M a rk e t
W o rk e rs
S u p p ly la b o r fo r p a y o ff
F irm s
D e m a n d la b o r g iv e n p ric e o f la b o r
a n d d e s ire fo r p ro fits
G o v e rn m e n t
T a x e s
R e g u la tio n s
R u le s o f e x c h a n g e
L a b o r M a rk e t

8. 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

9. 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

10. Supply and Demand in
the Economist Market
Equilibrium
50,000
40,000
30,000
20,00010,000 30,000
Labor Supply
Curve
Labor Demand
Curve
Earnings

11. The Alaskan Labor Market and
Construction of the Oil Pipeline
D0
D1
S0
Earnings
Employment
w1
w0
E1E0

12. 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

13. Scatter Diagram: Wages
and Schooling by Occupation,
2
2.5
3
3.5
4
8 10 12 14 16 18 20
Years of schooling
Logwage
Gary Becker’s Human Capital
Theory

14. 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
Logwage
A
B
C

15. The Scatter Diagram and
the Regression Line
2
2.5
3
3.5
4
8 10 12 14 16 18 20
Years of schooling
Logwage

16. A Reminder :
• “It matters nothing to the seller of bricks
whether they are to be used in building a
palace or a sewer: but it matters a great deal
to the seller of labor, who undertakes to
perform a task of given difficulty, whether or
not the place in which it is to be done is a
wholesome and pleasant one, and whether or
not his associates will be such as he cares to
have.”
-- Alfred Marshall

17. End of Chapter 1