Introduction and Overview

1. Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Chapter 1
Labor Economics: Introduction
and Overview

2. 1-2
1.Labor Economics
as a Discipline

3. 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.

4. 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.

5. 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.

6. 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

7. 1-7
2. The “Old” and the
“New”

8. 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

9. 1-9
3. Economic
Perspective

10. 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…

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 1-16
4. Overview

17. 1-17
Overview
o Microeconomics
• Individual economic units or
markets
o Macroeconomics
• Economy as a whole

18. 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.