Course description. The course provides basic knowledge of labor economics. It analyzes behav- ior of the main labor market actors. 7/17/ 2. 1 Why Study Labour Economics? M h ll b. i l i d. h l b. • Most humans allocate substantial time and energy to the labour market. • Labour. Labor Economics by Pierre Cahuc and André Zylberg, MIT Press .edu/ soundofheaven.info
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ILO ISBN (PDF). ILO ISBN topics in labour economics that are relevant to developing countries. It is our hope that this . Topic 1 - Introduction to Labour Economics. Professor H.J. Schuetze. Economics What is Labour Economics? Let's begin by looking at what economics is in. In , Professor Borjas was awarded the IZA Prize in Labor Economics. He was an editor of the Review of Economics and Statistics from to
Such a phenomenon, called adverse selection , can sometimes lead to market collapse. The participation rate is the number of people in the labour force divided by the size of the adult civilian noninstitutional population or by the population of working age that is not institutionalized. Glossary Glossary of economics. Labour demand is a derived demand; that is, hiring labour is not desired for its own sake but rather because it aids in producing output, which contributes to an employer's revenue and hence profits. The MRP of the worker is affected by other inputs to production with which the worker can work e.
Finally, it underscores the need for a theoretical construct that sets Keynesian and neoclassical explanations of unemployment in the same framework as demographic, social, institutional, time and economic factors.
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View access options below. You previously purchased this article through ReadCube. Institutional Login. Log in to Wiley Online Library. Purchase Instant Access. View Preview. Learn more Check out. Abstract Abstract. Citing Literature Number of times cited according to CrossRef: Volume 5 , Issue 1 March Pages Microeconomic techniques study the role of individuals and individual firms in the labour market.
Macroeconomic techniques look at the interrelations between the labour 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. The labour force is defined as the number of people of working age , who are either employed or actively looking for work. The participation rate is the number of people in the labour force divided by the size of the adult civilian noninstitutional population or by the population of working age that is not institutionalized.
The non-labour force includes those who are not looking for work, those who are institutionalised such as in prisons or psychiatric wards, stay-at home spouses, children, and those serving in the military. The unemployment level is defined as the labour force minus the number of people currently employed. The unemployment rate is defined as the level of unemployment divided by the labour force.
The employment rate is defined as the number of people currently employed divided by the adult population or by the population of working age. In these statistics , self-employed people are counted as employed.
Variables like employment level, unemployment level, labour force, and unfilled vacancies are called stock variables because they measure a quantity at a point in time. They can be contrasted with flow variables which measure a quantity over a duration of time. Changes in the labour force are due to flow variables such as natural population growth, net immigration, new entrants, and retirements from the labour force.
Changes in unemployment depend on inflows made up of non-employed people starting to look for jobs and of employed people who lose their jobs and look for new ones, and outflows of people who find new employment and of people who stop looking for employment. When looking at the overall macroeconomy, several types of unemployment have been identified, including:. Neoclassical economists view the labour market as similar to other markets in that the forces of supply and demand jointly determine price in this case the wage rate and quantity in this case the number of people employed.
However, the labour market differs from other markets like the markets for goods or the financial market in several ways. In particular, the labour market may act as a non-clearing market.
While according to neoclassical theory most markets quickly attain a point of equilibrium without excess supply or demand, this may not be true of the labour market: Contrasting the labour market to other markets also reveals persistent compensating differentials among similar workers. Models that assume perfect competition in the labour market, as discussed below, conclude that workers earn their marginal product of labour.
Households are suppliers of labour. In microeconomic theory, people are assumed to be rational and seeking to maximize their utility function. In the labour market model, their utility function expresses trade-offs in preference between leisure time and income from time used for labour.
However, they are constrained by the hours available to them. The individual's problem is to maximise utility U , which depends on total income available for spending on consumption and also depends on time spent in leisure, subject to a time constraint, with respect to the choices of labour time and leisure time:.
This is shown in the graph below, which illustrates the trade-off between allocating time to leisure activities and allocating it to income-generating activities.
The linear constraint indicates that every additional hour of leisure undertaken requires the loss of an hour of labour and thus of the fixed amount of goods that that labour's income could purchase. Individuals must choose how much time to allocate to leisure activities and how much to working.
This allocation decision is informed by the indifference curve labelled IC 1. The curve indicates the combinations of leisure and work that will give the individual a specific level of utility. The point where the highest indifference curve is just tangent to the constraint line point A , illustrates the optimum for this supplier of labour services.
If consumption is measured by the value of income obtained, this diagram can be used to show a variety of interesting effects. This is because the absolute value of the slope of the budget constraint is the wage rate.
The point of optimisation point A reflects the equivalency between the wage rate and the marginal rate of substitution  of leisure for income the absolute value of the slope of the indifference curve. Because the marginal rate of substitution of leisure for income is also the ratio of the marginal utility of leisure MU L to the marginal utility of income MU Y , one can conclude:. If the wage rate increases, this individual's constraint line pivots up from X,Y 1 to X,Y 2.
To understand what effect this might have on the decision of how many hours to work, one must look at the income effect and substitution effect. The wage increase shown in the previous diagram can be decomposed into two separate effects.
The pure income effect is shown as the movement from point A to point C in the next diagram. Employment time decreases by the same amount as leisure increases. But that is only part of the picture. As the wage rate rises, the worker will substitute away from leisure and into the provision of labour—that is, will work more hours to take advantage of the higher wage rate, or in other words substitute away from leisure because of its higher opportunity cost.
This substitution effect is represented by the shift from point C to point B. The net impact of these two effects is shown by the shift from point A to point B. The relative magnitude of the two effects depends on the circumstances. In some cases, such as the one shown, the substitution effect is greater than the income effect in which case more time will be allocated to working , but in other cases the income effect will be greater than the substitution effect in which case less time is allocated to working.
The intuition behind this latter case is that the individual decides that the higher earnings on the previous amount of labour can be "spent" by purchasing more leisure. If the substitution effect is greater than the income effect, an individual's supply of labour services will increase as the wage rate rises, which is represented by a positive slope in the labour supply curve as at point E in the adjacent diagram, which exhibits a positive wage elasticity.
This positive relationship is increasing until point F, beyond which the income effect dominates the substitution effect and the individual starts to reduce the amount of labour hours he supplies point G as wage increases; in other words, the wage elasticity is now negative. The direction of slope may change more than once for some individuals, and the labour supply curve is different for different individuals. Other variables that affect the labour supply decision, and can be readily incorporated into the model, include taxation, welfare, work environment, and income as a signal of ability or social contribution.
A firm's labour demand is based on its marginal physical product of labour MPP L. This is defined as the additional output or physical product that results from an increase of one unit of labour or from an infinitesimal increase in labour. See also Production theory basics. Labour demand is a derived demand; that is, hiring labour is not desired for its own sake but rather because it aids in producing output, which contributes to an employer's revenue and hence profits.
With a perfectly competitive goods market, the MRP is calculated by multiplying the price of the end product or service by the Marginal Physical Product of the worker. If the MRP is greater than a firm's Marginal Cost, then the firm will employ the worker since doing so will increase profit. The MRP of the worker is affected by other inputs to production with which the worker can work e.
It is typical in economic models for greater availability of capital for a firm to increase the MRP of the worker, all else equal.
Education and training are counted as " human capital ". Since the amount of physical capital affects MRP, and since financial capital flows can affect the amount of physical capital available, MRP and thus wages can be affected by financial capital flows within and between countries, and the degree of capital mobility within and between countries.
According to neoclassical theory, over the relevant range of outputs, the marginal physical product of labour is declining law of diminishing returns. That is, as more and more units of labour are employed, their additional output begins to decline. The marginal revenue product of labour can be used as the demand for labour curve for this firm in the short run. In imperfect markets, the diagram would have to be adjusted because MFC L would then be equal to the wage rate divided by marginal costs.
Because optimum resource allocation requires that marginal factor costs equal marginal revenue product, this firm would demand L units of labour as shown in the diagram. The demand for labour of this firm can be summed with the demand for labour of all other firms in the economy to obtain the aggregate demand for labour. Likewise, the supply curves of all the individual workers mentioned above can be summed to obtain the aggregate supply of labour.
These supply and demand curves can be analysed in the same way as any other industry demand and supply curves to determine equilibrium wage and employment levels. For example, the wages of a doctor and a port cleaner, both employed by the NHS , differ greatly. There are various factors concerning this phenomenon. This includes the MRP of the worker. A doctor's MRP is far greater than that of the port cleaner.
In addition, the barriers to becoming a doctor are far greater than that of becoming a port cleaner. To become a doctor takes a lot of education and training which is costly, and only those who excel in academia can succeed in becoming doctors.
The port cleaner however requires relatively less training. The supply of doctors is therefore significantly less elastic than that of port cleaners.
Demand is also inelastic as there is a high demand for doctors and medical care is a necessity, so the NHS will pay higher wage rates to attract the profession. Some labour markets have a single employer and thus do not satisfy the perfect competition assumption of the neoclassical model above. The model of a monopsonistic labour market gives a lower quantity of employment and a lower equilibrium wage rate than does the competitive model.
In many real-life situations the assumption of perfect information is unrealistic. An employer does not necessarily know how hard workers are working or how productive they are.
This provides an incentive for workers to shirk from providing their full effort — since it is difficult for the employer to identify the hard-working and the shirking employees, there is no incentive to work hard and productivity falls overall, leading to the hiring of more workers and a lower unemployment rate.
One solution used recently [ when? However, this solution has attracted criticism as executives with large stock-option packages have been suspected of acting to over-inflate share values to the detriment of the long-run welfare of the firm. Another solution, foreshadowed by the rise of temporary workers in Japan and the firing of many of these workers in response to the financial crisis of , is more flexible job- contracts and -terms that encourage employees to work less than full-time by partially compensating for the loss of hours, relying on workers to adapt their working time in response to job requirements and economic conditions instead of the employer trying to determine how much work is needed to complete a given task and overestimating.
Another aspect of uncertainty results from the firm's imperfect knowledge about worker ability. If a firm is unsure about a worker's ability, it pays a wage assuming that the worker's ability is the average of similar workers. This wage undercompensates high-ability workers and may drive them away from the labour market. Such a phenomenon, called adverse selection , can sometimes lead to market collapse.
There are many ways to overcome adverse selection in labour market. One important mechanism is called signalling , pioneered by Michael Spence. Employers can then use education as a signal to infer worker ability and pay higher wages to better-educated workers.