1
LABOR ECONOMICS
Ning Guangjie
Tel,23504565
E-mail:seanning@eyou.com
2
Chapter 1 INTRODUCTION
1.1 What does labor economics study?
? Labor economics studies how labor markets work,
? Such as labor force participation,the firm’s
demand for the high-skill workers,wage
determination,the human capital investment,the
labor mobility,the labor market discrimination,
trade Unions and unemployment,
3
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,
4
? 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,
1.2 Theory and facts
5
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
6
Chapter 2 Labor Supply
Whether to work and how many hours to work
Labor 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)
7
LF=E+U,
Labor force participation rate=LF/P
Unemployment rate=U/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,
8
? The huge increase in the labor force
participation rate of women,
? A sizable decline in average hours of work
per week prior to 1940,
9
年劳动时间 （ 小时 ） 的国际比较
年份
日本
美国
西德
英国
法国
1975
2043
1881
1678
1923
1830
1980
2162
1893
1985
2168
1929
1659
1952
1643
1989
2159
1957
1638
1989
1646
资料来源,[日 ]永山武夫：, 劳动经济 ——日本的经营与劳动问题,,第 107页。
10
2.2 The worker’s preferences and budget
constraints
Utility function,U=U(C,L) C,consumption of
goods,L,consumption of leisure,U=C*L
Indifference curve
Marginal utility
Marginal rate of substitution in consumption
Time constraints,T=L+h L,leisure time; h,work
time
Budget constraint,C=wh+V V,non-labor income
C=(wT+V)-wL budget line the boundary of the
worker’s opportunity set
Slope -w
11
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
12
Tangency condition,the slope of the
indifference curve equals the slope of the
budget line,
? Labor supply function h*=h(w,V)
? Leisure is a normal good,Non-labor
income increase and hours of work(fall),
reservation wage(rise)
? Income effect
13
U0
U1
U2
Hours of
leisure
P
12
8
3
50 100
An interior Solution to the labor-leisure
Decision
Consumption
14
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,
15
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,
16
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,
17
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 household’s opportunity frontier
Figure pp54
? A division of labor in a household pp56
18
? 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
? h=aw+bV+cwelfare+other variable
19
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,
? Pwomen=aw+bV+cwelfare+dchild+dWhusband+other
variable
Other variable includes culture factors and the
institutional framework,
20
? 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 woman’s
hours of work and her wage rate,0.2
21
2.7 Labor supply over the life cycle
Present value
Lifetime utility =
Marginal utility of hour of leisure in second
year =
22
? 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,
23
? 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 worker’s lifetime
income unchanged,there are no income
effects associated with the process of aging,
24
? 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
substitution=change rates in hours as
worker ages/change rates in wage as worker
ages
? 0.1 is not very responsive
25
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
26
? 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,
27
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= αURt+ other variables
α<0,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,
28
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,
29
? Figure pp94
? The impact of income and prices on he
household’s fertility Figure pp95
? Nchild = αPchild +βI+ other variables
? Mother’s wage __forgone earning
? Cost of raising child rises with the increase
of income,High quality,
? Benefits and revenue of raising children
30
Chapter 3 Labor Demand
Derived demand
3.1 The production function Q=f(L,K)
? Marginal product and average product of
labor, holding capital constant
? Law of diminishing returns
? Profit maximizationΠ=pf(K,L)-wL-rK
31
3.2 The employment decision in the short run
? value of the marginal product VMPL = p,
MPL
? VMPL = w MR=MC 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,
32
? The only points that are relevant for the
firm’s 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 DSL=g(w,p,
K0)
? Elasticity of labor demand,the percentage
change in short-run employment resulting
from a 1 percent change in the wage,
33
3.3 The employment decision in the long run
? Isoquants and isocosts
? The firm’s optimal combination of inputs
MPL/MPK=w/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,p’s role
34
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
DLL=g(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),
35
3.4 The substitution and complements
? perfect substitutes and perfect complements
? elasticity of substitution δ=%⊿ (K/L)/
%⊿ (w/r)∣ q positive
? The size of the substitution effect depends
on the magnitude of the elasticity of
substitution,
36
? Cross-elasticity of factor demandδxy=%⊿ Dx/
%⊿ Py
? Positive--substitutes; negative—complements
? 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(δxy<0),
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,
37
Marshall’s 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
labor’s share in total costs,
? Labor demand is more elastic the greater the
supply elasticity of other factors of
production,such as capital,
38
? Unions and Marshall’s 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,
? ρxy=%⊿ Wx/ %⊿ Qy
>0,complements; <0,substitutes,
39
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,
40
? 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,
41
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,
42
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,
43
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,
44
? 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,
45
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,
46
? 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,
47
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 worker’s
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,
48
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,
49
? ΠWmin=Wu,Πis 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
50
? 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,
51
? 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
worker’s reservation wage,
52
? 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
53
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),
54
? Monopoly in output market,MR<AR,
Marginal revenue product(MRP)<VMP
? 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?
55
? 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,
LABOR ECONOMICS
Ning Guangjie
Tel,23504565
E-mail:seanning@eyou.com
2
Chapter 1 INTRODUCTION
1.1 What does labor economics study?
? Labor economics studies how labor markets work,
? Such as labor force participation,the firm’s
demand for the high-skill workers,wage
determination,the human capital investment,the
labor mobility,the labor market discrimination,
trade Unions and unemployment,
3
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,
4
? 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,
1.2 Theory and facts
5
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
6
Chapter 2 Labor Supply
Whether to work and how many hours to work
Labor 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)
7
LF=E+U,
Labor force participation rate=LF/P
Unemployment rate=U/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,
8
? The huge increase in the labor force
participation rate of women,
? A sizable decline in average hours of work
per week prior to 1940,
9
年劳动时间 （ 小时 ） 的国际比较
年份
日本
美国
西德
英国
法国
1975
2043
1881
1678
1923
1830
1980
2162
1893
1985
2168
1929
1659
1952
1643
1989
2159
1957
1638
1989
1646
资料来源,[日 ]永山武夫：, 劳动经济 ——日本的经营与劳动问题,,第 107页。
10
2.2 The worker’s preferences and budget
constraints
Utility function,U=U(C,L) C,consumption of
goods,L,consumption of leisure,U=C*L
Indifference curve
Marginal utility
Marginal rate of substitution in consumption
Time constraints,T=L+h L,leisure time; h,work
time
Budget constraint,C=wh+V V,non-labor income
C=(wT+V)-wL budget line the boundary of the
worker’s opportunity set
Slope -w
11
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
12
Tangency condition,the slope of the
indifference curve equals the slope of the
budget line,
? Labor supply function h*=h(w,V)
? Leisure is a normal good,Non-labor
income increase and hours of work(fall),
reservation wage(rise)
? Income effect
13
U0
U1
U2
Hours of
leisure
P
12
8
3
50 100
An interior Solution to the labor-leisure
Decision
Consumption
14
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,
15
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,
16
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,
17
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 household’s opportunity frontier
Figure pp54
? A division of labor in a household pp56
18
? 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
? h=aw+bV+cwelfare+other variable
19
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,
? Pwomen=aw+bV+cwelfare+dchild+dWhusband+other
variable
Other variable includes culture factors and the
institutional framework,
20
? 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 woman’s
hours of work and her wage rate,0.2
21
2.7 Labor supply over the life cycle
Present value
Lifetime utility =
Marginal utility of hour of leisure in second
year =
22
? 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,
23
? 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 worker’s lifetime
income unchanged,there are no income
effects associated with the process of aging,
24
? 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
substitution=change rates in hours as
worker ages/change rates in wage as worker
ages
? 0.1 is not very responsive
25
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
26
? 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,
27
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= αURt+ other variables
α<0,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,
28
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,
29
? Figure pp94
? The impact of income and prices on he
household’s fertility Figure pp95
? Nchild = αPchild +βI+ other variables
? Mother’s wage __forgone earning
? Cost of raising child rises with the increase
of income,High quality,
? Benefits and revenue of raising children
30
Chapter 3 Labor Demand
Derived demand
3.1 The production function Q=f(L,K)
? Marginal product and average product of
labor, holding capital constant
? Law of diminishing returns
? Profit maximizationΠ=pf(K,L)-wL-rK
31
3.2 The employment decision in the short run
? value of the marginal product VMPL = p,
MPL
? VMPL = w MR=MC 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,
32
? The only points that are relevant for the
firm’s 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 DSL=g(w,p,
K0)
? Elasticity of labor demand,the percentage
change in short-run employment resulting
from a 1 percent change in the wage,
33
3.3 The employment decision in the long run
? Isoquants and isocosts
? The firm’s optimal combination of inputs
MPL/MPK=w/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,p’s role
34
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
DLL=g(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),
35
3.4 The substitution and complements
? perfect substitutes and perfect complements
? elasticity of substitution δ=%⊿ (K/L)/
%⊿ (w/r)∣ q positive
? The size of the substitution effect depends
on the magnitude of the elasticity of
substitution,
36
? Cross-elasticity of factor demandδxy=%⊿ Dx/
%⊿ Py
? Positive--substitutes; negative—complements
? 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(δxy<0),
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,
37
Marshall’s 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
labor’s share in total costs,
? Labor demand is more elastic the greater the
supply elasticity of other factors of
production,such as capital,
38
? Unions and Marshall’s 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,
? ρxy=%⊿ Wx/ %⊿ Qy
>0,complements; <0,substitutes,
39
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,
40
? 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,
41
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,
42
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,
43
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,
44
? 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,
45
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,
46
? 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,
47
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 worker’s
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,
48
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,
49
? ΠWmin=Wu,Πis 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
50
? 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,
51
? 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
worker’s reservation wage,
52
? 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
53
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),
54
? Monopoly in output market,MR<AR,
Marginal revenue product(MRP)<VMP
? 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?
55
? 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,
