Chapter 1

Labor Economics:
Introduction and Overview

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
1.Labor Economics
as a Discipline

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 Labor Economics
• Labor economics examines
– the organization, functioning and outcomes of
labor markets;
– decisions of prospective and present labor market
participants;
– public policies relating to employment and
payment of labor resources.
Importance of Labor Economics
• Socioeconomic Issues
– Gender and race discrimination
– Legal and illegal immigration
– Fall in unionization
– Free trade
• Quantitative Importance
– 70% of national income goes to
labor.

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TURKSTAT NEWSLETTER
Importance of Labor Economics
• Unique Characteristics
– Labor is rented and not bought/sold
– Non-monetary aspects: 40hrs/week
is spent on the job, opportunity for
training and advancement, social
status
– Institutional factors
• Unions, licensing, minimum wage,
discrimination
– Labor demand is a derived demand:
Employers do not demand
autoworkers if the society does not 1-11
• «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 labour, 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 a pleasant one, and whether
or not his associates will be such as he cares
to have. » Alfred Marshall, Principles of
Economics 8th edition
2. The “Old” and the
“New”

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 Change in Labor Economics
• Old Approach
– Highly descriptive and historical
– Little economic analysis
• New Approach
– Uses applied micro and macro theory

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3. Economic Perspective

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 Choice
• Labor economics uses theories of choice
to explain behavior of labor market
participants and resulting outcomes.
• Why do some people work and some do
not?
• Why do some people delay their labor
market entry to go to college?
• Why do some employers hire more men
than women (high skill vs. low skill or
labor vs. capital)

• Theories rest on three assumptions…

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 Choice
1. Relative scarcity
- Scarce time: How much time to devote to
jobs/working at home/leisure?
- Spendable income: How much present income to
forgo for prospect of earning higher income?
- 2. Purposeful behavior
• Choices involve giving something up -an opportunity
cost.
• Individuals make choices purposefully with an
expected net gain.
3. Adaptability
• Workers and firms adapt to changes in
expected costs and benefits.

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4. Overview

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 Overview
• Microeconomics
– Individual economic units or markets
• Macroeconomics
– Economy as a whole
• Productivity, Employment /
Unemployment

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Questions for Thought
1. Why must the concepts of supply and demand as
they pertain to products be modified when
applied to labor markets?
2. Indicate whether each of the following
statements pertains to microeconomics or
macroeconomics:
(a) The unemployment rate in the United States was 8.9
percent in 2011.
(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.

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