Econ 360 Labour Economics

Lecture 1: Introduction

David Macdonald

UBC Okanagan

Winter 2023
Basic Information

▸ Instructor: David Macdonald

▸ Contact: david.macdonald@ubc.ca

▸ Course website on Canvas: https://canvas.ubc.ca/

▸ Office hours: Wednesdays and Fridays 11am to 12pm ART 275

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Resources

Required Text:
▸ Labour Market Economics: Theory, Evidence and Policy in Canada (9th Edition)
by Benjamin, D., Gunderson M., Lemieux T., Riddell, C., Schirle, T., McGraw Hill
Canada (2021)
▸ Print or e-book edition available from UBC bookstore

Other Resources:
▸ Supplemental textbook: Labor Economics by Borjas, G. J.
▸ Supplemental material I will post on canvas

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What is Labour Economics?

Labour Economics: The study how the Labour Market functions.

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What is Labour Economics?

Labour Economics: The study how the Labour Market functions.

▸ The Labour market is arguably the most important market:
▸ We will spend a substantial amount of time in the labour market
▸ Determines our income/wealth and lifestyle
▸ Influences our social circle, relationships, identity...

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What is Labour Economics?

Labour Economics: The study how the Labour Market functions.

▸ The Labour market is arguably the most important market:
▸ We will spend a substantial amount of time in the labour market
▸ Determines our income/wealth and lifestyle
▸ Influences our social circle, relationships, identity...

▸ The Labour market is also one of the most regulated markets:

▸ Minimum wages, maximum hours
▸ pensions, unemployment insurance, social benefits
▸ qualification requirements, public provision of education
▸ parental leave, safety regulation, immigration policy...

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Why Study Labour Economics?

▸ Labour Economics can help us analyze many important (and often controversial)
social policy issues:
1. What is the impact of raising the minimum wage on employment?
2. What is the impact of immigration on wages and employment?
3. What is the impact of unions on wages for both union members and the rest of
society
4. How much discrimination occurs in the labour market? What is its impact and how
best do we combat it?
5. Do generous unemployment benefits prolong unemployment spells?

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This Course

▸ The core of this course will centre on building and analyzing the neoclassical
model of labour supply and demand and its extensions
▸ This model summarizes and can make powerful predictions regarding the
interaction between three sets of actors who we assume have different goals:
1. Workers who supply labour in order to maximize their well-being.
2. Firms who demand labour to produce output and maximizes profits.
3. Governments who establish the rules of how workers and firms interact. e.g.
Minimum wages, maximum hours, safety standards, unemployment insurance etc.

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Wages and Employment in a Competitive Labour Market

▸ N S is labour supply
▸ N D is laobur demand
▸ Eq. is where N D and N S intersect
▸ wage = W ∗ and employment = N ∗
▸ Eq. arises due to optimizing behaviour by
both workers and firms

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Why Do We Need Theory?

▸ The competitive labour market model is “unrealistic”.

▸ A lot of the complexities of labour markets are left out.
▸ It implies things that are clearly wrong (e.g. zero involuntary unemployment).

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Why Do We Need Theory?

▸ The competitive labour market model is “unrealistic”.

▸ A lot of the complexities of labour markets are left out.
▸ It implies things that are clearly wrong (e.g. zero involuntary unemployment).

▸ But... Economic models help us generalize and simplify a complex world

▸ We abstract from the details to focus on what’s (hopefully) important
▸ If our models are as complex as the real world, they provide as with no insight. We’d
need another simplified model to understand our model.

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Why Do We Need Theory?

▸ The competitive labour market model is “unrealistic”.

▸ A lot of the complexities of labour markets are left out.
▸ It implies things that are clearly wrong (e.g. zero involuntary unemployment).

▸ But... Economic models help us generalize and simplify a complex world

▸ We abstract from the details to focus on what’s (hopefully) important
▸ If our models are as complex as the real world, they provide as with no insight. We’d
need another simplified model to understand our model.

▸ Sometimes a model just tells a story that illuminates a broader economic idea,
behaviour or insight.
▸ e.g. The Market for Lemons (Akerlof, 1970), Nash Equilibrium/Prisoners Dilemma

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What Makes a Good Model? (Adapted from Gabaix et al. (2008))

1. Simplicity:
▸ The model has relatively few assumptions, and the assumptions are clear and concise.
▸ The model is tractable: we can solve and understand it

2. Conceptually Insightful: The model reveals useful and fundamental insights into
economic behaviour

3. Generalizable: lessons from the model can be applied to a wide range of

situations.

4. Predictive: The model provides strong, concise predictions.

5. Fasifiability: Predictions of the model are falsifiable. Meaning that in principle,

the predictions of the model can be empirically tested.

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Does the simple competitive labour market model help us understand the world?

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Example 1: Oil And The Alaskan Labour Market (from Borjas (2017))

▸ In the late 1960s oil was discovered in a remote section of northern Alaska

▸ To get oil to consumers an almost 1300KM pipeline was built

▸ Construction was between 1974 and 1977 employing 50,000 total workers in the
summers of those years

▸ After construction was complete, the number or workers was reduced to a small
maintenance crew.

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Alaska: Theory Predictions

w
▸ The construction of pipeline should
increase demand for workers.
Ns

W0

N0d
E
0 E0

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Alaska: Theory Predictions

w
▸ The construction of pipeline should
increase demand for workers.
Ns
▸ Shifting the demand curve from N0D to
N1D
W1
▸ Wage and employment should both
W0
increase from {W0 , E0 } to {W1 , E1 }

N1d
N0d
E
0 E0 E1

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Alaska: Theory Predictions

w
▸ The construction of pipeline should
increase demand for workers.
Ns
▸ Shifting the demand curve from N0D to
N1D
W1
▸ Wage and employment should both
W0
increase from {W0 , E0 } to {W1 , E1 }

N1d ▸ After construction demand should fall,

N0d shifting N1D back to N0D returning wages
E and employment to their previous level
0 E0 E1

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Wages and Employment in Alaska, 1968-1983

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Example 2: Minimum Wages

▸ The competitive model makes a clear prediction regarding minimum wages:

→ If a minimum wage is set above the market clearing wage then it will create
unemployment and overall employment will decrease.

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Example 2: Minimum Wages

▸ The competitive model makes a clear prediction regarding minimum wages:

→ If a minimum wage is set above the market clearing wage then it will create
unemployment and overall employment will decrease.

▸ Turns out this prediction is not always verified by empirical studies:

▸ Card & Krueger (1994) found that employment went up in response to an increase
in the minimum wage.

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Example 2: Minimum Wages

▸ The competitive model makes a clear prediction regarding minimum wages:

→ If a minimum wage is set above the market clearing wage then it will create
unemployment and overall employment will decrease.

▸ Turns out this prediction is not always verified by empirical studies:

▸ Card & Krueger (1994) found that employment went up in response to an increase
in the minimum wage.
▸ There is an ongoing disagreement on the impact of the minimum wage on
employment in the economic literature.
▸ e.g. Allegretto et al. (2017a) and Neumark and Wascher (2017)
▸ Most evidence points towards a zero to very small negative effect.

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Conflicting Minimum Wage Studies

In 2015-2016 Seattle raised it’s minimum wage to $12 to $15 an hour. Two studies
found conflicting effects on employment:

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Conflicting Minimum Wage Studies

In 2015-2016 Seattle raised it’s minimum wage to $12 to $15 an hour. Two studies
found conflicting effects on employment:

1. Allegretto et al. (2017b) Finds no effect

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Conflicting Minimum Wage Studies

In 2015-2016 Seattle raised it’s minimum wage to $12 to $15 an hour. Two studies
found conflicting effects on employment:

1. Allegretto et al. (2017b) Finds no effect

2. Jardim et al. (2022) Finds a negative effect

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Conflicting Minimum Wage Studies

In 2015-2016 Seattle raised it’s minimum wage to $12 to $15 an hour. Two studies
found conflicting effects on employment:

1. Allegretto et al. (2017b) Finds no effect

▸ Analysis on the fast food industry

2. Jardim et al. (2022) Finds a negative effect

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Conflicting Minimum Wage Studies

In 2015-2016 Seattle raised it’s minimum wage to $12 to $15 an hour. Two studies
found conflicting effects on employment:

1. Allegretto et al. (2017b) Finds no effect

▸ Analysis on the fast food industry

2. Jardim et al. (2022) Finds a negative effect

▸ Analysis focused on broader set of companies, but leaves out very large companies
(meaning fast food left out)

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Conflicting Minimum Wage Studies

In 2015-2016 Seattle raised it’s minimum wage to $12 to $15 an hour. Two studies
found conflicting effects on employment:

1. Allegretto et al. (2017b) Finds no effect

▸ Analysis on the fast food industry
▸ Finds no extensive margin (i.e. employed to not-employed) effect

2. Jardim et al. (2022) Finds a negative effect

▸ Analysis focused on broader set of companies, but leaves out very large companies
(meaning fast food left out)

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Conflicting Minimum Wage Studies

In 2015-2016 Seattle raised it’s minimum wage to $12 to $15 an hour. Two studies
found conflicting effects on employment:

1. Allegretto et al. (2017b) Finds no effect

▸ Analysis on the fast food industry
▸ Finds no extensive margin (i.e. employed to not-employed) effect

2. Jardim et al. (2022) Finds a negative effect

▸ Analysis focused on broader set of companies, but leaves out very large companies
(meaning fast food left out)
▸ Has better data: small negative extensive margin effect larger negative intensive
margin effect (reduction in hours worked)

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Example 2: Why The Discrepancy Between Theory and Empirical
Evidence?

▸ The minimum wage might not be truly binding, i.e. wage floor below actual
market wage

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Example 2: Why The Discrepancy Between Theory and Empirical
Evidence?

▸ The minimum wage might not be truly binding, i.e. wage floor below actual
market wage

▸ Labour market might not be competitive; firms may be able to act like a
monopsony

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Example 2: Why The Discrepancy Between Theory and Empirical
Evidence?

▸ The minimum wage might not be truly binding, i.e. wage floor below actual
market wage

▸ Labour market might not be competitive; firms may be able to act like a
monopsony

▸ Most studies look at relatively small changes in the min. wage. Larger changes
might conform more with theory

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Example 2: Why The Discrepancy Between Theory and Empirical
Evidence?

▸ The minimum wage might not be truly binding, i.e. wage floor below actual
market wage

▸ Labour market might not be competitive; firms may be able to act like a
monopsony

▸ Most studies look at relatively small changes in the min. wage. Larger changes
might conform more with theory

▸ Employment may not fall in the short run, but does in the long run.

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Example 2: Why The Discrepancy Between Theory and Empirical
Evidence?

▸ The minimum wage might not be truly binding, i.e. wage floor below actual
market wage

▸ Labour market might not be competitive; firms may be able to act like a
monopsony

▸ Most studies look at relatively small changes in the min. wage. Larger changes
might conform more with theory

▸ Employment may not fall in the short run, but does in the long run.

▸ Firms may respond in other ways: e.g. reducing hours in order to reduce benefits
(Clemens et al., 2018; Yu et al., 2021)

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Sidebar: Right and Wrong Answers in an Economics Class

▸ If asked on a test: What is the impact of raising a minimum wage in a

competitive labour market?

→ Right answer: employment decreases (and probably should draw the graph)

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Sidebar: Right and Wrong Answers in an Economics Class

▸ If asked on a test: What is the impact of raising a minimum wage in a

competitive labour market?

→ Right answer: employment decreases (and probably should draw the graph)

▸ If asked: in the real world what’s the employment effect of raising the minimum
wage?

→ Right answer: ??? (depends?)

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Sidebar: Right and Wrong Answers in an Economics Class

▸ If asked on a test: What is the impact of raising a minimum wage in a

competitive labour market?

→ Right answer: employment decreases (and probably should draw the graph)

▸ If asked: in the real world what’s the employment effect of raising the minimum
wage?

→ Right answer: ??? (depends?)

▸ We should also be aware: employment is not the only thing that matters.

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Overview of the Canadian Labour Market

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Mean Labour Market Outcomes

Source: Canada Income Survey 2017

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Distribution of Labour Earnings in Canada

Source: Canada Income Survey 2017

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Distribution of Hours Worked in Canada

Source: Canada Income Survey 2017

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Distribution of Hourly Wages in Canada

Source: Canada Income Survey 2017

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Quantifying the Labour Force

▸ Statistics Canada conducts the Canadian Labour Force Survey monthly to

quantify the state of the labour market.

▸ Survey ≈ 56,000 households (comprising 100,000 individuals) about their labour

force involvement during the reference week

▸ Reference Week: the calendar week (Mon-Sun) before the survey is conducted

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Labour Market Definitions

1. Potential Labour Force Participants (POP): Eligible labour force participants

(those over 15 years of age, excluding those who live in the territories and on first
nations reserves)

2. Employed (E): Those who worked in reference week or were employed but absent
from work

3. Unemployed (U): Those not working, but are actively searching for work in 4
years prior to the reference week.

4. Labour Force (LF): LF = E + U

5. Not in Labour Force (NLF): Those not working and and not actively seeking
work. (e.g. students, retired, non-market labour, long-term disability, discouraged
workers)
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Labour Market Statistics

U
1. Unemployment rate: U R = LF

E
2. Employment rate: ER = P OP

LF
3. Labour force participation rate: P R = P OP

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Canadian Labour Force Survey

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Canadian Labour Force Survey

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Canadian Labour Force Survey June 2023

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Hidden Unemployed?

▸ Official Unemployment statistics do not count those NLF

▸ Meaning those who are discouraged from looking for work due to a poor job
market are not counted as unemployed

▸ Some argue that this means unemployement rates understate issues in the
economy, especially during/after deep recessions (2009?).
▸ Would the employment rate: ER = E/POP be a better measure?

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Hidden Unemployed?

▸ Official Unemployment statistics do not count those NLF

▸ Meaning those who are discouraged from looking for work due to a poor job
market are not counted as unemployed

▸ Some argue that this means unemployement rates understate issues in the
economy, especially during/after deep recessions (2009?).
▸ Would the employment rate: ER = E/POP be a better measure?
▸ POP would include the hidden unemployed but would also include many others
legitimately not in the labour force (young parents, retirees, those in school)

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Canada Unemployment Rate 2005-2023

Source: Statistics Canada (2023)

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Canada Employment Rate 2005-2023

Source: Statistics Canada (2023)

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Canada Participation Rate 2005-2023

Source: Statistics Canada (2023)

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US Participation Rate 2005-2023

Source: Statistics Canada (2023) 32 / 35

References I

Akerlof, G. A. (1970). The market for ”Lemons”: Quality uncertainty and the market
mechanism. The Quarterly Journal of Economics, 84(3):488–500.
Allegretto, S., Dube, A., Reich, M., and Zipperer, B. (2017a). Credible research
designs for minimum wage studies: A response to neumark, salas, and wascher. ILR
Review, 70(3):559–592.
Allegretto, S., Godøy, A., and Reich, M. (2017b). Seattle’s minimum wage experience
2015-16. SSRN Electronic Journal, pages 2015–2031.
Benjamin, D., Gunderson, M., Lemieux, T., Riddell, C., and Schirle, T. (2021). Labour
Market Economics: Theory, Evidence and Policy in Canada. McGraw Hill Canada,
9th edition.
Borjas, G. (2017). Labor economics. McGraw-Hill, 7. ed edition.

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References II

Clemens, J., Kahn, L. B., and Meer, J. (2018). The Minimum Wage, Fringe Benefits,
and Worker Welfare. NBER Working Papers 24635, National Bureau of Economic
Research, Inc.
Gabaix, X., Laibson, D., Caplin, A., and Schotter, A. (2008). ”The Seven Properties of
Good Models”. Oxford University Press.
Jardim, E., Long, M. C., Plotnick, R., van Inwegen, E., Vigdor, J., and Wething, H.
(2022). Minimum-wage increases and low-wage employment: Evidence from seattle.
American Economic Journal: Economic Policy, 14(2):263–314.
Neumark, D. and Wascher, W. (2017). Reply to “credible research designs for
minimum wage studies”. ILR Review, 70(3):593–609.
Yu, Q., Mankad, S., and Shunko, M. (2021). Evidence of the unintended labor
scheduling implications of the minimum wage. In Social Science Research Network.

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