Labor Economics

JAY PEE ILACAS

Faculty, Department of Economics
Labor Economics
Labor economics seeks to
understand the functioning and
dynamics of the markets for wage
labour.
Labor Economics
Labor economics is the study of
economic behavior of employers and
employees in response to changing
prices, profits, wages, and working
conditions.
Labor Economics
Labor economics seeks to understand
the functioning of the market and
dynamics for labour. Labour markets
function through the interaction of
workers and employers.
Labor Economics
Labor Economics looks at the suppliers
of labor services (workers), the
demanders of labor services (employers),
and attempts to understand the resulting
pattern of wages, employment, and
income.
Labor Economics
It is an important subject because
unemployment is a problem that affects
the public most directly and severely.
Full employment (or reduced
unemployment) is a goal of many modern
governments.
Labor as a Factor of Production
• Factors of production is an economic concept
that refers to the inputs needed to produce
goods and services.
• Labor as a factor of production refers to the
effort that individuals exert when they
produce a good or service.
Labor Economics
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.
Micro and Macroeconomic Techniques of
Labor Economics
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.
Demand for Labour and Wage
Determination
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.
Demand for Labour and Wage
Determination
The demand for an additional amount of
labour depends on the Marginal Revenue
Product (MRP) and the marginal cost (MC)
of the worker. The MRP is calculated by
multiplying the price of the end product or
service by the Marginal Physical Product of
the worker.
Demand for Labour and Wage
Determination
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 firm
only employs however up to the point where
MRP=MC, and not beyond, in economic
theory.
Common Aspirations
While as a rule, workers exhibit different
characteristics, attitudes, traits and beliefs from
one another, nevertheless, they have common
aspirations.
Common Aspirations
1. Satisfaction- efficient & responsible workers find
happiness & satisfaction in a job well done
2. Recognition- as human beings, workers clamor for a
recognition for a job well done (praises or monetary
rewards)
3. Fulfillment-realization of dreams of becoming better
individuals through their contribution to production
4. Achievement- people work well because they feel a
sense of challenge, accomplishment and service to
others
5. Humane treatment – to be treated with decency and
with respect.
6. Security
Labor Force
The labour force is defined as the number
of individuals age 16 and over, excluding
those in the military, who are either
employed or actively looking for work.
Labor Force
The participation rate is the number of
people in the labour force divided by the
size of the adult civilian non-institutional
population (or by the population of working
age that is not institutionalised).
Labor Force
The nonlabour 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.
Who is not included in the labor force?

•Persons who are neither employed nor

unemployed are not in the labor force. This
category includes retired persons, students,
those taking care of children or other family
members, and others who are neither
working nor seeking work.
Structure of the Labor Force
LF Employed
Emp+
Unemp
Lay-off New hires
Quits Recall
Pop’n New Entrants Drop-outs
Retirees
16-65 Re-entrants

Unemployed
Not in
LF
Labor Force Participation Rate

LFPR = Labor Force

x 100
Labor Force Potential
(Civilian Non-institutional Population)
Labor Force Participation Rate
Labor Force Participation Rate

Source: PSA, 2018

Source: Phil. Econ. Briefing 2023
 .

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.
 When looking at the overall
macroeconomy, several types of
unemployment have been identified,
including:
Frictional unemployment — This reflects the fact
that it takes time for people to find and settle into
new jobs. If 12 individuals each take one month
before they start a new job, the aggregate
unemployment statistics will record this as a
single unemployed worker. Technological
advancement often reduces frictional
unemployment, for example: internet search
engines have reduced the cost and time
associated with locating employment.
Structural unemployment — This reflects a
mismatch between the skills and other
attributes of the labour force and those
demanded by employers.
Structural unemployment
Rapid industry changes of a technical and/or
economic nature will usually increase levels of
structural unemployment, for example:
widespread implementation of new machinery or
software will require future employees to be
trained in this area before seeking employment.
Structural unemployment —The process of
globalization has contributed to structural
changes in labour, some domestic
industries such as textile manufacturing
have expanded to cope with global demand,
whilst other industries such as agricultural
products have contracted due to greater
competition from international producers.
Natural rate of unemployment — This is the
summation of frictional and structural
unemployment, that excludes cyclical
contributions of unemployment e.g.
recessions. It is the lowest rate of
unemployment that a stable economy can
expect to achieve, seeing as some frictional
and structural unemployment is inevitable.
Demand deficient unemployment — In Keynesian
economics, any level of unemployment beyond the
natural rate is most likely due to insufficient
demand in the overall economy.
During a recession, aggregate expenditure, is
deficient causing the underutilization of inputs
(including labour). Aggregate expenditure (AE) can
be increased, according to Keynes, by increasing
consumption spending (C), increasing investment
spending (I), increasing government spending (G),
or increasing the net of exports minus imports
(X−M).
{AE = C + I + G + (X−M)}
Basics of Labor Market
 Participants are assigned motives:
1. Workers look for the “best” job.
2. Firms look for profits.
3. Government uses regulation to
achieve goals of public policy.
o Minimum wages
o Occupational safety
Three Actors in Labor
Market
Workers
- The most important actor; without workers,
there is no “labor”.
- Desire to maximize utility (i.e., to optimize
by selecting the best option from available
choices).
- Supplies more time and effort for higher
payoffs, causing an upward sloping labor
supply curve.
Three Actors in Labor
Market
Three Actors in Labor
Market
Firms
- Decide who to hire and fire.
- Motivated to maximize profits.
- Relationship between price of labor
and the number of workers a firm is
willing to hire generates the labor
demand curve.
Three Actors in Labor
Market
Government
- Imposes taxes, regulations.
- Provides ground rules that guide
exchanges made in labor markets.
- Subsidize training in profession that
the economy or society has a
shortage for either for currently or
future.
Three Actors in Labor
Market
Government
- Alter immigration rules to augment
immediate labor market needs
- Legislate laws to address solutions
to the various problems in the labor
market
Positive vs Normative
Economics
Positive Economics
- Addresses the facts
- Focus on “what is”
- Questions answered with the tools of
economists
Normative Economics
- Addresses values
- Focus on “what should be”
- Requires judgments
Positive vs Normative
Economics
Positive Economics
The country's unemployment rate dropped
to 6.0 percent in May 2022.
Normative Economics
The government must take action in order to
reduce unemployment rate.
 Characteristics of labor
1. Labour is original and indispensable factor of production.
2. Labour is an active factor of production.
3. Labour cannot be separated from the laborer.
4. Labour is less mobile.
5. Labour supply is inelastic.
6. A labourer sells his labour and not himself .
7. Labour is both the beginning and the end of production:
8. Efficiency of labour differs
9. Labour creates capital:
10. Labour can not be purchased en masse but individually one at
a time:
Blue Collar and White Collar Job
Wages
• Price employers pay for labor.
• It may take form of bonuses, royalties,
commissions and salaries.
• Used to mean wage rate or price paid per unit of
labor time.
Nominal Wages and Real Wages
• Nominal Wages are the amount of money
received per hour, per day, per week, and so on.
• Real Wages are the purchasing power of the
wage, i.e., the quantity of goods and services
that can be obtained with the wage.
• Real wages depend on one’s nominal wage and
the price level of the goods and services that will
be purchased.
Nominal Wages and Real Wages
• Example:
If nominal wages rise by 10% and there is a 5% rate
of inflation, then the “real” wage rose only by 5%.
Nominal Wages and Real Wages
1. In year one, a worker's nominal wage is
250,000, and the CPI is 100. The following year,
the worker's nominal wages stay the same, but
the CPI is 105. Calculate the real wage in year
1 and 2.
2. Using the table below:
Year Consumer Price Nominal Wage
Index
2017 100 340,000
2018 110 350,000
2019 125 350,000

Compute for the real wage in 2019 using 2017 CPI

as the base year.
Thank you!