All rights reserved. 4th edition Copyright © 2008 The McGraw-Hill Companies. . Inc.Chapter 1 Introduction to Labor Economics McGraw-Hill/Irwin Labor Economics.

1-3 Why study Labor Economics? • Human resources allocate substantial time and energy to labor markets • Labor economics studies how labor markets work • Labor economics helps us understand and address many social and economic problems facing modern societies .

Workers look for the best job .Firms look for profits .1-4 Basics of the Labor Market • Participants are assigned motives: .Government uses regulation to achieve goals of public policy • Minimum wages • Occupational safety .

Will want to supply more time and effort for higher payoffs. there is no “labor” .Desire to optimize (to select the best option from available choices) to maximize well-being . causing an upward sloping labor supply curve .1-5 Three “Actors” • Workers . without workers.The most important actor.

Decide who to hire and fire .Relationship between price of labor and the number of workers a firm is willing to hire generates the labor demand curve .1-6 Three “Actors” • Firms .Motivated to maximize profits .

1-7 Three “Actors” • Government .Imposes taxes. regulations .Provides ground rules that guide exchanges made in labor markets .

1-8 Summary: the Three “Actors” Three Actors in the Labor Market Labor Market Workers Supply labor for payoff Firms Demand labor given price of labor and desire for profits Government Taxes Regulations Rules of exchange .

1-9 Why Do We Need a Theory? • Explain and understand how labor markets work • Focus on the essential variables while leaving out other. factors • Create a model that helps explain the theory . less crucial.

10 Positive vs.Addresses values .Requires judgments . Normative Economics • Positive economics .Questions answered with the tools of economists • Normative economics .Focus on “what should be” .1 .Focus on “what is” .Addresses the facts .

11 Supply and Demand in the Engineering Market Earnings ($) Labor Supply Curve 50.000 30.000 Equilibrium 40.000 20.000 30.000 .000 Labor Demand Curve 10.1 .

12 The Alaskan Labor Market and Construction of the Oil Pipeline Earnings ($) S0 w1 w0 D1 D0 Employment E0 E1 .1 .

13 Wages and Employment in the Alaskan Labor Market.000 150.000 2.500 4.500 1984 .000 50.1 .000 190.000 1968 Employment Monthly Salary ($) 4.000 130.000 210.000 90.000 170.500 Wage 2.000 70.000 110.000 230.000 3. 1968-1983 Employment 250.500 3.000 1970 1972 1974 1976 1978 1980 1982 1.

14 The Regression Line Log Wage Change in log wage Slope = b a Change in schooling Years of Schooling .1 .

5 2 8 10 12 14 16 18 20 Years of schooling . 2001 4 3.1 .15 Scatter Diagram: Wages and Schooling by Occupation.5 Log wage 3 2.

1 .5 2 8 10 12 14 16 18 20 Years of schooling .16 Choosing Among Lines Summarizing Trends in the Data 4 B 3.5 Log wage 3 A C 2.

1 .5 Log wage 3 2.17 The Scatter Diagram and the Regression Line 4 3.5 2 8 10 12 14 16 18 20 Years of schooling .

18 End of Chapter 1 .1 .