Introduction to Labor Economics

Lecture one

Any topic of study can be approached from different point of views and using methods or tools of analysis.

For example : Social :behavioural , attitude, tradition Political : political power, trade unions Economics :using resources ± labour human resources

What is Economics ? 

Economics is the study of how people choose to use resources----behavior of individuals. uses
product and services

- Time - Knowledge - Talent - Lands - Building - Equipment

how to combine these resources

This raise questions? 

How to choose to use resources? How much of time to devote to work or a leisure ? How many pound to spend or to save ? How to combine resources to produce goods and services?


Economics addresses the collective behaviour of business and industries, governments and countries and the globe as a whole . So economic study the decision makers (household and firms) which occur in the market ( product & factor market), where the determination of interest in goods and services are the equilibrium price and quantities of goods exchanged.


What are the level of economic analysis? .  Than our analysis is different in each level of economics.

Mesoeconomics :It is a bridge between the two main economic paradigms in mainstream economics . Micro economics : Studies the behaviour of the individual decisions.Level of analysis : Macroeconomics : Studies the behaviour of the overall all economic activities/ aggregate outcomes.

Normative Economics  Positive economics .relies on value judgments to evaluate the overall functioning of the economy.  .an attempt to describe how the economy operates using the scientific Method.Positive vs. It is a descriptive study Normative economics .

Positive economics    Abstraction Ceteris paribus assumption Test of model based on predictions. not assumptions .

Fundamental positive economic concepts     Scarcity Rational self-interest Utility maximization Profit maximization .

Normative economics   Interpersonal comparisons of utility are impossible Problems with the pareto optimality criterion .

The nonexistence of markets when externalities are present. Transaction barriers. Price distortions.Types of Market failure       Imperfect information. and Capital market imperfections. Public goods. .

and The suppliers of labor care about the way in which the labor is used. not sold. other markets    Labor services are rented. Labor productivity is affected by pay and working conditions.Labor market vs. .

Where the equilibrium price is the wage that the workers receive and the equilibrium quantity is the amount of work that people do ( hours. . skill) in the economy .effort. weeks.What is labor economics ?   Labor economics is the study of the market for one particular commodity in the economy : labor services.

prestige. self esteem. occupation career are an important aspect of identity. .Some criticise that labor is not a commodity?   Because A person¶s labor is not something they sell in return for income. Rather . who you are? But other responds that : ³In today µs society labor is a commodity that is traded ion markets´. a person¶s job.

but this doesn't reverse the fact that labor id is something bought and sold in a modern capitalist economy and whose price is set by supply and demand. Yet labor can be distinguished from other goods and services as follows: .  True.

training are needed. Also it requires physical presence: quality of the worker environment matter. The flow is the right to use it for a period of time. labor is one of the few goods they sell.labor is a factor Unlike most goods of production not which households buy the final product . 1. . The stock in this case 2.labor is a low is the worker and the of services attached to a stock skills he/she possess.How labor is distinguish from other goods and services? Aspect of labor Explanation Consequences Income effects work in different ways for labor than other goods Stock must be produced and maintained: education.

Workers are differentiated by type of skill and demographic characteristics. This gives rise to a distribution of earnings. 4.Aspect of labor 3. Consequences Human capital investment is riskier than physical capital investment because it is non-diversifiable. for example to finance education. people can¶t sell ³shares´ in themselves. .stock cannot be bought and sold Explanation Slavery is prohibited.labor is very heterogeneous commodity A wide variety of prices and market conditions for different labor services exist. For various reasons.

Consequences Compensation and incentive systems need to be designed appropriately 6.the quality of labor services being supplied is often hard to measure Explanation Workers may simply be poor in management decisions and this may be apparent for years Employers¶ association and unions.sometimes the demanders or suppliers of labor have a considerable monopoly power Use monopoly and search . Theory study these markets .Aspect of labor 5.

labor markets are highly regulated . work place safety legislation. immigration policy« Consequences Government policy has important effects on labor markets . Explanation Income and payroll taxes.Aspect of labor 7. income support programs . the exchange of labor is both highly taxed and subsidized.

Problem oriented .Analytical perspective .Descriptive /traditional approach It include facts -Economics of labor .Modern approach .What is the difference between Labor Economics and Economics of Labor? -Labor economics .

Labor economics     Economics characteristics of labor Economic system Role of labor as a factor of production Economic effect of trade unions .

How to use labor efficiently to achieve macro objectives Problem Problem oriented approaches analytical approaches .Economics of labor    Usage of human resources economically .

Labor economics is a descriptive approach towards studying human resources .True or false & explain 1.Labor economics is the modern approach in studying the human resources 2.

Economics a-Microeconomics Studies decision that people and business make regarding the allocation of resources and prices of goods and services. Focuses on the demand and supply of labor that determine price levels for specific companies in specific industries.Unemployment in the industrial sector .up approach to analyze the economy Example: Microeconomics would look at: .How a specific company could maximize its production and capacity so it could lower prices and better compete in its industry. .Price of petrol  . Microeconomics takes a bottoms.

national income.How GDP would be affected by unemployment rate. rate of growth and price levels. Looks at the economy ± wide such as GDP ( Gross domestic product) and how it is affected by changes in unemployment. Example: Macroeconomics would look at: . .Macroeconomics takes a top-down approach .Economics a-Macroeconomics Studies the behavior of the economy as a whole and not just on specific companies but entire industries and economies.  .How a an increase / decrease in net exports would affect a nation¶s capital account.

Q: Price of petrol is considered microeconomics but has a macro effect.  Increased inflation ( macro effect ) would cause the price of raw materials to increase for a specific company/ industry. . such as price of petrol ( micro) and in turn affecting the end product¶s price charged to public ( affecting income) and thus affecting the whole economy.

you may have to delete the image and then insert it again.INSATIABLE WANTS + FINITE RESOURCES = THE NEED TO ECONOMISE The image cannot be displayed. or the image may have been corrupted. . and then open the file again. If the red x still appears. Restart your computer. Your computer may not have enough memory to open the image.

i.e. choose how to use our resources to our greatest advantage ECONOMISE .Best case scenario: Maximize our satisfaction with our limited resources.

.e. i. Factors of Production 3 types: .Resources Specific known amount of resources available to each person/economy Resources are anything which can be used to satisfy wants by producing G&S.

1. LAND ± all natural resources 2. LABOUR ± human effort involved in production 3.expenditure on capital is µcapital investment¶ . CAPITAL ± machinery/equipment for manufacturing other G&S¶s .

Fourth ± Enterprise .

E.. Whereas.g.µReal Economy¶ versus µMoney Economy¶ Q: Would the wealth & standard of living of the country increase if the Government printed more money? The real economy is concerned with the amount of Goods & Services available to the population . money has no intrinsic value ± it merely enables transactions to take place ± it can be exchanged for G & S¶s . quantity of food. public transport.. number of hospital beds etc. shopping centres.

A measure of the wealth of an economy: Amount of G&S produced (National Production) Amount of Income received (National Income) Amount of Expenditure on G&S (National Expenditure) Q: How can we achieve true economic growth in the economy? .

i. economists use constant prices when comparing National production figures. The prices of one µbase¶ year are applied to the output of other years . However. Therefore. when comparing we must take into account inflation.e.Answer: We compare µNational Production¶ on a year by year basis.

based on wealth you own and real income.   As economy grows than standard of living increases and standard of welfare increase than we end with a civilized society Standard of living: is what you own. . Standard of welfare: is not based on what you won . rather on the degree of entertainment and the ability to enjoy what you own.

.Do the economic problem affect the labor market?  Economic problem tries to find a way of how to allocate these scarce resources efficiently to satisfy the needs and desires as much as possible.

Backward market Input market Supply Demand Population Workers Business activity Forward market Output market Supply Demand Company selling product .

Who are the actors in labor markets? .Firms demand labor .Workers supply labor .Firms and workers interact in markets. . but governments influence the rules of the interaction.

Demand for labor The labor demand curve is downward sloping due to:  a substitution effect. and  a scale effect. .

Substitution effect  Substitution effect . .substitution of other resources for a resource that becomes relatively more expensive.

Leading to a reduction in the quantity of the product demanded.Scale effect The scale effect associated with a wage increase involves the following steps:     Higher wages result in higher average and marginal costs of production. Leading to an increase in the equilibrium price of the product. . Leading to a reduction in the use of all inputs used to produce the product.

.Slope of labor demand curve   Both the substitution and scale effects result in a reduction in the quantity of labor demanded when the wage rate rises. Labor demand changes only if the labor demand curve shifts in some manner (as discussed below). but does not affect labor demand. A change in the wage changes the quantity of labor demanded.

and the prices of other resources. .Shifts in labor demand Labor demand may shift due to changes in:   the demand for the product.

Industry demand for labor   An industry's demand for labor consists of the total demand for a particular type of worker in a given industry. . (An industry consists of all of the firms that produce a given type of output.) An industry's labor demand curve is determined by adding together the labor demand curves for all of the firms in the industry.

Market demand for labor   The market for a given category of labor consists of all of the firms that might hire a given type of labor. . regardless of the industry in which the firm operates. The market demand for labor is determined by adding together all of the industry demand for labor curves.

Long-run vs. short-run labor demand .

 induce some workers to shift from other labor markets to this relatively more remunerative alternative employment. . and  will cause some individuals who are not currently in the labor force to enter this market.Market labor supply The market labor supply curve is expected to be upward sloping because an increase in the wage in a particular labor market will:  cause some workers in this market to work additional hours.

Market labor supply .

hifts in market labor supply curve Shifts such as this may be due to: ‡ changing wages in other markets. or ‡changes in worker tastes and preferences .

Labor supply to individual firms .

Labor market equilibrium .

and A reduction in labor supply results in a higher equilibrium wage. but a higher equilibrium level of employment.Shifts in labor market equilibrium     An increase in labor demand results in an increase in both the equilibrium wage and the equilibrium level of employment. An increase in labor supply results in a lower equilibrium wage. but a lower equilibrium level of employment. A reduction in labor demand results in a decrease in both the equilibrium wage and the equilibrium level of employment. .

TWO TYPES OF UNIONS   Industrial union Trade union (also known as a craft union) .

Collective bargaining agreement .

upply restriction .

Workers are underpaid if their wage is below the equilibrium wage. .Overpaid and underpaid workers   Economists argue that workers are overpaid if their wage is above the equilibrium.

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