McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 1 “Observations always involve theory.” -Edwin Hubble

1-2 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.

1-3 Basics of the Labor Market Participants are assigned motives: o Workers look for the “best” job. o Firms look for profits. o Government uses regulation to achieve goals of public policy. Minimum wages Occupational safety

1-4 Three “Actors” Workers o The most important actor; without workers, there is no “labor”. o Desire to maximize utility (i.e., to optimize by selecting the best option from available choices). o Supplies more time and effort for higher payoffs, causing an upward sloping labor supply curve.

1-5 Three “Actors” Firms o Decide who to hire and fire. o Motivated to maximize profits. o 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” Government o Imposes taxes, regulations. o Provides ground rules that guide exchanges made in labor markets.

1-7 Why Do We Need a Theory? Explain and understand how labor markets work. Focus on the essential variables while leaving out other, less crucial, factors. Create a model that helps explain the theory.

1-8 Positive vs. Normative Economics Positive economics o Addresses the facts o Focus on “what is” o Questions answered with the tools of economists Normative economics o Addresses values o Focus on “what should be” o Requires judgments

1-9 Supply and Demand in the Engineering Labor Market Equilibrium 50,000 40,000 30,000 20,00010,00030,000 Labor Supply Curve Labor Demand Curve Earnings ($) Employment

1-10 The Alaskan Labor Market and Construction of the Oil Pipeline D0D0 D1D1 S0S0 Earnings ($) Employment w1w1 w0w0 E1E1 E0E0

1-11 Wages and Employment in the Alaskan Labor Market,

1-12 Summary Labor economics studies how labor markets work. Models in labor economics typically contain three actors: workers, firms, and governments. A good theory should have realistic assumptions and can be tested with real-world data. The tools of economics are helpful in answering positive questions.

1-13 Appendix: Regression Analysis Log Wage Slope =  Change in log wage Years of Schooling Change in schooling 

1-14 Scatter Diagram: Wages and Schooling by Occupation, 2001

1-15 Choosing Among Lines Summarizing Trends in the Data

1-16 The Best-Fit Regression Line

1-17 Multiple Regression Extending regression analysis to include multiple independent variables Each estimated coefficient shows the impact of a particular variable on the dependent variable, other things constant Standard errors of the regression coefficients are used to evaluate significance of the relations between each particular variable and the dependent variable