1. Chapter 1- Introduction to Labor Economics
1-1 An Economic Study of the Labor Market
1-2 Actors in the Labor Market
1-3 Why do we need a theory?
Give a brief overview of the presentation. Describe the major focus of the presentation and why it is important.
Introduce each of the major topics.
To provide a road map for the audience, you can repeat this Overview slide throughout the presentation, highlighting the particular topic you will discuss next.

2. Why study Labor Economics?
Human resources allocate substantial time and energy to labor markets.
Labor economics  How labor markets work.
Why care about labour markets?
Personal Involvement
Social Policy Issues (Labor market experience of subgroups, Worker-Firm relationship, etc.)

3. Policy issues examined
Why did LFPR of women  tremendously throughout the century?
Impact of income assistance programs of government on incentive to work
Impact of immigration on wages & employment of the opportunities of native born workers
Are government subsidies of investments on human capital an effective way to improve economic well-being of disadvantaged workers?

4. 1-1 An Economic Story of the Labor Market
Mainly interested in the story of the labor markets:
Actors and interaction between these actors
b) Labour market outcomes
Main approach followed:
Present factors & observed outcomes
Develop theories that provide a framework to explain the stylized facts & outcomes
Verify predictive power of theories & modify the theoretical model accordingly

5. 1-2 The Actors in the Labor Market
Participants are assigned motives:
Workers look for the “best” job.
Firms look for profits.
Government uses regulation to achieve goals of public policy.
Minimum wages
Occupational safety

6. A) 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  Work vs Leisure).
Adding up individuals’ decisions  Labour Supply in the economy, and Qty & Qlty of skills available to employers
Supplies more time and effort for higher payoffs, causing an upward sloping labor supply curve: w  qLs

7. B) Firms Decide who to hire and fire.
Motivated to maximize profits (π).
Demand for input(s): Derived Demand
Objective: max π = TR – TC = p*q – TC(q) where q=output
Relationship between price of labor and the # of workers a firm is willing to hire generates the labor demand curve.

8. C) Government
Provides ground rules that guide exchanges made in labor markets:
i.e: Minimum wage, occupational safety regulations, mandatory retirement, etc.
Imposes taxes, regulations.
Interaction of A, B and C determines:
Distribution of occupations, skills, wages in the economy
Labor turnover, structural employment

9. Supply and Demand in the Engineering Labor Market
Caution: Ls slope
Equilibrium
Disequilibrium
Transition to eq.
Involuntary emp.
Government
Taxes
Min wage
Immigration laws
Equilibrium
50,000
40,000
30,000
20,000
10,000
Labor Supply
Curve
Labor Demand
Earnings ($)
Employment

10. Trans-Alaskan PipelineD0 D1 S0
Earnings ($)
Employment w1 w0 E1 E0
Shock: Discovery of oil in Prudhoe Bay, Alaska
Oil reserves:10 bill. Barrels
Discovery in a remote & frigid location of Alaska
Solution: Build a 48-inch pipeline across 789 mile stretch from Northern Alaska to southern port

11. Trans-Alaskan Pipeline
Construction:
Started in 1974, continued until 1977
Employed 25,000 workers
Upon completion, employment reduced to a skeleton maintenance crew
Types of workers:
Skilled (engineers)
Unskilled (construction) D0 D1 S0
Earnings ($)
Employment w1 w0 E1 E0
Alaskan residents  Skilled workers (Scarce), Unskilled workers (Abundant)
Question: Construction of the pipeline  Impact on the labor market for skilled workers

12. Trans-Alaskan PipelineD0 D1 S0
Earnings ($)
Employment w1 w0 E1 E0
Neo-classical theory predicts…
An increase in wages
An increase in employment
Temporary effects since demand is expected to return to initial level in the LR

13. Wages and Employment in the Alaskan Labor Market, 1968-1984
Why did we observe these outcomes?
Upward sloping Ls (region and outside)
Implicit willingness to work in the market
Homework: How would the implications of the construction of the pipeline differ for the skilled and unskilled workers?

14. 1-3 Why Do We Need a Theory?
In the previous section: Use theory to develop a framework and analyze the impact of an event (i.e. construction of a pipeline)
Theory  Model  Predictions of Outcomes Verification  Calibration
Explain and understand how labor markets work.
Focus on the essential variables while leaving out other, less crucial, factors: Simple vs Complex  Other factors

15. Positive vs. Normative Economics
Positive economics
Addresses the facts
Focus on “what is”
Questions answered with the tools of economists
Ex: What is the impact of pipeline (if built) on wages?
Ex2: What is the impact of minimum wages?
Normative economics
Addresses values
Focus on “what should be”
Requires judgments
Ex: Should we build the pipeline? Should there be min wage?

16. Positive vs. Normative Economics
Real life problems: Interaction of positive and normative
Debate: Immigration of 10 million workers
Reduce the income of native born workers by $ 25 billion
Increase economic surplus of firms by $40 billion
Positive: What is the impact of admitting immigrant workers?
$15 billion additional economic surplus  net gain
Normative: Should we admit 10 million immigrant workers?
Admitting immigrant workers results in changes in the distribution of income among subgroups:
Native Born (Lose), Immigrants & Firms (Gain)
Answer: Whether we should admit them or not depends on the national interest: Who matters more? (Social Preferences)

17. Positive vs. Normative Economics
Government’s role
Use public policy to move away from normative towards positive questions
Taxation: Redistribution of income/surplus
Possible to make everyone better off!  Pareto improvement

18. 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.

19. Appendix: Regression Analysis
Log Wage
Slope = b
Change in log wage
Years of Schooling
Change in schooling a

20. Scatter Diagram: Wages and Schooling by Occupation, 2001

21. Choosing Among Lines Summarizing Trends in the Data

22. The Best-Fit Regression Line

23. 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