CHAPTER 1
INTRODUCTION TO LABOR ECONOMICS
1st Semester, S.Y 2014-2015
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Chapter Outline
A.
B.
C.
D.
E.
F.
G.
H.
I.
What is Labor Economics?
Labor as an Economic Resource
Circular Flow Model Revisited
Economics Revisited
Microeconomics vs. Macroeconomics
Labor Economics Questions
Economic Models
Normative and Positive Economics
Labor Market: Overview and Perspectives
 Characteristics of Labor Market
 Functions of the Labor Market
 Objectives of Labor Market
J. Three Actors of Labor Market: Roles and Functions
 Workers (Employees)
 Firms (Employers)
 Government
K. Graphical Analysis of Labor Market
L. Why Study Labor Economics?
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
What is Labor Economics?
Labor economics economic analysis of how
workers, firms and the government interact in
shaping the outcomes in the labor market,
primarily employment and earnings.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
What is Labor Economics?
LABOR + ECONOMICS
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Labor
 Labor is the work time and work effort that
people devote to producing goods and
services.
 This includes the physical and mental efforts
of all the people who work on farms and
construction sites and in factories, shops,
offices, etc.
 In macro level, this refers to the employed
individuals in the labor force.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Labor as an Economic Resource
 Labor is an economic resource which is
supplied by households (workers) and
demanded by firms (employers).
 For example, a person working in a factory is
considered to be the labor resource. The
factory worker sells labor and firm buys labor.
 Labor is paid in wages (resource payment).
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Circular Flow Model
Factor Markets
Supply of
Resources
S
Demand for
Resources
D
Households
Firms
S
Demand for Goods
and Services
D
Supply of Goods
and Services
Product Markets
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
What is Economics?
 The study of making choices
 The study of scarcity
 The study of resource allocation
 The study of production and consumption
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Microeconomics vs. Macroeconomics
Microeconomics is concerned with the behavior
of individual entities such as markets, firms,
and households.
 This answers how labor markets work and how workers
(household), employers (firms) and government make
decisions
Macroeconomics looks into the behavior of the
performance of the economy as a whole.
 This studies macroeconomic variables such as
unemployment that may affect the overall performance
of the economy.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Let’s Check Your Understanding!
Determine whether each of the following cases on labor
economics is a concern of microeconomics or macroeconomics.
1. The unemployment rate of the country raised by 3%.
2. A worker’s decision to choose between two offered jobs
- job A or job B.
3. The determinants why do some people earn more than
others
4. Because of reduced demand, a cellphone company
temporarily closes one of its factories and lays off
workers.
5. Government extends tax subsidies to encourage firms
to increase their employment.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
What is Labor Economics?
Labor economics studies how labor markets
work. This includes the firm’s demand for the
high-skilled workers, wage determination,
allocation of a worker’s time to the labor market,
the human capital investment, the labor mobility,
the labor market discrimination, determination of
income distribution, labor force participation, the
economic impacts of labor unions and
determinants of unemployment.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Labor Economics Questions
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How employers & employees interact in the labor
market?
Are high skilled people better worked at a particular job?
What affects the unemployment rate, and how?
What affects the labor participation rates, and how?
What are the consequences on human capital
accumulation?
What are the consequences of marital patterns in the
labor market?
Do wage and tax subsidies encourage firms to increase
their employment?
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Labor Economics Questions
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Are government subsidies of investment in human capital
an effective way to improve the economic well-being of
disadvantaged workers?
What is the impact of occupational safety and health
regulation on employment and earnings?
What is the impact of affirmative action on the earnings
of women and minorities and on the number of women
and minorities that firms hire?
What is the economic impact of unions on both their
membership and the rest of the economy?
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Economic Models in Labor Market
Analysis
 To explain and understand how labor
markets work, the use of economic models
is a must.
 An economic model is a simplified
description of reality used to understand
and predict the relationship between
variables.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Positive vs. Normative Economics
Positive economics
 Addresses the facts.
 Focuses on “what is”.
 Questions answered with the tools of
economists.
Normative economics
 Addresses values.
 Focuses on “what should be”.
 Requires judgments.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Let’s Check Your Understanding!
Determine whether each of the following statements is
normative or positive.
1. The labor force participation rate in the Philippines is
64.1% during January 2013.
2. More job fairs should be done to allow people looking for
work to meet with many potential employers.
3. Earnings increase with education because the latter raises
a worker's productivity.
4. As the wage rate rises, the quantity supplied of labor rises,
ceteris paribus.
5. Several politicians have argued that the minimum wage
should be raised in order to ensure that unskilled workers
can make a decent living.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Labor Market
The labor market functions through the interaction of
workers and employers.
The labor market is like other markets in that a
commodity (labor services) is bought and sold. It differs
from most product markets in several important ways.
The labor market is an example of a factor market.
Supply of labor represents those people seeking
employment (employees)
Demand for labor represents those people employing
workers (employers).
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Unique Characteristics of Labor Market
1. Labor services are rented, not sold.
2. Labor productivity is affected by pay and working
conditions.
3. The suppliers of labor care about the way in
which the labor is used.
4. Fairness, equity or humanness is important,
since worker is not a product.
5. Contractual relationship between employers and
workers.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Unique Characteristics of Labor Market
6. Labor is heterogeneous (skills, character etc.
vary) unlike goods which cannot be
standardized.
7. There are a variety of labor markets
(occupations, locations etc.).
8. Individual skills level may improve overtime due
to training and experience.
9. Prices in the labor markets are determined by a
variety of other things (inflation, medical aid,
standard of living, etc.).
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Two Main Functions of the Labor Market
1. Allocate human resources among sectors,
businesses, locations and occupations.
2. Distribute incomes as rewards to workers.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Objectives of the Labor Market
1. Efficiency
 to achieve maximum output, minimum amount of waste,
labor productivity and specialization (division of labor)
2. Equity
 implying equal opportunity for all to access to jobs,
training, treatment at work and payment.
3. Growth
 higher productivity and incomes, full employment
4. Social justice
 minimizing any negative effects labor markets may have
on workers welfare.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Basics of the Labor Market
Participants in the labor market have assigned
motives:
 Workers look for the best job
 Firms aim and look for profits
 Government uses regulation to achieve goals
of public policy
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Three Actors in the Labor Market
 Workers (Employees)
 Firms (Employers)
 Government
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
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Workers
 A worker is an actor of the labor market who
supplies labor service for payoff.
 The most important actor. Without workers, there
is no “labor”.
 Workers want to supply more time and effort for
higher payoffs, causing an upward sloping labor
supply curve
 Economists model the worker as an individual
who wants to maximize well-being subject to the
constraints of time and income.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Questions answered by Workers
 How much education to attain?
 Whether to work or not?
 To work for whom (which occupation and industry)
and for how much (number of hours)?
 How much effort to allocate into a work?
 Which skills and trainings (human capital) to acquire
on the job?
 When to quit, seek new employment or retire?
 Whether to join a labor union?
 Who to choose for a spouse?
 How much to invest in own children’s welfare and
education?
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Firms (Employers)
 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
 Economists model firms as either trying to
maximize profit subject to a production function or
minimize costs subject to capital and labor.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Questions answered by Firms
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What type of workers to hire?
How many workers to hire?
What is the duration of work week?
How much is the wage rate?
How much capital to augment the use of labor?
When to layoff or close plant?
How much training to offer the workers?
How to provide safe working conditions?
How to ensure workers maximize their effort and
do not shirk their responsibility?
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Government
 Government regulates the “rules of the game”
in the labor market.
 Imposes taxes and grants subsidies
 Provides ground rules that guide exchanges
made in labor markets
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Roles of the Government in the Labor
Market
 Impose taxes on workers’ earning to meet other
public needs.
 Subsidize training in profession that the economy
or society has a shortage for either
 currently or future.
 Impose hiring rules based on ethnic makeup of
labor force in the firm or economy.
 Alter immigration rules to augment immediate labor
market needs.
 Legislate laws to achieve desire marriage market
welfare or of specific populace, example children
from divorced families.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Let’s Check Your Understanding!
Determine whether each of the following labor market roles
belongs to the workers, firms or government. Deliver safe and
better working conditions.
1. Join labor unions.
2. Provide ground rules that guide exchanges made
in labor markets.
3. Decide who to hire, promote or fire.
4. Look for the best job as much as possible.
5. Deliver safe and better working conditions
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Graphical Analysis of the Labor Market
 Labor supply curve is upward sloping.
 Labor demand curve is downward sloping.
 Equilibrium is where the supply and demand
curves intersect.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Graphical Analysis of the Labor Market
Hourly
Wage

LS


100
Labor supply curve is
upward sloping
Labor demand curve is
downward sloping.
Equilibrium is where the
supply and demand
curves intersect.
LD
2,000
Number of
Workers
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Why We Study Labor Economics?
 Most of us will spend 30-40 years of our life working for an income
so labor markets help determine our
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Wealth
Goods that we can afford
Who we associate with?
Vacations
Which schools we will attend?
Maybe, even who we will marry?
 Human resources allocate substantial time and energy to labor
markets
 A major decision that household members make is the decision to
work (career decisions, the amount of hours or effort, human capital
acquisition, location)
 One of the most important decisions that businesses make are
employment decisions.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS
Why We Study Labor Economics?
 Learning labor economics can help us have a better
understanding of the real labor economics problems and
predict the labor market outcomes. It also helps us
understand and address many social and economic
problems facing modern societies.
 More important, public policy issues also need
sophisticated analyses of the labor market. The policy
issues include but not limited to the following.
 The change of labor force participation over time in many industrialized
countries
 The impact of immigration on the wage and employment opportunities
of local/native workers
 The rising wage inequality
 The impact of union on the welfare of both members and non-members
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
ECON 125 – LABOR ECONOMICS