Labor Economics
Xiaomin Gai
Textbooks and References

George J. Borjas, Labor Economics, 5th edition.

Handbook of Labor Economics, various
volumes.
Course Outline
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Part I: Introduction
Part II: Labor Demand
Part III: Labor Supply
Part IV: Labor Market Equilibrium
Part V: Special Topics
–Compensating Wage Differentials
–Human capital
–The wage structure
–Labor mobility
–Labor market discrimination
–Labor unions
–Incentive pay
–Unemployment
Chapter 1 Introduction
Science is built up with facts, as a house is with
stones. But a collection of facts is no more a
science than a heap of stones is a house.
—Jules Henri Poincare
1.1 Why We Study Labor Economics?

Most of us will allocate a substantial fraction of
time to the labor market.
–Our wealth
–Types of goods that we can afford to consume
–School choices
–Fertility
–Migration
……
1.1 Why We Study Labor Economics?

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 and China
–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
1.1 Why We Study Labor Economics?
–Minimum wage versus unemployment rate of
unskilled workers
–Should governments subsidize the behaviors of
human capital investment?
–Does unemployment insurance lengthen the
duration of unemployment?
–Does technical change increase unemployment
rate?
–Why did labor compensation share (in GDP)
decrease over the past decades in China?
……
1.2 What does Labor Economics Study?

Labor economics studies how labor
markets work.
Such as labor force participation, the
firm’s demand for the high-skill workers,
wage determination, the human capital
investment, the labor mobility, the labor
market discrimination, trade Unions and
unemployment.
1.2 What does Labor Economics Study?
The actors in the labor market:
Workers (utility maximum), firms (profit
maximum) and government (influence
the supply and demand or change the
rules of the game)
 Learning labor economics can help you
have a better understanding of the real
labor economics problems and predict
the labor market outcomes.
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1.3 Theory and facts
The theory helps us understand how the
facts are generated, and where the facts
can help shape our thinking about the
way labor markets work.
 Model: simplify; The realism of
assumption to the extent to which it
helps us understand and predict how
labor markets work.
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Summary

Labor economics studies how labor markets
work. Important topics addressed by labor
economics include the determination of the
income distribution, the economic impact of
unions, the allocation of a worker’s time to the
labor market, the hiring and firing decisions of
firms, labor market discrimination, the
determinants of unemployment, and the
worker’s decision to invest in human capital.
Summary

Models in labor economics typically
contain three actors: workers, firms, and
the government. It is typically assumed
that workers maximize their well-being
and that firms maximize profits.
Governments influence the decisions of
workers and firms by imposing taxes,
granting subsidies, and regulating the
“rules of the game” in the labor market.
Summary

A good theory of the labor market should have
realistic assumptions, should not be clumsy or
overly complex, and should provide empirical
implications that can be tested with real-world
data.
 The tools of economics are helpful for
answering positive questions. The information
thus generated may help in making policy
decisions. The answer to a normative question,
however, typically requires that we impose a
value judgment on the desirability of particular
economic outcomes.