Chapter 1: Introduction to Labour Market Economics
Keywords
Aggregate or time series data: data describing macroeconomic variable such as unemployment or
inflation; there is a one-to-one correspondence between the time period and a data value, as the value
vary over the dimension of time
Coefficient: a parameter of a regression model; a constant scalar value that, multiplied by the economic
variable(s), gives the effect of explanatory variable on the variable being explained
Cross-section micro data: data describing attributes of microeconomic units such as firms and workers;
there is a one-to-one correspondence between the unit of observation and a data value; the values vary
over the dimension of economic actors at the same time period
Dualism: an analytical perspective that is an alternative to the neoclassical supply and demand
approach; the labour market is segmented into two parts: the core and the periphery
Employment: the market quantity of labour that is hired and inputted into the production process
Equilibrium: the state of an economic model; such as the supply and demand framework, in which there
are no forces action to change the values of the economic variables
Institutionalism: an analytical perspective that is alternative to the neoclassical supply and demand
approach; plays down the importance of the economic forces of supply and demand, and plays up the
role of institutions, conventions, customs, social mores, and political forces
Involuntary unemployment: unemployment occurs when a candidate is able and willing to work but
currently without work
Labour Demand: the relationship between the amount of labour that firms are willing to hire over a
given time interval and the wages level offered by workers
Labour market outcome: the phenomena generated from the labour market as a result of the forces of
labour supply and labour demand; primary examples are wages, employment levels, and unemployment
levels
Labour shortage: is an economic condition in which there are insufficient qualified candidates to fill
market place
Labour supply: the relationship between the amount of work that workers are willing to provide over a
given time interval and the wage level offered by the firm
Market clearing Model: the supply and demand model equilibrium output and prices determination;
the market is said to clear when the equilibrium price is reached
Multiple regressions: a regression model having more than one explanatory variable
Neoclassical economics: the analytical approach used in mainstream economics: Self-interested
economic actors produce, consume, and exchange goods and services in markets
Neoclassical supply and demand model: the analytical framework used for most of the field of labour
markets; based on the self-interested choices of firms and workers who exchange services in labour
market
Ordinary lest squares: a statistical or econometric technique employed to estimate the values of
parameters of regression models having a linear form; applicable under certain conditions
Parameter: an element of a regression model that links the economic variables; typically it takes the
form of a slope coefficient or the intercept term
R-squared: the proportion of the fluctuations in the dependent variable of a regression model that can
explain by fluctuations in the independent variable
Regression analysis: a tool for empirical analysis in which fluctuation in the dependent variable are
explained as a function of fluctuation in one or more independent variable; the regression model is a
mathematical equation describing the relationship between a dependent variable and one or more
independent variables; the primary elements are parameters and variables
Sampling errors: the error in the estimation process that stem from drawing data from a sample not
totally representative of the population
Standard error: a statistical measure of the dispersion of an economic variable or an estimator for a
parameter
Statistical significance: an indication that the true value of a parameter of the regression model is
different from zero
T-ratio: the ratio of the estimated parameter to the estimate standard of error of the estimated
parameter
Unemployment: human resources that are not employed on the job market; such workers are actively
searching for work and are willing to work at the going market wage
Wages/Wage rate: the market price for a unit of labour
Main actors/ participants in labour market:
 Individuals: make decisions concerning how they will earn a living
 Firms: make decisions about how much and what type of labour they will hire
 Governments: establishes the environment in which employees and employers interact; effect
on labour market
Positive labour market behaviour: obtaining a job/ wage increases/ generous pension
Negative labour market behaviour: Unemployed/ Permanent displacement/ discrimination
Labour supply Dimensions
 Increase/decrease variables of population
 Labour force participation and for those that participate
 Education, training, and health
 Work effect and intensity
Labour demand Dimensions
 Firm vary their demand for labour in response to changes in the wage rates and other elements
of labour cost
Dimensions of labour supply and demand interactions determine key market outcomes such as:
 Wages
 Employment and unemployment
 Labour shortage
These outcomes are also influenced by unions, collective bargaining and legislative interventions
Various Wage structure differentials
 Occupation
 Industry
 Region
 Personal characteristics
Unemployment is analyzed at both micro/macroeconomic levels. At the micro level, the emphasis is on
theories of job search, implicit contracts and efficiency wages, and the impact of unemployment
insurance. At macro level, the relationship between wage changes, price inflation, productivity, and
unemployment is emphasized.
Supply and demand Model
Neoclassical supply and demand model: the analytical framework used for most of the field of labour
markets; based on the self-interested choices of firms and workers who exchange services in labour
market
2 key elements:
1. Behavioural assumptions and how buyers and sellers respond to prices and other factors
2. Assumptions about how buyers and sellers interact, and how the market determines the level
and terms of exchange