Section 3 Operation of the labour market

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UNIVERSITY OF BATH
Department of Economics and International Development
ECOI0017 LABOUR ECONOMICS
Semester 1 Session 2001/02
Credits: 6
Unit Code and Title: ECOI0017 - Labour Economics
Prerequistes: ECOL10006 Introductory Microeconomics and ECOL10007 Introductory
Macroeconomics
Lecturer: John Cullis (Room 3E3.7,ext 5842:email: J.G.Cullis@bath.ac.uk)
Organisation:
Lectures: One two-hour lecture per week on Tuesdays 11.15 am – 1.15 pm in
4 W 4.11. There will be 22 contact hours 19 of lectures and 3 classes in the second half of
the course.
Attendance at lectures and classes will be monitored as they are viewed as an
integral part of the course not optional extras.
Assessment:
The intermediate output of this course will be a mark for ECOI 10017. It will be made up as
follows:
Coursework question worth 20% of the final mark
“The use of subsidies produces economically unattractive outcomes in markets.”
Critically evaluate this assertion with respect to the use wage subsidies in general and
the case for subsidised pre-school day care and education in particular. How does the
economic features of the child care market affect your arguments, if at all?
You will get help from:
Shone R (1981) Applications in Intermediate Microeconomics Oxford: Martin Robertson
Chapter A8
Dex S and Rowthorn R. (1997) Labour Force Participation: the Case for a Ministry of the
Family, University of Cambridge Working Paper 74 December (A photocopy of this article
will be distributed.)
Magenheim E B (1995) Information, Prices and Competition in the Child Care Market:
What Role should Government Play? Chapter 10 in Pogodzinski J M (ed) Readings in Public
Policy Oxford: Basil Blackwell
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Cordes J J, Kirby S N and Buddin R (1995) Thinking about School Vouchers: Theory,
Evidence and Rhetoric Chaper 9 in Pogodzinski J M (ed) Readings in Public Policy Oxford:
Basil Blackwell
N.B.
(i) Please acknowledge all direct quotations. Plagiarised work will attract an
automatic zero, plus some bad feeling.
(ii) Word limit 2,000 words to be handed in by Friday 7th DEC 2001.
If for any reason you feel you are going to miss this deadline you must contact
the Director of Studies Dr Cathy Winnett.
(iii)The coursework is only worth 20% of the final mark therefore do not spend too
much time on it.
Unseen exam in January 2001 examination period lasting 2 hours and worth 80% of the
final mark. The last two examination papers set are reproduced at the end of this reading
list.
UNIVERSITY OF BATH REGULATION 3.3 (p.2)
Students shall attend regularly and Senate may at any time preclude any student from
continuing studies in the University if in the opinion of the Senate that student’s attendance
shall not have been satisfactory.
AIMS and OBJECTIVES
This course is a sustained application and extention of predominantly intermediate
microeconomic theory to the labour market. Students should gain a critical appreciation of
the impact of market forces, institutions and regulations within labour markets. The general
desirability of government intervention of various forms into this part of the economy is a key
question students should be able to tackle by the end of the course.
OVERVIEW
This sub-discipline in economics is primarily concerned with the application of
microeconomic theory to the most important factor of production - labour (human capital). A
simple time allocation model suggests that individuals divide their time between leisure, nonmarket production and market production. Leisure and non-market production can be
encompassed in the notion of the production of fundamental commodities (Becker).
Fundamental commodities are "produced" by individuals by combining their own time inputs
with other market and/or state produced inputs. As Wiseman points out human capital
exhibits a "duality" in that it is not only a created factor of production but also the end
purpose of economic activity. Furthermore the sentient (feeling) elements of capital unlike
the physical counterpart have self-interest and moral feelings and therefore may seek
changes in the constraints they face and the property rights human capital enjoy e.g. union
bargaining.
Broadly the course will follow a life-cycle approach.
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Section 1 covers the time allocation, economics of family formation, family functioning and
the number and ability of children in the family. This is the so-called ‘new’ household
economics. The material covered will partly be used to illustrate the nature of neo-classical
microeconomic economic reasoning.
Section 2 will deal with essentially orthodox labour supply and labour demand analysis. The
effects of taxation on labour supply and some criticisms of the marginal revenue productivity
approach to labour demand will be included.
Section 3 of the course will examine human resources, the functioning of the labour market
and their impact on the production of market goods and services in the economy. The
distribution of income and other rewards in the labour market will be considered.
Throughout this section of the course we will try to contrast market forces, labour market
institutions and regulation: what can the labour market achieve unaided, and whether
government regulation and/or intervention is desirable in circumstances likely to prevail in
the labour market (i.e. given the labour market institutions). The policy issues to be
discussed include training (and education) policies, trade unions, job security and
unemployment.
CLASSES will be built around the following questions. Disscussion arrangements will
be made when the numbers on this option becomes clear.
Class 1
(1) The Baux-it Corporation is the major tin producer in a remote town. Blueruth. in south
west England. The corporation is the only effective buyer of local labour but has to sell tin
at the current world price of £2 per ton. The marginal product of labour is given by
MPL = 100 - 0.05L
whilst the supply of labour is given by
SL = 20 + 0.2L
Use this information to:
(i)
Determine the optimal wage and employment decisions as far as Baux-it Corporation
is concerned. Illustrate your answer with a diagram.
(ii)
What do you understand by the term economic exploitation?
Are workers in Blueruth being exploited and, if so' how would you measure the
extent of exploitation?
(2) How would you model migration as an investment in human capital? Ho do you think
age, education, unemployment, distance and family circumstances would affect the decision
to migrate?
Class 2
(i)
How would you interpret the following labour supply function estimated by linear
regression?
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(ii) The following earnings equation (estimated using data on individuals) may be used to
test some of the main propositions of the human capital theory:
In W=C+ 1S + 2X + 3X2 + 4OJT + 5A L + 6UNI
+ 1FEM + 2NW + 3MAR + 4IND + 5LU + 
where:
W=
Individual earnings
S=
Years of schooling (prior entering labour market)
X=
Years of work tenure
OJT=
Received on-the-job training
AL=
Certificate of gained A-levels
UNI=
Certificate of a university degree
FEM=
Female
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NW=
Non-white
MAR=
Married
IND=
Industry where working
LU=
Local unemployment rate
C=
Constant
=
Error term
(a) Discuss the specification of the model and predict the significance and sign (if
significant) of the coefficients 1, 2, 3, 4, 5, 6 if the predictions of the human capital
theory are correct.
(b) Can any of the included variables be used to test an alternative hypothesis of the
effects of education on productivity?
Class 3
(1) Two separate earnings equations have been estimated using individual data for men
and women with the following results:
ln(Wm) = 2.0 + O.O5S + 0.25X -O.OO5X2 - 0.15NW - 0.05CH + 0.2 MAR + e
ln(Wf) = 1.85 + 0.045S + 0.2X - 0.005X2 - 0.1NW - 0.2CH + 0.4MAR + e
where Wm stands for male earnings and Wf stands for female earnings. The average
values of data used are given in the table below:
Variable Description
Men:
Women:
sample averages
W = Earnings
74
S = Years of schooling
10
X = Years of work experience 12
NW = Non-white
5
CH = Number of children
2
MAR = Married
0.75
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10
5
1
0.5
(i) Using the estimated earnings equations evaluate and illustrate the degree of
discrimination between men and women.
(ii) Discuss the possible difficulties connected with the method of evaluation of discrimination
used.
(2) Is there a case for government intervention in regulating work place safety? If not, why
not? If so, why so and what form should it take?
Helpful analysis can be found in:
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Gramlich E (1981) Benefit Cost Analysis of Government Programs Englewood Cliffs :
Prentice – Hall Chapter 11
JJ Chapter 8
You will get help from many of the course texts listed below.
TOPICS AND READING
Reading
There are a number of texts covering the material of the course. Below references to
several main texts are made along with other book chapters and article material. The texts
mentioned are:
Bosworth D , Dawkins P and Stromback T (1996) The Economics of the Labour Market
Harlow: Addison Wesley [B D and S below} this is a comprehensive text and worth
purchasing.
Bryant W K (1990) The Economic Organisation of the Household
Cambridge: CUP (K B below)
Booth A L (1995) The Economics of the Trade Union Cambridge: CUP (AB below)
Elliot R F (1991) Labour Economics: A Comparative Text
Maidenhead: McGraw-Hill (E below)
Jacobsen J P (1998) The Economics of Gender, Second Edition, Oxford: Basil Blackwell (JJ
below).
Kooreman P and Wunderink S (1996) The Economics of Household Behaviour Basingstoke:
Macmillan (K and W below)
Polachek S W and Siebert W S (1993) The Economics of Earnings Cambridge: CUP (P and
S below)
Sapsford D and Tzannatos Z (1993) The Economics of the Labour Market
Basingstoke: Macmillan (S and T below)
Smith S W (1994) Labour Economics London: Routledge (S below)
Thomas J J (1992) Informal Economic Activity Hemel Hempstead: Harvester Wheatsheaf (T
below)
Alternative texts in referenced below contain similar material and can often be considered as
alternatives. Earlier well known texts are:
Addison J T & Siebert W S (1979) The Market for Labor: an Analytical Treatment
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Santa Monica: Goodyear (A and S below)
Joll C, McKenna C, McNabb R and Shorey G (1983) Developments in Labour Market
Analysis
London: Allen and Unwin (JMMS below)
Carline D Pissarides C A Siebert W S & Sloane P J (1985) Labour Economics (Surveys in
Economics) London: Longman
Creedy J & Thomas B (eds.) (1982) The Economics of Labour London: Butterworth
Drago R & Perlman R (eds.) (1989) Microeconomic Issues in Labour Economics: New
Approaches
London: Harvester Wheatsheaf
Ehrenberg R G & Smith R S (1988) Modern Labor Economics - Theory and Public Policy
(3rd Edition) London: Scott Foresman
Fallon P & Verry D (1988) The Economics of Labour Markets Deddington: Philip Allan (F
and V below)
Fleisher B M & Kniesner T J (1984) Labor Economics: Theory, Evidence and Policy
Englewood Cliffs: Prentice-Hall
Freeman R B & Medoff J L (1984) What Do Unions Do? New York: Basic Books
Hamermesh D S & Rees A (1988) The Economics of Work and Pay (4th ed.) New York:
Harper & Row
Hirsh B T & Addison J T (1986) The Economic Analysis of Unions - New Approaches and
Evidence
Winchester, Mass., USA: Allen & Unwin
Killingsworth M R (1983) Labor Supply Cambridge: Cambridge University Press
Layard R Nickell S & Jackman R (1991) Unemployment - Macroeconomic Performance and
the Labour Market Oxford: Oxford University Press (L, N and J below)
Section 1
Fundamental commodities and the economic family
(i)
Time allocation and "fundamental commodities".
K and W pp 25-31 and chapter 6
Chadeau A (1992) What is Households' Non-Market Production Worth?
OECD Economic Studies No 18 Spring pp 86-103
T chapters 1, 2 & 3 pp 1 - 50
F and V chapter 1 pp 1-27
JMSS chapter 2 pp 30-48
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A and S chapter 3 pp 79-85
(ii)
The economics of the family.
J J chapter 3 pp 73 - 113
KB chapters 7 and 8
K and W chapters 7 and 8
Gravelle H and Rees R (1992) Microeconomics 2nd edition Harlow: Longman
chapter 5 section D pp157-65
Willis R J (1987) What Have We Learned about the Economics of the
Family? American Economic Review Vol 77 No 2 pp 68-81
Ermisch J (1993) Familia Oeconomica A Survey of the Economics of the
Family Scottish Journal of Political Economy Vol 40 No 4 November pp 35374
Section 2
(iii)
The supply and demand for labour
Labour supply.
- traditional approach to individual decision making in the labour market.
B D and S chapters 2, 3, 4 and 5
S and T chapters 2 and 3
E chapters 2 and 3
A and S chapter 3
F and V chapters 1 and 2
JMMS chapters 1 and 2
J J chapters 4 and 5 pp 113-220
S chapter 1 pp 5 – 33
K and W chapter 5
Killingsworth M R (1983) Labour Supply Cambridge : CUP
Blundell R (1992) Labour supply and taxation: A survey Fiscal Studies vol 13
no 3 pp 15 - 40
Connolly S and Munro A (1999) Economics of the Public Sector
London:Prentice – Hall Chapter 13 Taxes on Labour
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Altman M (2001) A behavioural model of labour supply: casting some light
into the black box of income-leisure choice Journal of Socio-Economics vol
33 pp 199-219
(iv)
Labour demand.
- traditional approach to firm decision making in the labour market.
B D and S chapters 6, 7, 8, 9 and 12
S and T chapters 5 and 6
E chapters 8 and 9
A and S chapter 2
F and V chapters 3 and 4
P and S chapter 5 pp 96-136
S chapter 2 pp 33 – 60
Hamermesh D S (1986) The demand for labour in the long run pp 429-72
In Ashenfelter O and Layard R (eds) Handbook of Labour Economics
Amsterdam: North-Holland
Section 3
(v)
Operation of the labour market
Training and investment in human capital.
- individual decisions of training and education: ‘screening’ v. traditional approach
- internal labour markets, on-the-job training, job tenure, retirement decisions
- training and education policy
B D and S chapters 15, 16 and 17
K and W chapter 12
Blaug M (1980) An Introduction to the Economics of Education Harmondsworth:
Penguin
chapters 2, 6 and 7
JMMS part of chapter 4 pp 89-98
Connolly S and Munro A (1999) Economics of the Public Sector London:Prentice –
Hall
Chapter 20 Education and Training
Molho I (1997) The Economics of Information Oxford: Blackwell chapters 5 and 6
Hirshleifer J and Riley J G (1992) The Analytics of Uncertainty and Information
Cambridge:
CUP chapter 11 pp 405-430
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AB chapters 3,4 and 5
S and T chapter 4
E chapter 6
A and S chapter 4 and 5.5-5.6
F and V chapter 5.1-5.4
P and S chapters 2, 3 and 4 pp 39 - 95
S chapter 4 pp 74 - 95
(vi)
Income distribution.
- income inequality
- wage differentials
- discrimination and effects of anti-discriminatory legislation.
B D and S chapters 13, 24 and 26
S and T chapters 7, 8 and 9
E chapters 11, 12 and 13
A and S chapters 6, 7, 8, 9 and 10
JMMS chapters 6 and 9
J J part III pp 221 - 373 (chapters 6 to 9)
P and S chapters 6 and 7 pp 137 - 209
S chapter 5 pp 96 – 119
K and W chapter 12
(vii)
Determination of pay: market clearing vs. non-market clearing approaches.
- market clearing in the labour market
- efficiency wage theories
- trade union wage setting
- implications for the level of employment
B D and S chapters 18, 22 and 25
S and T chapters 10 and 11
E chapters 7 and 14
F and V chapters 3.3, 6 and 7.4
L, N and J chapters 2 and 3
JMMS chapter 5
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P and S chapters 8, 9 and 10 pp 210 - 329
S chapters 6 and 7 pp 118 - 164
Oswald A J (1985) The Economic Theory of Trade Unions: An Introductory Survey
Scandinavian Journal of Economics Vol 87 No 2 pp 160-93
Estrin S and Laidler D (1995) Introduction to Microeconomics Hemel Hempstead:
Harvester-Wheatsheaf Chapter 25
(viii)
Futher issues on unemployment.
- job search and duration of unemployment
- unemployment benefits
- employment security
- structure of unemployment, mismatch and labour mobility
- policies for combating unemployment
B D and S chapter 28
S and T chapters 12 and 14
E chapters 10 and 15
F and V chapters 7.1-7.2
L, N and J chapters 5 and 6
JMMS chapters 4 and 10
S chapters 8 and 9 pp 165 – 232
ASSESSMENT: 80% of your final mark will come from an examination in January 2002
The most recent two Exam Papers set were:
(Time allowed 2 hours)
1.
Answer any THREE of the following six sub-questions (each sub-question carries equal
marks):
(i) How and in what ways do fundamental commodities extend conventional
consumer theory?
(ii) Using indifference curve analysis explain the 'Rotten Kid' theorem. What is its
significance?
(iii)
Assuming a positive amount of unearned income, use indifference curve
analysis to show labour force non-participation. Illustrate two changes that
would imply participation.
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(iv)
Indicate how migration can be analysed as an investment in human capital and
briefly outline its main predictions.
(v) Distinguish between demand and supply side gender discrimination. How
might their empirical significance be separated?
(vi) What is the 'Solow Condition' and what is its importance?
2.
"Microeconomics sheds light on family formation and functioning but the power of that
light is dimmed by the weaknesses inherent in microeconomics itself." Elucidate and
critically evaluate this assertion.
3.
Can economic theory predict a priori the impact of tax changes on the individual's
supply of work hours? Distinguish between the disincentive effects; of taxation and the
welfare costs of taxation. Which do you think are more important and why?
4.
Using appropriate diagrams indicate how the various labour demand curves are
derived. Explain whether firms with higher labour hiring and training costs will show
greater employment stability in the face of short run demand fluctuations.
5 . "Whether education is viewed as an investment in human capital or a screening device
does not matter to you as a student but does matter for public policy." Explain the two
views referred to in the statement and examine whether the statement is correct.
6.
"The framework used to analyse the behaviour of single economic agents, be they
consumers or firms, can be extended to more complex organisations such as trade
unions." How has this been done and what are the main predictions of this
‘extension'?
7.
To what extent does search unemployment augment or displace other accounts of
unemployment? How are inflation and unemployment benefits predicted to affect job
search?
JGC
ECOI 00 1 7/END
Semester 1 2000/1
ECOL0017
LABOUR ECONOMICS
Time allowed: Two Hours
Answer question 1 and any 2 others. All questions carry equal marks.
A calculator is not required or this examination.
1. Answer any THREE of the following six sub-questions (each sub-question carries equal
marks):
(i) How do individuals allocate time and how might the extent of non-market or
household production be measured?
(ii) How would an increase in the wage rate would affect the number of births?
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(iii) In the face of short run demand fluctuations it is claimed that firms with higher
training costs show greater employment stability. Explain why this is, or is not, the case.
(iv) The general criticisms levelled at human capital theory do not strike at the heart of
what Blaug (1976) called “the hard core of the human capital research programme”.
Indicate the criticisms and comment on the judgement.
(v) “The weakness of agency theory is that whilst it spreads some light on institutional
practices it does not represent a general theory of wage determination.” Smith 1994).
Explain and critically evaluate this assertion.
(vi) “The unemployed are another group where, surprising as it may appear, it is
relatively easy to place a value on leisure.” (Pryke, 1995). How is this done and what is
the nature of the debate of which this statement forms a part?
2. “The new home economics is an application of modern economic ideas to the institution
of marriage. Some people may reject the notion that economics can throw light on an area
which involves such intimate personal relationships, but this would be a mistake.” What are
the modern economic ideas and how valid is the assertion?
3. “It can be shown using fairly elementary economic analysis that the willingness of the
labour force to work is influenced by the extent of non-work income available and the nature
of the income tax regime.” (Smith, 1994) What is that “fairly elementary economic analysis”
and what policy implications would you draw from it?
4. In his signalling model Spence (1974) suggests that firms faced with a hiring decision
may pay more for better educated workers even if education has no effect on productivity.
Why would they do this? Comment on the view that the underlying economics of this
payment process is ‘unattractive’.
5. What economic models have been employed to analyse discrimination in the labour
market and how successful have they been? How does the following statement inform
thinking about measuring the extent of gender discrimination: “… if discrimination against
women were eliminated, one should not expect that women would be paid equally or would
be employed on the same basis as men. This would only be the case if women and men
were the same.” (Sapsford and Tzannatos, 1993).
6. EITHER
(a) Considerable difficulties arise in the specification of what trade unions are maximising or
minimising. What are these difficulties and why do they matter? In what ways, if any,
has the use of the Stone-Geary utility function helped resolve the specification
problem?
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OR
(b) “Economists distinguish between frictional, structural and cyclical (demand deficient)
unemployment.” In accounting for these types of unemployment economists have
focused on the roles of job search, rigid wages and efficiency wages. Elaborate
these statements and comment on the view that search unemployment is largely
voluntary and a form of human capital investment.
JGC,Oct 00
JOHN CULLIS September 2001
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