1 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 1 2 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. 2 3 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? 3 4 (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 4 5 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 38 8 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: 5 6 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 6 7 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 7 8 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 8 9 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 9 10 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 10 11 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. 11 12 (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? 12 13 (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? 13 14 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 14