CHAPTER 1
“Observations always involve
theory.”
-Edwin Hubble
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Why study Labor
Economics?
• Human resources allocate substantial time and energy
to labor markets.
• Labor economics studies how labor markets work.
• Labor economics helps us understand and address
many social and economic problems facing modern
societies.
1-2
Basics of the Labor Market
• Participants are assigned motives:
o Workers look for the “best” job.
o Firms look for profits.
o Government uses regulation to achieve goals of public
policy.
• Minimum wages
• Occupational safety
1-3
Three “Actors”
• Workers
o The most important actor; without workers, there is no
“labor”.
o Desire to maximize utility (i.e., to optimize by selecting the
best option from available choices).
o Supplies more time and effort for higher payoffs, causing an
upward sloping labor supply curve.
1-4
Three “Actors”
• Firms
o Decide who to hire and fire.
o Motivated to maximize profits.
o Relationship between price of labor and the number of
workers a firm is willing to hire generates the labor demand
curve.
1-5
Three “Actors”
• Government
o Imposes taxes, regulations.
o Provides ground rules that guide exchanges made in labor
markets.
1-6
Why Do We Need a Theory?
• Explain and understand how labor markets work.
• Focus on the essential variables while leaving out other, less
crucial, factors.
• Create a model that helps explain the theory.
1-7
Positive vs. Normative
Economics
• Positive economics
o Addresses the facts
o Focus on “what is”
o Questions answered with the tools of economists
• Normative economics
o Addresses values
o Focus on “what should be”
o Requires judgments
1-8
Supply and Demand in
the Engineering Labor Market
Earnings ($)
Labor Supply
Curve
50,000
Equilibrium
40,000
Labor Demand
Curve
30,000
10,000
20,000
30,000
Employment
1-9
The Alaskan Labor Market and
Construction of the Oil Pipeline
Earnings ($)
S0
w1
w0
D1
D0
Employment
E0
E1
1-10
Wages and Employment in the
Alaskan Labor Market, 1968-1984
1-11
Summary
• Labor economics studies how labor markets work.
• Models in labor economics typically contain three
actors: workers, firms, and governments.
• A good theory should have realistic assumptions and
can be tested with real-world data.
• The tools of economics are helpful in answering
positive questions.
1-12
Appendix: Regression Analysis
Log Wage
Change in log
wage
Slope = b
a
Change in
schooling
Years of Schooling
1-13
Scatter Diagram: Wages
and Schooling by Occupation, 2001
1-14
Choosing Among Lines Summarizing
Trends in the Data
1-15
The Best-Fit Regression Line
1-16
Multiple Regression
• Extending regression analysis to include multiple
independent variables
• Each estimated coefficient shows the impact of a
particular variable on the dependent variable, other
things constant
• Standard errors of the regression coefficients are used
to evaluate significance of the relations between each
particular variable and the dependent variable
1-17