Modern Labor Economics:
Its Roots, Development, and
Recent Trends
Two Traditions of Labor Economics
• Neoclassical Economics
• Emphasis on “economics”
 Deductive (theoretical) approach, based
on profit- and utility maximization in face
of constraints
 Focus on prices, underlying supply and
demand conditions
 Looks for “systematic” part of behavior, with
little regard for cultural differences or
unusual behavior
 Institutionalism
 Emphasis on “labor”
 Inductive (descriptive, fact-based)
approach
 Focus on problems and remedies
 Institutionalists:
 “Generalization is especially difficult
when each problem that arises may be
unique because it presents a slightly
different combination of factors or a new
set of circumstances.”
 Neoclassical approach is “barren,”
“dry bones”
 Neoclassical economist
(commenting on the institutionalists):
 “Without a theory they had nothing
to pass on except a mass of
descriptive material waiting for a
theory, or a fire.”
Time Lines of the Two Traditions
• Neoclassical: Alfred Marshall: groundwork
for modern labor economics (Principles of
Economics, 1890)
• Institutionalists:
 first “labor economics” text published in 1886
(by Richard Ely)
 reacting to “dry bones” economics of 1870s and
1880s, University of Wisconsin turned into a
center for institutionalism by Ely, Commons
(1892).
1900s-1920s: Institutionalism Dominant
• Institutional text published by Commons (1905) with
a focus on “Evils” (child labor, immigration, poverty,
sweatshops) and “Remedies” (unions, profit-sharing,
education, labor laws)
• First book with “Labor Economics” in title (1926):
was institutional in approach, rejecting “deductive”
approach to focus on “groups of men creating (and
being variously affected by) economic institutions.”
1930s: Two Neoclassical Works
• Theory of Wages by Paul Douglas (1934): theory with
empirical analysis and attention to policy. Tried to steer
between “sterile” approach of pure theory and the
“theoretical blind alley” of institutionalism
• Depression: “There has been no date in this century to
which the theory that I was putting out could have been
more inappropriate” (Hicks)再没有其他任何时候比我现在提出这些
理论不合时宜了。
• Both Hicks and Douglas leave labor economics (Hicks
for pure theory, Douglas for politics)
1940s and 1950s:
• Institutionalist scholars trained in economics and
in economics departments, but deeply suspicious
of theory (Lester, Kerr, Dunlop, Reynolds)
• Lately, this group has referred to themselves as
“neoclassical revisionists” – as neoclassical
economists with “realistic” interests.
• But in fact they did not use theory, did not revise
theory, and were not cited by the early “modern”
labor economists.
Debates Between the Two Approaches
• Debate on the Marginal Productivity
Theory of Demand
 Institutionalists: Decision-makers do not
talk (or collect data) in terms of marginal
costs and benefits
 Neoclassical group: But they may act
instinctively “as if” they understand
theory
• Debate on Modeling
 Institutionalists: world is complex
and models do not take account of that.
 Neoclassical group: Purpose of models
is to remove complexity so underlying
forces can be studied.模型的作用在于化繁为简从而可
以考察潜在的因素
 Judge assumptions by quality of
predictions, not “realism”
 Predictions hold “other things” equal.
Examples of Early “Modern” Research in
1960s-1970s
•
•
•
•
Relative wage effects of unions (Lewis)
Discrimination (Becker)
Human capital (Becker)
Household production, labor force
participation (Becker)
• Search theory: unemployment, wage
differentials; law of one price (Stigler)
Explaining Anomalies
• Wages that do not fall: implicit contracts
and signaling, unemployment insurance,
compensating wage differentials
• “Law of one price” does not hold: search
costs, “efficiency wages,” internal labor
markets, considerations of status
Explaining Anomalies
• Why older workers may be paid more than
their marginal product
• Why small differences in productivity
among executives result in large pay
differences
New Areas of Research
• Personnel economics: understanding decisions
within firms: hiring, training, motivating,
promoting (Lazear)
• Use of longitudinal data matching information
from employer and employee (Abowd)
• Cross-country comparisons
Policy Areas with Potential Influence from
Neoclassical Labor Economists
•
•
•
•
•
Military draft
Minimum wage
Welfare programs
Unemployment insurance
Workers’ compensation
insurance
• Education
• Discrimination
• Safety and health
regulation
• Immigration
• Program evaluation
Labor Economics: Undergraduate Courses
ILRLE 140 Development of Economic Institutions
ILRLE 240 Economics of Wages & Employment (also
Econ 341)
ILRLE 340 Economic Security (also Econ 451)
ILRLE 440 Special Topics In Labor Economics
ILRLE 441 Income Distribution (also Econ 455)
ILRLE 442 The Economics of Employee Benefits (also
Econ 456)
ILRLE 444 The Evolution of Social Policy In Britain &
America
ILRLE 445 Women In The Economy (also Econ 457
also Womns 446)
ILRLE 446 Economic History of British Labor 17501940 (also Econ 459)
Labor Economics: Undergraduate Courses
ILRLE 448
Topics In Twentieth-Century Economic
History: The Economics of Depression and
The Rise of The Managed Economy (also
Econ 458)
ILRLE 495
Honors Program
ILRLE 497-498 Internship
ILRLE 499
Directed Studies
ILRLE 540
Labor Economics
ILRLE 544
Labor Market and Personnel Economics
ILRLE 642
Economic Analysis of The Welfare State
(also Econ 460)
ILRLE 648
Economic Analysis of The University (also
Econ 342)
Ph.D. Program in Labor Economics
Prerequisites in Mathematics:
• Minimum: two semesters of calculus plus one of linear
algebra
• Preferred: a background in differential equations, real
analysis, or mathematics courses in probability and statistics
• A student must at least be comfortable working with limits,
continuity, vectors, matrices, series, differentiation, partial
differentiation and integration
• A mathematics refresher course is offered during August. In
our experience most entering students can benefit
significantly from that course, though it is not required
Ph.D. Program in Labor Economics
• Usually takes 5 years
• The first year:
 Fall semester: Micro-economics I, Macro-economics I,
Econometrics I, and a course in mathematics for
economics
 Spring semester: Micro II & III, Macro II, and
Econometrics II.
 Students must pass Qualifying Exams in Micro &
Macro. A student is permitted to take the
examinations twice, and must pass both by the end of
the second year of study.
Ph.D. Program in Labor Economics
• Second Year:
 Three or four courses each semester in major and
minor subjects
 To establish expertise in an area of study
generally requires two semesters of an advanced
course sequence.
 Some subjects may also administer qualifying
examinations at the conclusion of the course
sequence
Ph.D. Program in Labor Economics
• Third year:
 Increase knowledge in the major subject
 Expand into other fields of interest
 Broaden tools such as mathematics
 Search for a dissertation topic, and to start dissertation research
 Become active in research seminars: Applied Microeconomics
(Industrial Organization and related topics), Macroeconomics,
Econometrics, Economic Development, Economic Theory,
Public Economics, International Economics, Labor Economics,
and Financial Economics
 Oral "Admission to Candidacy" examination, by student’s
Special Committee (typically focuses on the student’s
dissertation research proposal)
 Submitting a doctoral dissertation (fourth or fifth year)
 Passing an oral final examination on the dissertation which is
conducted by the student's Special Committee
 In final year student is on the Ph.D. Job market. As part of the
placement process we meet with students to address preparing
for the market and to facilitate their job search.
School of Industrial and Labor Relations