Labour Economics

Albrecht Glitz
Department of Economics, Universitat Pompeu Fabra

Monday, 1 April 2019

Organisation of the Course
Details
• Professor: Albrecht Glitz
• Teaching Assistants
• Guohao Yang
• Sebastian Ellingsen
• Lectures
• Mondays 11:00-12:30, Aula 13.007 (Groups 1 & 2).
• Tuesdays 11:00-12:30, Aula 13.007 (Groups 1 & 2).
• Mondays 13:00-14:30, Aula 40.150 (Group 3).
• Tuesdays 13:00-14:30, Aula 40.150 (Group 3).
• Classes: see schedule.
• Email: [Link]@[Link]
• Office hour: Mondays 15:30-16:30.
• Office: 20.1E84, Jaume I Building.
Goals

• Introduction to the modern theory of labour economics.

• Introduction to the economic analysis of the behaviour of

agents in the labour market.

• The course will focus on both:

• The theories developed to understand the functioning of the
labour market.
• The empirical evaluation of these theories and the role of
public policies.
Topics
1. Labour supply.
2. Labour demand.
3. Labour market equilibrium.
4. Wage determination.
5. Discrimination.
6. Unemployment.
7. Unions.
8. Earnings Inequality.
9. Immigration.
Materials

• Textbooks:
• George J. Borjas: Labor Economics (2013), 6th Edition.

• Ronald G. Ehrenberg & Robert S. Smith: Modern Labor

Economics: Theory and Public Policy (2014), 12th Edition.

• Lecture Notes: in Aula Global.

• Problem Sets: in Aula Global.

Evaluation

• Final Exam (70%).

• You need at least a grade of 40/100 in the final exam in order
to pass!

• Problem Sets (20%).

• Written summary of research paper (10%).

Lectures

• Attendance is very important: lectures and classes.

• Read recommended chapters in advance.

• Feel free to participate, ask questions, interrupt me.

Problem Sets
• Most likely 6 problem sets.

• In some, you can work in groups of up to 4 (same seminar

groups!).

• Submit solutions at the beginning of each class.

• Solutions to problem sets will be discussed in class, starting in

week 4.

• Some problem sets might contain some empirical analysis.

• Only those students who have attended at least 5 out of 6

seminars and the final exam will be allowed to take the resit
exam in July.
Written Summary

• Students will have to summarise a research paper.

• Students will work individually.

• Paper will be determined by the professor.

• Summaries should not exceed 10 pages (but can be shorter).

Grade Categories

• If your final grade is

• Lower than 5.0: Fail

• Between 5.0 and 6.9: Sufficient

• Between 7.0 and 8.9: Good

• Between 9.0 and 10.0: Very Good (Excellent)

Any questions regarding the organisation of the
course?
Introduction
What is Labour Economics?

• Labor Economics studies how labor markets work.

(Borjas)

• Labor Economics is the study of the workings and

outcomes of the market for labor. (Ehrenberg & Smith)
Why Study Labour Economics?

• People allocate substantial time and energy to labour markets.

• Labour economics studies how labour markets work.

• Labour economics helps us understand and address many social

and economic problems facing modern societies.
Interesting Questions

• Can taxes influence how much people work?

• How does a family decide how to distribute their time between

market work, childcare, housework and leisure?
• How much does university education contribute to finding a
better job and earn higher wages?
• Why do women earn lower wages than men?

• What are the effects of immigration on the workers in the

destination country?
• Why do football players make so much more money than
economists?
Basics of the Labour Market

• Participants are assigned motives:

• Workers look for the “best” job.

• Firms look for profits.

• Government uses regulation to achieve goals of public policy.

• Minimum wages.

• Occupational safety.
Three “Actors”

• Workers
• The most important actor; without workers, there is no
“labour”.

• Desire to maximize utility (i.e. to optimize by selecting the

best option from available choices).

• Supplies more time and effort for higher payoffs, causing an

upward sloping labour supply curve.
Three “Actors”

• Firms
• Decide whom to hire and fire.

• Motivated to maximize profits.

• Relationship between price of labour and the number of

workers a firm is willing to hire generates the labour demand
curve.
Three “Actors”

• Government
• Imposes taxes, regulations.

• Provides ground rules that guide exchanges made in labour

markets.
The Labour Market

• Brings together the “buyers” (firms) and “sellers” (workers).

• Interaction determines equilibrium wage.
• Why do we observe wage variation associated with
• Education levels.
• Occupation.
• Experience.
• Gender/Race.

• How do institutions/legislation affect salaries and employment

in the economy:
• Social security.
• Minimum wage.
• Unions.
Why Do We Call It a Market?

• The labour market is clearly not the same as the market of

grain, oil and fish.

• Non-pecuniary factors are more important than in markets for

commodities.
• Work environment, risk of injury, flexibility of hours.

• There are many laws and institutions that are specific to the
labour market.
Why Do We Call It a Market?

• But it is still a market because. . .

1. There are institutions that facilitate contact between buyers
and sellers of labour services.
2. Once a contact is arranged, information about price and
quality is exchanged.
3. When an agreement is reached, a contract is executed,
covering compensation, conditions, durations, etc.

• The result of this transaction is the placement of people in jobs

at certain rates of pay.

• Through the labour market, labour is allocated to firms,

industries, occupations and regions.
Why Do We Need a Theory

• Explain and understand how labour markets work.

• Focus on the essential variables while leaving out other, less

crucial, factors.

• Create a model that helps explain the real world.

Positive vs. Normative Economics

• Positive economics.
• Addresses the facts.
• Focus on “what is”.
• Questions answered with the tools of economists.

• Normative economics.
• Addresses values.
• Focus on “what should be”.
• Requires judgements.
Models

• Positive economics uses simplified models to try to explain a

complex set of behaviour and outcomes.

• Models are simplified so that we can focus on general

principles, the forces that are most important.

• We do this because we want to know the average tendencies of

outcomes, for policy purposes.
Example

• The day after you get your degree, you could choose one of
several options:
• You can take the first job that you find and start making
money straight away.
• You can take some time to look for a job that you like better.
• You could get more education (Masters, PhD).

• You will choose the option that you think is best for you.
• Given your preferences, your ability, the unemployment rate. . .
Another Example

• Suppose the government wants to know what the effect would

be of eliminating all restrictions to immigration on the Spanish
labour market.

• We need a model that isolates the main forces at work.

• The model will allow us to make predictions.

What Do We Do with Our Model?

• After we make some assumptions about individual behaviour. . .

• ...the model will give us predictions on the aggregate outcomes.

• These predictions can then be tested by looking at empirical

evidence.
Empirical Evidence

• Empirical evidence is what we observe in reality (actual data).

• We can, for example, obtain empirical evidence from:

• Household surveys.
• Firm surveys.
• Administrative data.
• ...
Empirical Evidence

• These data sources tell us about the decisions made by workers,

firms or the government.

• We can use the data to confirm the predictions of the model.

• Because we want models that explain what happens in reality!

• A model is good only if its predictions coincide with what

happens in reality.

• If the predictions are in general not confirmed in the data,

something is wrong in our model.
Normative Economics

• Positive economics can help us to understand what would be

the effect of A on B by isolating the main forces at work.

• However, it does not always tell us whether a given policy is

“good” or “bad” from a social point of view.

• Any normative statement that tells us what should be instead

of what is, is based on underlying values.
Policy Decisions

• For example, many government policies affecting the labour

market are based on the underlying value that society should
try to make the distribution of income more equal.

• Economic theory cannot help us make certain decisions that

rely on underlying values.

• Society usually relies on the political system for these decisions,

not on market analysis.
But!

• Sometimes economic theory and corresponding empirical

evidence can help us support certain policies.

• When it shows that they would be unambiguously good for all

the parties involved!
Example

• Suppose our model and empirical evidence tell us that

eliminating restrictions to immigration would be good for
immigrants, but would hurt Spanish workers.

• Then we must decide on the basis of values.

Another Possibility

• But now suppose that the model and corresponding evidence

show that more immigration would actually be good for
everyone in the Spanish labour market.

• Then we can all support reducing restrictions to immigrants, it

does not matter what our political views or values are.
Government Intervention

• In general, the government should intervene in the labour

market if
• its intervention creates more gains for the beneficiaries than it
imposes costs on others.
• Efficiency gains.
• Redistribution.
• Pareto improvement.
• it helps overcome market failures.
• Ignorance.
• Transaction barriers.
• Externalities.
• Public goods.
• Price distortions.
Testing Our Model - Example

• We have seen that a model should provide predictions that we

should then test by looking at actual data.

• Let’s see a practical example of how we would do that.

• The human capital model.

Human Capital Investment

• We can use economic theory to model how people decide how

much to invest in education.

• A simple model would tell us that when you finish high school
you can decide whether to go to university or to work.

• You choose the option that you think is best for you.
The Education Decision

• You would probably compare how much money you will be

making if you start working right now, with how much money
you will make later if you go to college (taking into account the
costs).

• A prediction of this simple model is that university attendance

will increase if the gap between earnings of university graduates
and high school graduates increases.
Testing the Model

• If the model is a good description of reality, real data should

confirm the predictions.
• We find data on male college enrolment and earnings (see
Ehrenberg & Smith).
Estimating a Relationship
Regression Analysis

• When the earnings gap is higher, college enrolment is also

higher.

• The data seem to confirm the prediction of our model of

investment in education.
Summary

• Labour economics studies how labour markets work.

• Models in labour 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.