Labour economics
Follows Borjas, Labor Economics, 8th edition (ECON 331, University of Alberta). Test 1 covers chapters 1 to 4; test 2 starts with chapters 5 to 7.
Chapter 1: Introduction
- What labour economics studies
Labour economics studies how workers, firms and governments interact in labour markets to set wages and employment, using models whose predictions are tested with data.
- Measuring the labour market
The Labour Force Survey sorts people aged 15 and over into employed, unemployed and not in the labour force; the participation, employment and unemployment rates follow.
- Regression and natural experiments
Labour economists test theories with regression, which fits the line that best predicts an outcome, and with natural experiments analysed by difference in differences.
Chapter 2: Labour supply
- The work-leisure choice
A worker chooses consumption and leisure on the budget line C = wh + V; at an interior optimum the indifference curve is tangent to the budget line, so the MRS equals the wage.
- Income and substitution effects
More non-labour income cuts hours if leisure is normal; a wage rise has a substitution effect toward work and an income effect toward leisure, so hours can rise or fall.
- Labour force participation and the reservation wage
The reservation wage is the lowest wage at which a person is willing to work. Anyone offered less stays out of the labour force, at a corner solution.
- The labour supply curve and its elasticity
The labour supply curve gives the hours a person works at each wage. Its elasticity is the percentage change in hours caused by a 1 percent rise in the wage.
- Welfare programs and work incentives
Welfare that is clawed back as earnings rise taxes work and reduces it. An earned income credit pays only people who work and raises participation.
- Labour supply over the life cycle and the business cycle
People work most in the years their wage is highest. In recessions discouraged workers leave the labour force while added workers join it, and the discouraged dominate.
Chapter 3: Labour demand
- Short-run labour demand
The number of workers a firm hires at each wage when its capital is fixed; it hires until the value of the marginal product of labour equals the wage.
- Long-run labour demand
The number of workers a firm hires at each wage when it can also change its capital, so that a wage change works through a scale effect and a substitution effect.
- Elasticity of labour demand
The percentage change in employment caused by a 1 percent change in the wage, which depends on substitution, product demand, labour's cost share and other inputs' supply.
- Overtime regulation
Rules that require premium pay for hours beyond a standard day or week, raising the price of hours relative to workers so that overtime falls and workdays bunch at the standard.
Chapter 4: Labour market equilibrium
- Competitive labour market equilibrium
The wage at which labour supply equals labour demand. It exhausts the gains from trade and, with free mobility, pays one wage across all linked markets.
- Minimum wages
A legal floor on the hourly wage. In a competitive market a binding minimum wage cuts employment and creates unemployment; under monopsony it can raise wages and employment together.
- Payroll taxes and employment subsidies
A payroll tax drives a wedge between what an hour of work costs a firm and what the worker takes home. Who bears it depends on elasticities, not on who sends the money to the government.
- Mandated benefits
A benefit employers must provide by law. If it costs firms C per hour and workers value it at B, employment moves only by the gap between C and B.
- Monopsony
An employer facing an upward-sloping labour supply curve. Because each hire raises the wage it must pay, it employs fewer workers and pays less than a competitive market would.
- The cobweb model and labour market shocks
When training takes time and students expect today's wage to last, skilled labour markets cycle through booms and busts. Disasters and pandemics act as shocks to supply and demand.
Chapter 5: Compensating wage differentials
- Compensating wage differentials and risky jobs
A compensating wage differential is the extra pay a job must offer to offset a bad working condition such as the risk of injury; in a competitive market the marginal worker sets its size.
- Hedonic wages and the value of a statistical life
The hedonic wage function is the wage-risk relationship traced out by matches of workers and firms; its slope for fatal risk is the value of a statistical life used to judge safety rules.
- Job amenities, health benefits and layoffs
Holding productivity fixed, jobs with better amenities, more benefits or steadier work pay lower wages; data often show the opposite because more productive workers get more of everything.
Chapter 6: Education
- Schooling as an investment in human capital
Schooling is an investment whose costs, tuition and forgone earnings, come before its returns; a worker stays in school until the marginal rate of return equals her discount rate.
- Returns to schooling
The rate of return to schooling is the percentage wage gain from one more year of school, estimated from a log-wage regression that overstates it when ability is omitted.
- School quality and the education production function
The education production function links school inputs to student outcomes; because inputs are not randomly assigned, credible estimates come from natural and randomized experiments.
- Education as a signal
In Spence's signalling model, education raises pay by revealing ability rather than creating it, which requires schooling to cost able workers less than less able ones.
Chapter 7: The wage distribution
- On-the-job training and the age-earnings profile
Workers pay for general on-the-job training, firms and workers share specific training, and investment that falls with age makes earnings rise at a decreasing rate.
- Evaluating government training programs
A training program's effect is what participants earn minus what they would have earned without it, a gap that selection bias and the Ashenfelter dip distort.
- Measuring inequality
Inequality measures summarize a whole wage or income distribution, either by the area between the Lorenz curve and perfect equality (the Gini) or by percentile ratios such as 90-10.
- Rising wage inequality
Since 1980 wage gaps have widened between and within skill groups; the skill premium rose because relative demand for skilled labour grew faster than relative supply.
- Intergenerational mobility
The intergenerational elasticity is the slope from regressing children's log earnings on their parents'; the closer it is to zero, the faster family advantages regress toward the mean.
Chapter 8: Labour mobility
- Migration and job turnover
Migration and job changes are investments. A worker moves when the present value of the expected wage gain exceeds the full cost of moving.
- Immigration
Who migrates depends on each country's return to skills. An inflow of competing workers lowers their wage in the short run, less once capital adjusts, and natives gain an immigration surplus.
Chapter 9: Discrimination
- Taste-based discrimination
Becker's model of prejudice as a taste. A discriminating employer acts as if minority workers cost more than their wage, hires too few of them and gives up profit.
- Statistical discrimination and measuring discrimination
Statistical discrimination is judging individuals by their group's average when productivity is hard to observe. Decompositions and résumé experiments measure discrimination.
Chapter 10: Labour unions
- Unions and collective bargaining
A union bargains collectively for workers; as a monopoly union it raises the wage and cuts jobs, while an efficient contract keeps competitive employment and divides the surplus.
- Union wage effects
The union wage gap is the percentage pay difference between union and comparable non-union workers; it misstates the union's true effect when unions change non-union wages.
Chapter 11: Incentive pay
- Incentive pay
Incentive pay ties earnings to output, rank or seniority so that workers supply effort the firm cannot observe; each scheme also changes which workers the firm attracts.
- Efficiency wages
An efficiency wage is a wage above the market-clearing level that a firm chooses because higher pay raises productivity; it implies involuntary unemployment.
Chapter 12: Unemployment
- Measuring unemployment
The unemployment rate is the share of the labour force without a job but available for and seeking work; it settles where monthly job losses balance job findings.
- Job search and Employment Insurance
A job seeker accepts the first offer above an asking wage set where the marginal benefit of more search equals its marginal cost; unemployment insurance lowers that cost.
- Unemployment and the business cycle
Cyclical unemployment is unemployment above the natural rate; theories differ on whether it is voluntary, and in the long run the Phillips curve is vertical at the natural rate.