Introduction to Labor Economics

Lecture one

Introduction
Any topic of study can be approached from different point of views and using methods or tools of analysis.

For example : Social :behavioural , attitude, tradition Political : political power, trade unions Economics :using resources labour human resources

What is Economics ?


Economics is the study of how people choose to use resources----behavior of individuals. uses
product and services

Resources
- Time - Knowledge - Talent - Lands - Building - Equipment

how to combine these resources

This raise questions?

 

 

How to choose to use resources? How much of time to devote to work or a leisure ? How many pound to spend or to save ? How to combine resources to produce goods and services?

WHAT IS ECONOMICS ?


Economics addresses the collective behaviour of business and industries, governments and countries and the globe as a whole . So economic study the decision makers (household and firms) which occur in the market ( product & factor market), where the determination of interest in goods and services are the equilibrium price and quantities of goods exchanged.

Than our analysis is different in each level of economics. What are the level of economic analysis?

Level of analysis :
Macroeconomics : Studies the behaviour of the overall all economic activities/ aggregate outcomes. Micro economics : Studies the behaviour of the individual decisions. Mesoeconomics :It is a bridge between the two main economic paradigms in mainstream economics

Positive vs. Normative Economics



Positive economics - an attempt to describe how the economy operates using the scientific Method. It is a descriptive study Normative economics - relies on value judgments to evaluate the overall functioning of the economy.

Positive economics
  

Abstraction Ceteris paribus assumption Test of model based on predictions, not assumptions

Fundamental positive economic concepts

   

Scarcity Rational self-interest Utility maximization Profit maximization

Normative economics


Interpersonal comparisons of utility are impossible Problems with the pareto optimality criterion

Types of Market failure

   

 

Imperfect information, Transaction barriers, Price distortions, The nonexistence of markets when externalities are present, Public goods, and Capital market imperfections.

Labor market vs. other markets

 

Labor services are rented, not sold, Labor productivity is affected by pay and working conditions, and The suppliers of labor care about the way in which the labor is used.

What is labor economics ?



Labor economics is the study of the market for one particular commodity in the economy : labor services. Where the equilibrium price is the wage that the workers receive and the equilibrium quantity is the amount of work that people do ( hours, weeks, ,effort, skill) in the economy

Some criticise that labor is not a commodity?

Because A persons labor is not something they sell in return for income. Rather , a persons job, occupation career are an important aspect of identity, self esteem, prestige, who you are? But other responds that : In today s society labor is a commodity that is traded ion markets.

True, but this doesn't reverse the fact that labor id is something bought and sold in a modern capitalist economy and whose price is set by supply and demand. Yet labor can be distinguished from other goods and services as follows:

How labor is distinguish from other goods and services?

Aspect of labor Explanation Consequences Income effects work in different ways for labor than other goods Stock must be produced and maintained: education, training are needed. Also it requires physical presence: quality of the worker environment matter. 1- labor is a factor Unlike most goods of production not which households buy the final product , labor is one of the few goods they sell. The stock in this case 2- labor is a low is the worker and the of services attached to a stock skills he/she possess. The flow is the right to use it for a period of time.

Aspect of labor
3- stock cannot be bought and sold

Explanation
Slavery is prohibited. For various reasons, people cant sell shares in themselves, for example to finance education. Workers are differentiated by type of skill and demographic characteristics.

Consequences
Human capital investment is riskier than physical capital investment because it is non-diversifiable.

4- labor is very heterogeneous commodity

A wide variety of prices and market conditions for different labor services exist. This gives rise to a distribution of earnings.

Aspect of labor
5- the quality of labor services being supplied is often hard to measure

Explanation
Workers may simply be poor in management decisions and this may be apparent for years Employers association and unions.

Consequences
Compensation and incentive systems need to be designed appropriately

6- sometimes the demanders or suppliers of labor have a considerable monopoly power

Use monopoly and search . Theory study these markets

Aspect of labor
7- labor markets are highly regulated ; the exchange of labor is both highly taxed and subsidized.

Explanation
Income and payroll taxes, income support programs , work place safety legislation, immigration policy

Consequences
Government policy has important effects on labor markets

What is the difference between Labor Economics and Economics of Labor?

-Labor economics - Descriptive /traditional approach It include facts

-Economics of labor - Analytical perspective - Problem oriented - Modern approach

Labor economics
   

Economics characteristics of labor Economic system Role of labor as a factor of production Economic effect of trade unions

Economics of labor


 

Usage of human resources economically . How to use labor efficiently to achieve macro objectives Problem --- solutions----policies Problem oriented approaches analytical approaches

True or false & explain

1- Labor economics is the modern approach in studying the human resources 2- Labor economics is a descriptive approach towards studying human resources

Economics a-Microeconomics
Studies decision that people and business make regarding the allocation of resources and prices of goods and services. Focuses on the demand and supply of labor that determine price levels for specific companies in specific industries. Microeconomics takes a bottoms- up approach to analyze the economy Example: Microeconomics would look at: - How a specific company could maximize its production and capacity so it could lower prices and better compete in its industry. - Unemployment in the industrial sector - Price of petrol


Economics a-Macroeconomics
Studies the behavior of the economy as a whole and not just on specific companies but entire industries and economies. Looks at the economy wide such as GDP ( Gross domestic product) and how it is affected by changes in unemployment, national income, rate of growth and price levels. Example: Macroeconomics would look at: - Macroeconomics takes a top-down approach - How a an increase / decrease in net exports would affect a nations capital account. - How GDP would be affected by unemployment rate.


Q: Price of petrol is considered microeconomics but has a macro effect.



Increased inflation ( macro effect ) would cause the price of raw materials to increase for a specific company/ industry; such as price of petrol ( micro) and in turn affecting the end products price charged to public ( affecting income) and thus affecting the whole economy.

INSATIABLE WANTS + FINITE RESOURCES = THE NEED TO ECONOMISE

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Best case scenario: Maximize our satisfaction with our limited resources, i.e. choose how to use our resources to our greatest advantage

ECONOMISE

Resources Specific known amount of resources available to each person/economy

Resources are anything which can be used to satisfy wants by producing G&S.

i.e., Factors of Production

3 types:

1. LAND all natural resources

2. LABOUR human effort involved in production

3. CAPITAL machinery/equipment for manufacturing other G&Ss - expenditure on capital is capital investment

Fourth Enterprise

Real Economy versus Money Economy

Q: Would the wealth & standard of living of the country increase if the Government printed more money?

The real economy is concerned with the amount of Goods & Services available to the population - E.g., shopping centres, public transport, quantity of food, number of hospital beds etc.. Whereas, money has no intrinsic value it merely enables transactions to take place it can be exchanged for G & Ss

A measure of the wealth of an economy: Amount of G&S produced (National Production)

Amount of Income received (National Income)

Amount of Expenditure on G&S (National Expenditure)

Q: How can we achieve true economic growth in the economy?

Answer: We compare National Production on a year by year basis. However, when comparing we must take into account inflation. Therefore, economists use constant prices when comparing National production figures, i.e. The prices of one base year are applied to the output of other years

As economy grows than standard of living increases and standard of welfare increase than we end with a civilized society Standard of living: is what you own, based on wealth you own and real income. Standard of welfare: is not based on what you won , rather on the degree of entertainment and the ability to enjoy what you own.

Do the economic problem affect the labor market?



Economic problem tries to find a way of how to allocate these scarce resources efficiently to satisfy the needs and desires as much as possible.

Backward market Input market Supply Demand

Population Workers

Business activity

Forward market Output market Supply Demand

Company selling product

Who are the actors in labor markets?

- Workers supply labor - Firms demand labor - Firms and workers interact in markets, but governments influence the rules of the interaction.

Demand for labor

The labor demand curve is downward sloping due to:  a substitution effect, and  a scale effect.

Substitution effect


Substitution effect - substitution of other resources for a resource that becomes relatively more expensive.

Scale effect
The scale effect associated with a wage increase involves the following steps:


Higher wages result in higher average and marginal costs of production, Leading to an increase in the equilibrium price of the product, Leading to a reduction in the quantity of the product demanded, Leading to a reduction in the use of all inputs used to produce the product.

Slope of labor demand curve



Both the substitution and scale effects result in a reduction in the quantity of labor demanded when the wage rate rises. A change in the wage changes the quantity of labor demanded, but does not affect labor demand. Labor demand changes only if the labor demand curve shifts in some manner (as discussed below).

Shifts in labor demand

Labor demand may shift due to changes in:


the demand for the product, and the prices of other resources.

Industry demand for labor



An industry's demand for labor consists of the total demand for a particular type of worker in a given industry. (An industry consists of all of the firms that produce a given type of output.) An industry's labor demand curve is determined by adding together the labor demand curves for all of the firms in the industry.

Market demand for labor



The market for a given category of labor consists of all of the firms that might hire a given type of labor, regardless of the industry in which the firm operates. The market demand for labor is determined by adding together all of the industry demand for labor curves.

Long-run vs. short-run labor demand

Market labor supply

The market labor supply curve is expected to be upward sloping because an increase in the wage in a particular labor market will:  cause some workers in this market to work additional hours,  induce some workers to shift from other labor markets to this relatively more remunerative alternative employment, and  will cause some individuals who are not currently in the labor force to enter this market.

Market labor supply

hifts in market labor supply curve

Shifts such as this may be due to: changing wages in other markets, or changes in worker tastes and preferences

Labor supply to individual firms

Labor market equilibrium

Shifts in labor market equilibrium



An increase in labor demand results in an increase in both the equilibrium wage and the equilibrium level of employment, A reduction in labor demand results in a decrease in both the equilibrium wage and the equilibrium level of employment, An increase in labor supply results in a lower equilibrium wage, but a higher equilibrium level of employment, and A reduction in labor supply results in a higher equilibrium wage, but a lower equilibrium level of employment.

TWO TYPES OF UNIONS

 

Industrial union Trade union (also known as a craft union)

Collective bargaining agreement

upply restriction

Overpaid and underpaid workers



Economists argue that workers are overpaid if their wage is above the equilibrium, Workers are underpaid if their wage is below the equilibrium wage.