Labor Economics

Units

1. 1

   Labor supply

   4 lessons

   1. The work and leisure choiceModel a worker's hours with utility U(C, L) and the budget C = wH + V, find the hours where an indifference curve is tangent to the budget line, and read the reservation wage off the starting point.
   2. Income and substitution effectsSplit the response of hours to a wage rise into a substitution effect and an income effect on the budget-line diagram, and use their sizes to derive a labor supply curve that bends backward.
   3. Labor force participationCompute the participation rate, the unemployment rate and the employment-population ratio from a count of people, state the participation rule that a person works when the wage offer exceeds the reservation wage, and read the long trends in male and female participation.
   4. Labor supply and public programsDraw the budget line with a welfare guarantee and with the EITC, find the effective wage on each segment, predict the hours and participation response, and read how natural experiments measure it.
2. 2

   Labor demand

   4 lessons

   1. Short-run demand for laborDerive the firm's short-run demand for labor from profit maximization, w = VMP = p × MP, using a production curve with diminishing returns, and show that a wage change moves along the demand curve while a price change shifts it.
   2. Long-run demand and elasticityFind a firm's cost-minimizing mix of labor and capital on an isoquant and isocost diagram, split the fall in labor demand after a wage rise into substitution and scale effects, and use the Hicks-Marshall rules to compute and compare the elasticity of labor demand.
   3. Wages in competitive labor marketsFind the wage and employment where labor supply meets labor demand, trace what a shift of either curve does to them, and show what a minimum wage above the equilibrium does in a competitive market, with the disemployment area.
   4. Monopsony and the minimum wageShow why an employer with wage-setting power faces a marginal cost of labor above the supply curve, find its wage and employment where MRP = MCL, compare them with the competitive market, and show that a minimum wage in a range can raise employment.
3. 3

   Human capital

   4 lessons

   1. The schooling decisionFrames education as an investment with present value of earnings, drawing an age earnings profile for graduates against nongraduates with costs and benefits, and the internal rate of return.
   2. Mincer earnings equation and returnsEstimates log w = a + b S + c X + d X², plotting a concave experience profile, and discusses ability bias with twin and instrumental variable estimates of returns to schooling.
   3. Signaling versus human capitalContrasts Becker's productivity view of education with Spence's signaling view using a graph of two types with different cost of schooling, and the sheepskin effect.
   4. On-the-job training and specific skillsDistinguishes general from firm-specific training in Becker's model, with a wage and productivity timeline showing who pays for training, and the implications for turnover, and wage profiles that rise with tenure.
4. 4

   Wage structure and inequality

   4 lessons

   1. Compensating wage differentialsShows wages rising with job disamenities and risk, drawn as the worker's indifference curves tangent to a firm's offer curve in wage-risk space, and the value of a statistical life.
   2. Trends in earnings inequalityPresents the rise in the college premium and the 90/10 wage ratio, with line charts of the wage premium over time and the race between education supply and technology demand.
   3. Skill-biased change, trade and superstarsModels relative demand and supply of skilled labor, with the shifting curves of skilled and unskilled labor markets, polarization of jobs and the role of globalization and superstar pay.
   4. The gender wage gapDecomposes the gap into explained and unexplained parts using Oaxaca-Blinder, with a bar chart of the raw and adjusted gaps and a discussion of occupation, hours and the child penalty.
5. 5

   Discrimination

   4 lessons

   1. Taste-based discriminationPresents Becker's model where employers have a discrimination coefficient d, the wage gap equal to the marginal discriminator's d, drawn as a supply curve of employers ranked by prejudice with the marginal firm marked.
   2. Statistical discriminationExplains how employers use group averages when individual productivity is unobserved, with a Bayesian signal diagram of overlapping productivity distributions and self-fulfilling expectations, with a worked numerical example.
   3. Measuring discriminationReviews audit and correspondence studies in which identical resumes get different callbacks, with a bar chart of callback rates by name, and regression decompositions of wage gaps.
   4. Policy and affirmative actionReviews the Civil Rights Act, equal pay laws and affirmative action, with a timeline of landmark cases and a graph of the black-white wage gap over time since 1960.
6. 6

   Personnel economics and compensation

   4 lessons

   1. Hiring, matching and job searchModels search with a reservation wage and offer distribution, drawn as a wage offer density with an accept region above the reservation wage, and firm recruiting and screening of applicants.
   2. Piece rates, bonuses and principal-agent problemsAnalyzes pay-for-performance with effort and risk, a payoff diagram showing incentives against risk bearing, and the Lazear Safelite study of piece rates, with multitasking dangers.
   3. Tournaments, promotions and executive payShows how a large prize at the top elicits effort in a rank-order tournament, drawn as a pay ladder with a steep jump at the CEO level, and the Peter principle.
   4. Efficiency wages and deferred payExplains why firms pay above market, using Shapiro-Stiglitz no-shirking, with the no-shirking constraint curve against the labor demand curve, and Lazear's upward sloping wage profile.
7. 7

   Unions and immigration

   4 lessons

   1. Unions and wagesModels a union facing labor demand with monopoly union and efficient bargaining, drawn with indifference curves and the contract curve, and the union wage premium of about 15 percent.
   2. Union membership and strikesCharts union density over time in the US and elsewhere, explains the decline, and models strikes as bargaining under asymmetric information with a Hicks paradox diagram.
   3. Immigration and the labor marketAnalyzes immigration as a supply shift in a labor market diagram with wage and employment effects, and the Card Mariel boatlift natural experiment as a line chart of wages.
   4. Selection, assimilation and fiscal effectsCovers Borjas selection of immigrants by skills with a Roy model diagram, assimilation of earnings over years in the country, and net fiscal impact by education level.
8. 8

   Unemployment and labor mobility

   4 lessons

   1. Measuring unemploymentDefines the unemployment rate, participation and employment ratio from the household survey, with a flow diagram of employed, unemployed and out of labor force states, and a chart of the rate over time.
   2. Labor market flows and the natural rateDerives the steady state u = s / (s + f) from job separation and finding rates, with flow arrows between pools, and decomposes frictional, structural and cyclical unemployment.
   3. Search and matching modelsIntroduces the matching function and the Beveridge curve of vacancies against unemployment, drawn as a downward sloping curve with shifts, and the Diamond-Mortensen-Pissarides intuition, plus how shocks move the economy along it.
   4. Job turnover, migration and the life cycleStudies job creation and destruction, migration as human capital investment, and tenure and wage growth, with charts of gross flows and wage profiles by years of tenure.