• <b>Federal Trade Commission</b>

Labor Economics


1. Labor Supply


The neclassical model of labor supply examines numerous aspects of labor-supply decisions, including the decision to work, how many hours to work conditional on working, how changes in nonlaobr income affect work decisions, how changes in wage rates affect labor-supply decisions, how the implementation of government programs (e.g., welfare/workfare) affect labor-supply decisions and how labor-supply behavior changes over the life cycle. While there are other models of labor supply that offer different conclusions and predictions, the neoclassical model is typically a good starting point to consider how changes in economic conditions or government interventions might alter work incentives and, hence, decisions. In the Pencasts for this topic, we examine worker preferences, budget constraints, the hours worked and participation decisions, how a change in the wage rate affects labor supply, and how a variety of different government policies affect work incentives.


2. Labor Demand


The topic of labor supply is important, but labor-market outcomes also depend on the hiring and firing behavior of firms. The neoclassical model of labor demand begins with the plausible assumption that firms hire/fire workers due changes in the demand for the goods that the firm produces (often referred to as "derived demand"). The model of labor demand focuses on the following decisions made by firms: short-run hiring/firing decisions, long-run hiring/firing decisions, and the ability of firms to substitute between capital and labor when their relative prices change. In the Pencasts for this topic, we cover the basics of production functions, employment in the short run, isoquants and their shapes, the minimization of costs, the maximization of output, and how changes in factor prices affect the demand for labor in the long run.


3. Labor Market Equilibrium


Workers prefer to receive high wages, but employers prefer to pay low wages. Labor markets balance out these competiting forces, which gives rises to an equilibrium wage and an equilibrium quantity of labor that is bought and sold. This topic focuses on the process throught which wages and employment levels are set, how changes in economic conditions alter wages and employment levels and how various government interventions affect competitive labor markets. The policies examined are the following: payroll taxes, employment subsidies, mandated benefits, immigration and minimum wages. In addition, noncompetitive markets, e.g., monopsony and monopolies, are examined.


4. Compensating Wage Differentials


In reality, workers are paid different wages. In part, the different wages received are due to their skills and preferences. Some workers are engineers, while others are laborers. Some workers prefer to do their work outdoors, while others prefer to sit behind a desk. Some workers have strong preferences for the geographic location of their job, while others have little or no preference for a particular city, state, or country. While workers differ in their characteristics and preferences, jobs also differ in their characteristics. Some jobs are risky, safe, physically demanding, and involve performing repetitive tasks. Compensating wage differentials are effectively compenstation for nonwage aspects of a job. For example, firms offering unpleasant working conditions may compensate workers in some way, perhaps with a higher wage, for the unpleasantness of the job. The theory of compensating wage differentials posits that the allocation of labor is not the result of random sorting, which is the case in the competitive model. Instead the theory of compensating wage differentials contends that it matters which workers work for particular firms.


5. Human Capital


In competitive labor markets, workers in the labor market are paid a uniform wage rate. In reality, this is not the case: different workers are paid different wages. The theory of compensating wage differtials posits that different wages result because jobs differ in their amenities. By contrast, the human capital model of wage determination contends that wages differ across workers because of differences in skill level. Much of a person's human capital is acquired through schooling or job training. It is important to understand why some individuals drop out of high school, graduate from high school, go to college or obtain graduate-level degrees. In addition, a critical question for public policy is whether public investment in schooling is a good idea, as public policy takes an active role in setting human capital policy. In the Pencasts for this topic, we develop the schooling model, demonstrate how differences in ability can give rise to earnings differences not attributable to schooling, examine an alternative theoretical framework in which education serves as a signal rather than an investment that augments productivity, and examine general and specific on-the-job training.


6. Labor Market Discrimination


The characteristics of jobs and workers often result in differences in pay. But it is possible for earnings differences to arise between equally skilled workers in competitive labor markets. In the Pencasts for this topic, we demonstrate how particular demographic characteristics, such as race, ethnicity, gender or sexual orientation, can generate wage dispersion. Differences based on such demographic characteristics are often attributed to discriminaiton. In economics, there are two primary theories of discrimination, one that is based on prejudice and another that is based on imperfect information. We examine both of these frameworks in the Pencasts for this topic.


7. Unemployment


The reason why some workers are unemployment is an important question in labor economics. While we have posited that competitive labor markets equate labor supply and labor demand, unemployment is common across labor markets. Unemployment can occur for many reasons, and some reasons are more worrysome than others. For example, workers could be in between jobs. A worker could have recently quit his/her job, and they are now searching for a replacement job. A mother/father could have exited the labor force for a period of time to rear their children and could be re-entering the labor force. In the Pencats for this topic, we cover the flows betweeen employment and unemployment, determinants of the asking wage (i.e. the wage recquired to get an unemployed job seeker to accept a job), and the tradeoff between inflation and unemployment.


8. Income Inequality


Income inequality has increased in the U.S. (and many other countries) over the last 30 years or so. As a result, academics and policymakers have debated the pros and cons of increased income equality and what, if anything, should be done about it. Because the analysis of income inequality is mostly empirical, the Pencasts for this topic focus on how one might measure inequality using a Lorenz Curve and calcluating a Gini Coefficient.


9. Labor Mobility


The analysis of a competitive labor market reveals that the value of the marginal product of labor is the same across firms, making the equilibrium outcome efficient. However, the outcomes in the real world do not quite fit the predictions from the competitive model. There is a great deal of incomplete information between what workers and firms know. For example, workers are often inadequately informed about job opportunities in other areas, and firms are rarely able to measure the value of a worker's marginal product with any high degree of precision. In the Pencasts for this topic, we develop some simple models designed to help us think through individual and family decisions to migrate from one area to another. We also examine how demographic factors, migration costs, and self selection affect migration decisions.


10. Labor Unions


Unions are often considered the only institution that represents the interests of workers. While union membership has fallen steadily over time, unions still represent a nontrivial share of the workforce. In our framework, we assume that the goal of a union is to maximize the well-being of its members and a firm is assumed to maximize its profits. In these pencasts, we examine the decision to join a union, the crowding or spillover effects of unions, monopoly unions, contracts between unions and firms, strikes and the optimal duration of a strike.


11. Incentive Pay


Thus far, we have studied what are called spot labor markets, in which firms and workers interact to determine equilibrium wages and employment. In these Pencasts, we examine in more detail the employment contract between workers and firms. The terms of the labor contract affect both the productivity of workers and the profits of firms, as employers rarely observe a worker's marginal product and workers prefer to earn high wages by exerting as little effort as possible. As a result, firms could use different compensation schemes, such as piece rates, time rates and delayed compensation contracts. We cover each of these different compensation schemes as well as the determination of an efficiency wage.