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                                                       Chapter 1
                                              Introduction to 
                                          Labour Economics
                                  McGraw-Hill/Irwin
                                Labor Economics, 4th edition       Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.
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                                    Some General Course Information
                               • Discussion of class handouts:
                                   - Course information sheet. 
                                   - Supplementary reading list.
                                   - New Zealand Official Yearbook 2008, Chapter 14 
                                     “Labour Market”. 
                               • Paper pre-requisites:
                                      st
                                   - 1 year micro (basic demand & supply curves etc.). 
                                   - Basic understanding of econometrics helpful (brief intro 
                                     given at end of chapter 1). 
                               • The textbook emphasizes theory and facts.
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                                                                                    Why Study Labour Economics?
                                                                   • MhMost humans allllocate subbstantiiall tiime andd energy to thhe llabbour 
                                                                       market.
                                                                   • Labour economics studies how labour markets work. It is, 
                                                                       therefore, important for all of us! The functioning of the labour 
                                                                       market(s) also important for economy as a whole (i.e. at macro 
                                                                       lllevel)).
                                                                   • Labor economics helps us understand and address many social 
                                                                       and economic problems facing modern societies (see p. 1-2).
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                                                                                          Basics of the Labour Market
                                                                   ••  WWee startstart withwith aa simsimpleple neoneo-classicalclassical labourlabour mmaarketrket (workers(workers 
                                                                       and firms want to maximize their objectives; the market clears; 
                                                                       ‘homogenous’ labour).
                                                                   • Participants are assigned motives:
                                                                           - Workers look for the best job.
                                                                           - FiFirms llookk ffor proffiits.
                                                                           - Government. It uses regulation to achieve goals of public policy.
                                                                                    • Minimum wages
                                                                                    • Occupational safety
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                                            Three “Actors”
                          • WkWorkers:
                              - The most important actor; without workers, there is no “labour”.
                              - Desire to optimize (to select the best option from available 
                               choices) to maximize well-being. 
                                 • Workers decide: Whether to work or not; how many hours to work; 
                                  hhowow mmuuchch effoeffortrt toto pputut inintoto wowork;rk; wwhichhich skskillsills toto acquiacquirere andand 
                                  when; which occupation to enter; when to quit a job; etc.  
                              - Workers will want to supply more time and effort for higher 
                               payoffs, (usually) causing an upward sloping labor supply 
                               curve. 
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                                           Three “Actors”
                          • FirmFirms:s:
                              - Decide who to hire and fire; the length of the workweek (?); how much 
                               capital to employ (thereby affecting worker productivity); whether to 
                               offer a risky or a safe working environment, etc.
                              - Motivated to maximize profits (at least that’s the standard story). A firm 
                               decides how much to produce to maximize profits. This determines how 
                               much labour it hires (therefore demand for labour is derived demand).  
                              - Relationship between price of labour and the number of workers a firm 
                               is willing to hire generates the labour demand curve. It has a negative 
                               slope, i.e. workers and firms enter the labour market with conflicting 
                               interests (see simple labour market diagram FIGURE 1-1, p. 4).
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                                                                         FIGURE 1-1: Supply and Demand in 
                                                                                                 the Engineering Market
                                                                                                     Earnings ($)
                                                                                                                                                                  LLaaboborr Supply  Supply 
                                                                                                                                                                           Curve
                                                                                                   50,000
                                                                                                                                                               Equilibrium
                                                                                                  40,000
                                                                                                                                                                           Labor Demand
                                                                                                   30,000                                                                        Curve
                                                                                                                     10,000         20,000            30,000
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                                                                                                                  Three “Actors”
                                                                   ••  TheThe thirdthird mamajjoror playerplayer inin thethe labourlabour mamarrketket isis thethe governmgovernmeentnt.
                                                                           - Imposes taxes (e.g. income tax), subsidizes education and 
                                                                                training, imposes regulations (hours worked, minimum wage, 
                                                                                equal opportunity, health and safety, migration etc.).
                                                                           - The government’s actions provide the ground rules that guide 
                                                                                exchangesexchanges mamadede inin labourlabour mamarrketskets.
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