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Introduction to the Labor Market

Introduction to the Labor Market. MAJOR QUESTIONS OF LABOR ECONOMICS. Concern with PRICING & ALLOCATION of Labor 4 Practical Questions Who works? What determines how much people are paid and in what form? Who can move where & why? Why is there unemployment & scarcity of workers?.

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Introduction to the Labor Market

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  1. Introduction to the Labor Market

  2. MAJOR QUESTIONS OF LABOR ECONOMICS • Concern with PRICING & ALLOCATION of Labor • 4 Practical Questions • Who works? • What determines how much people are paid and in what form? • Who can move where & why? • Why is there unemployment & scarcity of workers?

  3. Components of an Economic Model • 3 Parts • Underlying assumptions, including ceteris paribus assumption • Theory of behavior • Predictions • Positive Model: value free

  4. CONTRADICTIONS IN THE MARKET • Employer need for flexibility vs. Employee need for income security • Demand for skilled workers vs. Failed Public Schools & Aging Work Force • Worker demand for non-wage benefits vs. Increasing cost of those benefits • Globalization of production & markets

  5. NEOCLASSICAL APPROACH TO LABOR MARKETS An Introduction

  6. LABOR MARKET THEORIES • Neoclassical Market Theory • Governed by Supply & Demand • Use of Efficiency Decision Rule • Internal Labor Market Theory • Governed by Administrative Rules Neoclassical Market Theory Institutional approach: Internal Labor Market Theory

  7. CLASSICAL DEFINITION OF THE MARKET Three Basic Problems Solved by Economy: Production What is Produced Distribution How it is Produced How Output & Income is Distributed

  8. MARKET PROCESS • Motivation: Self-Interest • Constraint: Competition • Mechanism: Prices FEATURES OF THE SYSTEM

  9. OUTCOMES OFMARKET PROCESS What: Consumer Sovereignty (“Willingness to Pay”) • How: Least Cost Production • Who: Supply & Demand for factors of Production • Perfect market: one with infinite number of small consumers and producers SOLUTIONS

  10. UNDERLYING ASSUMPTIONS • Individuals are rational (prefer A to B and B to C, etc.) • Information is perfect & costless • More is better • Instant adjustments • Zero transaction costs • People know their trade-offs

  11. UNIQUENESS OF LABOR • Labor Services Rented not Purchased • Use of Labor Services - Time-Specific • Workers Heterogeneous (Asset specificity) • Chronic Excess Supply & Shortages • Continuity of Employment Relationship • Rare that individual can increase demand by dropping wage • Labor Concern with non-pecuniary factors

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