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Labor Economics: A Bird’s Eye View

M. Zia Hydari
August 4, 2018

Labor economics is the “study of the factors that underpin choices

made concerning employment, wages, and other terms and condi-
tions of employment for an individual or group of workers.”1 1
Fundamentals of Labor Economics by
Because of the vast number of issues that affect wages and em- Thomas Hyclak, Geraint Johnes, Robert
ployment (e.g., individual’s time, family time, law, regulations, cor-
porate policies, unions, etc.), the range of topics that labor economists
study is large. For instance, the following are some of the topics cov-
ered by Professor Daron Acemoglu and Professor Joshua Angrist in
their graduate labor economics courses at MIT: 2 2
files/12186, and
• Labor supply3 courses/economics/
– Tax and transfer programs (welfare, earned income tax credit, syllabus/.

unemployment insurance)
The basic neoclassical labor supply
models posits that individuals choose
– Household family models (participation decision; family eco- their labor hours so that the sum of
their non-labor income and labor
nomics; children and their parent’s labor supply)
income can satisfy their needs for
– Immigration goods. However not all individuals
choose to work and the choice between
– Life-cycle model4 , 5 working and not working is known as
the participation decision (see Economics
and Consumer Behavior by Angus
• Labor demand Deaton and John Muellbauer).
The life-cycle model is the standard
– Minimum wages and labor supply shifts
framework which economists use to
– Immigration think about the intertemporal allocation
of time, money and effort (see https:
– Unions, bargaining, strikes, and effect of unions on wages //
Theory of spending based on the
• Human capital6 idea that people make intelligent
choices about how much they want
– Schooling and higher education
to spend at each age, limited only
– Experience and on-the-job training (OJT) by the resources available over their
lives. By building up and running
– Education production—school inputs, school quality, student down assets, working people can make
provision for their retirement, and more
and teacher incentives
generally, tailor their consumption
– Government training program patterns to their needs at different ages,
independently of their incomes at each
age (see
• Discrimination ~deaton/downloads/romelecture.pdf).
Human capital corresponds to any
– Wage gaps stock of knowledge or characteris-
tics the worker has (either innate
– Anti-discrimination policy or acquired) that contributes to
his or her “productivity” (see Lec-
tures in Labor Economics by Daron
Acemoglu and David Autor https: