Labor Economics

Introduction

(Sources:  Various references - common knowledge)

Labor Economics:

• Deals with people that work -- with contracts and exchanges in labor markets.

• Economists typically view workers as:

            1.

            2.

            3.

• Labor Economics is interesting for two main reasons:

            1.  The large total value of labor --

            2.  The strong emotional commitments people have to their beliefs about how labor markets work.  Therefore:

                    a. 

                    b. 

• At first glance - labor economics seems simple - supply and demand of labor determines wage, etc.  But supply and demand alone cannot explain everything that goes on in labor markets - more complicated.

Because of how complicated labor markets are - there are many questions surrounding them.  We will (hopefully) eventually answer these questions throughout the semester - although not all economists agree on the right answer to each:

The Top Ten Questions Regarding Labor Markets (according to Deb): 

1.  What are the "obligations" of employers to employees?  Employees to employers?

2.  Do employers have more "power" in bargaining than do employees?  Is there exploitation?

3.  What really determines wages?  Supply and demand?  Discrimination?  Old Boy Network?  Tenure?

4.  Why are wages rigid (if they are)?

5.  How are jobs created?

6.  Can the government create jobs?  Are "make-work" programs successful?

7.  Are there a fixed number of jobs -- such that Bob should retire to be fair to younger Betty who wants his job?

8.  Why do some jobs pay so much more than others?

9.  When a U.S. firm hires people in India, does that decrease the number of jobs for people in the U.S.?

10.  Is unemployment voluntary or involuntary?

Can you think of any I missed?

Two Extreme Views by Economists Regarding Labor Markets:

    1.  Choice Model assumes that individuals have bargaining power AND bargain in an open and free marketplace.

                All individuals have equal bargaining "power."                 

                People always maximize their own utility and in a firm - they maximize monetary profit and rewards.

                There is no coercion - everything free and open, exchange is mutually beneficial, both parties benefit.

                This is the "mainstream" model -- in some models it is assumed that all actors in labor markets have perfect information,

                in others the theory involves a search for information.

                The trade between worker and employer is mutually beneficial - otherwise the trade would not happen.

    2.  Institutional Model assumes we all have a common goal (know what we all want, value in society).

                Rules and regulations exist, there are patterns of behavior that we recognize - these certain laws and customs can be considered

                institutions.

                Labor markets are viewed as institutions and the individuals are not in control - the Institutions develop and override the individual.

                Therefore there is not open and free bargaining  -- individuals have little or no "power" in determining their own situation.

                Choices are constrained or even not choices at all.

                The rules or the institution can be written (explicit) such as a minimum wage law or not written (implicit) such as a cultural norm (won't

                 hire a woman for a job that requires a lot of logical, rational thought).

                There is not freedom in the sense that the Choice Model assumes -- there is coercion in the sense that people are not free to make

                 choices about their lives in labor markets (Joe needs to live and eat - must find a "good" job but can't -- so he's coerced into taking

                 any job he can at any wage).

    Why there is not Mutually Beneficial trade in labor markets under this view?

        1.  Ignorance -

        2.  Legal institutions (barriers to trade)-

        3.  Other institutional constraints (customs, norms)-

We will spend most of our time on the market (exchange) view of labor - however, will look at how the market is not "perfect" because of many things - including institutional factors.

Unique Features of Labor Markets (How do labor markets differ from other markets?)

    1. Multiplicity of markets -

        For Example:  Geography

            a. Local -

            b. National -

            c.  International -

        Choice model says barriers to movement in the market are nonexistent (except perhaps government barriers). 

        Institutional model says there are barriers.

    2.  Nonstandard Workers (Contract) - Every worker is unique - so every contract is unique.

    3.  Continuity of Employment -

    4.  Workers deliver themselves along with their labor -

There are Three Basic Actors in Labor Markets

        1.  Workers:  have choices and preferences.

                Decisions workers make:  Am I going to work or not?  What training will I get?  Should I enter the workforce now or train? 

                Should I work full or part time?

                Labor Supply: 

        2.  Firms:  also make choices - who to hire?  How much to pay?  What working conditions?  What mix of pay (money vs. benefits/perks)?

                Labor Demand:

        3.  Government:  Regulations, laws - the rules of the game.

A lot of Statistics Used in Labor Markets -- Watch Out for the Problems

    Source:  Thomas Sowell, "By the Numbers," Policy Review, Winter 1982, pp. 9-27.

"The problem is not with statistical complexities and subtleties - of which there are many - but with the uncritical reliance of the public, legislatures, and judges on data containing gross misconceptions, arbitrary presumptions, and sophisticated nonsense."

Problems Sowell Mentions:

1.  Smorgasbord Statistics:  heterogeneous items have been added up to achieve statistics in favor of some goal or policy.

        Example:  Measuring discrimination - often compares blacks and whites with the "same" education, measured by years of schooling.

            But the same number of years of school in no way constitute the same education for blacks and whites -- or even across other

            characteristics as well (south vs. north, private vs. public, etc.).

        Watch out for quantitative measures that are qualitatively different. 

        By varying the level of detail, one can reach different conclusions from the same data set.

        Example:  White faculty members earn more than black faculty members as a group - but black Ph.D. holding faculty in a given field

        generally earn more than their white counterparts.

2.  Random Distribution Hypothesis:  many labor economists (and others) assume that if people are distributed randomly in the population -

        they will also be randomly distributed in jobs.  Sowell says this is not so -- this assumes everyone is alike and they are not.

        Example:  If women are 50% of the population in a given geographic area -- will every job have 50% female?

        Example:  Among faculty Ph.D.s in the U.S., Chinese American and Japanese Americans have 47% higher "representation" than whites

        in the natural sciences.  Their Ph.D.s are also from higher ranked departments than those of whites, and they publish more.

3.  Base Year Problem:  In time series -- you can get very different results depending upon the base year used (the longer the period -

        the more trends you will see).  Also -- where an historical trend clearly does exist -- before and after studies are especially

        misleading.

        Example:  The long-term average annual rate of growth of the GNP in the U.S. - from early 20th century to 1970, has been about 3

        percent per year.  As of 1960, the growth rate was as low as 1.9 percent (since 1945) and as high as 4.4 percent (since 1958).   

        The presidential election of 1960 - theme was "get America moving again" -- after a presumably low growth rate under the

        incumbent president.  Whether the growth rate was low or high depended entirely on when you started looking at the numbers.

4.  Pitfalls of Survey Data:  Economists should always question survey data for many reasons:   

        a.  Sample could be a sample of survivors -- who tell one story.

                Example:  survey soldiers who come home after the war.  Their story might be very different than those who didn't.

        b.  Survey data is a study of intentions and not action -- remember, action reveals preference because it entails a cost that

                intentions don't entail.

                Example:  are you going to look for a job this week?  Yes -- then don't.

        c.  Even if one answers correctly -- individual intentions and actions lead to spontaneous orders that cannot be explained or

            predicted by simply looking at individual intentions.

5.  Regression Analysis:  A = f (B, C, D, etc.)

        Regression can't show cause and effect -- only correlation.  Need to have a theory in mind and then find the evidence to see

        if the theory matches reality.  One can only find evidence to support a theory - can't prove or disprove it - use rationality and

        reason to persuade.