CHAPTER 1 INTRODUCTION TO LABOR ECONOMICS 1 st Semester, S.Y 2014-2015

1. CHAPTER 1 INTRODUCTION TO LABOR ECONOMICS 1st Semester, S.Y 2014-2015

2. Chapter Outline • What is Labor Economics? • Labor as an Economic Resource • Circular Flow Model Revisited • Economics Revisited • Microeconomics vs. Macroeconomics • Labor Economics Questions • Economic Models • Normative and Positive Economics • Labor Market: Overview and Perspectives • Characteristics of Labor Market • Functions of the Labor Market • Objectives of Labor Market • Three Actors of Labor Market: Roles and Functions • Workers (Employees) • Firms (Employers) • Government • Graphical Analysis of Labor Market • Why Study Labor Economics?

3. What is Labor Economics? • Labor economicseconomic analysis of how workers, firms and the government interact in shaping the outcomes in the labor market, primarily employment and earnings.

4. What is Labor Economics? LABOR + ECONOMICS

5. Labor is the work time and work effort that people devote to producing goods and services. This includes the physical and mental efforts of all the people who work on farms and construction sites and in factories, shops, offices, etc. In macro level, this refers to the employed individuals in the labor force. Labor

6. Labor is an economic resource which is supplied by households (workers) and demanded by firms (employers). For example, a person working in a factory is considered to be the labor resource. The factory worker sells labor and firm buys labor. Labor is paid in wages (resource payment). Labor as an Economic Resource

7. S S D D Households Firms Circular Flow Model Factor Markets Demand for Resources Supplyof Resources Demand for Goods and Services Supply of Goods and Services Product Markets

8. The study of making choices The study of scarcity The study of resource allocation The study of production and consumption What is Economics?

9. Microeconomics is concerned with the behavior of individual entities such as markets, firms, and households. This answers how labor markets work and how workers (household), employers (firms) and government make decisions Macroeconomicslooks into the behavior of the performance of the economy as a whole. This studies macroeconomic variables such as unemployment that may affect the overall performance of the economy. Microeconomics vs. Macroeconomics

10. Determine whether each of the following cases on labor economics is a concern of microeconomics or macroeconomics. The unemployment rate of the country raised by 3%. A worker’s decision to choose between two offered jobs - job A or job B. The determinants why do some people earn more than others Because of reduced demand, a cellphone company temporarily closes one of its factories and lays off workers.   Government extends tax subsidies to encourage firms to increase their employment. Let’s Check Your Understanding!

11. What is Labor Economics? Labor economics studies how labor markets work. This includes the firm’s demand for the high-skilled workers, wage determination, allocation of a worker’s time to the labor market, the human capital investment, the labor mobility, the labor market discrimination, determination of income distribution, labor force participation, the economic impacts of labor unions and determinants of unemployment.

12. Labor Economics Questions • How employers & employees interact in the labor market? • Are high skilled people better worked at a particular job? • What affects the unemployment rate, and how? • What affects the labor participation rates, and how? • What are the consequences on human capital accumulation? • What are the consequences of marital patterns in the labor market? • Do wage and tax subsidies encourage firms to increase their employment?

13. Labor Economics Questions • Are government subsidies of investment in human capital an effective way to improve the economic well-being of disadvantaged workers? • What is the impact of occupational safety and health regulation on employment and earnings? • What is the impact of affirmative action on the earnings of women and minorities and on the number of women and minorities that firms hire? • What is the economic impact of unions on both their membership and the rest of the economy?

14. To explain and understand how labor markets work, the use of economic models is a must. An economic model is a simplified description of reality used to understand and predict the relationship between variables. Economic Models in Labor Market Analysis

15. Positive economics Addresses the facts. Focuses on “what is”. Questions answered with the tools of economists. Normative economics Addresses values. Focuses on “what should be”. Requires judgments. Positive vs. Normative Economics

16. Determine whether each of the following statements is normative or positive. The labor force participation rate in the Philippines is 64.1% during January 2013. More job fairs should be done to allow people looking for work to meet with many potential employers. Earnings increase with education because the latter raises a worker's productivity. As the wage rate rises, the quantity supplied of labor rises, ceteris paribus. Several politicians have argued that the minimum wage should be raised in order to ensure that unskilled workers can make a decent living. Let’s Check Your Understanding!

17. Labor Market Thelabor marketfunctions through the interaction of workers and employers. The labor market is like other markets in that a commodity (labor services) is bought and sold. It differs from most product markets in several important ways. The labormarket is an example of a factor market. Supply of laborrepresents those people seeking employment (employees) Demand for laborrepresents those people employing workers (employers).

18. Labor services are rented, not sold. Labor productivity is affected by pay and working conditions. The suppliers of labor care about the way in which the labor is used. Fairness, equity or humanness is important, since worker is not a product. Contractual relationship between employers and workers. Unique Characteristics of Labor Market

19. Labor is heterogeneous (skills, character etc. vary) unlike goods which cannot be standardized. There are a variety of labor markets (occupations, locations etc.). Individual skills level may improve overtime due to training and experience. Prices in the labor markets are determined by a variety of other things (inflation, medical aid, standard of living, etc.). Unique Characteristics of Labor Market

20. Allocate human resources among sectors, businesses, locations and occupations. Distribute incomes as rewards to workers. Two Main Functions of the Labor Market

21. Efficiency to achieve maximum output, minimum amount of waste, labor productivity and specialization (division of labor) Equity implying equal opportunity for all to access to jobs, training, treatment at work and payment. Growth higher productivity and incomes, full employment 4. Social justice minimizing any negative effects labor markets may have on workers welfare. Objectives of the Labor Market

22. Participants in the labor market have assigned motives: Workers look for the best job Firms aim and look for profits Government uses regulation to achieve goals of public policy Basics of the Labor Market

23. Three Actors in the Labor Market • Workers (Employees) • Firms (Employers) • Government

24. A worker is an actor of the labor market who supplies labor service for payoff. The most important actor. Without workers, there is no “labor”. Workers want to supply more time and effort for higher payoffs, causing an upward sloping labor supply curve Economists model the worker as an individual who wants to maximize well-being subject to the constraints of time and income. Workers

25. Questions answered by Workers • How much education to attain? • Whether to work or not? • To work for whom (which occupation and industry) and for how much (number of hours)? • How much effort to allocate into a work? • Which skills and trainings (human capital) to acquire on the job? • When to quit, seek new employment or retire? • Whether to join a labor union? • Who to choose for a spouse? • How much to invest in own children’s welfare and education?

26. Decide who to hire and fire Motivated to maximize profits Relationship between price of labor and the number of workers a firm is willing to hire generates the labor demand curve Economists model firms as either trying to maximize profit subject to a production function or minimize costs subject to capital and labor. Firms (Employers)

27. Questions answered by Firms • What type of workers to hire? • How many workers to hire? • What is the duration of work week? • How much is the wage rate? • How much capital to augment the use of labor? • When to layoff or close plant? • How much training to offer the workers? • How to provide safe working conditions? • How to ensure workers maximize their effort and do not shirk their responsibility?

28. Government regulates the “rules of the game” in the labor market. Imposes taxesand grants subsidies Provides ground rules that guide exchanges made in labor markets Government

29. Roles of the Government in the Labor Market • Impose taxes on workers’ earning to meet other public needs. • Subsidize training in profession that the economy or society has a shortage for either • currently or future. • Impose hiring rules based on ethnic makeup of labor force in the firm or economy. • Alter immigration rules to augment immediate labor market needs. • Legislate laws to achieve desire marriage market welfare or of specific populace, example children from divorced families.

30. Determine whether each of the following labor market roles belongs to the workers, firms or government. Deliver safe and better working conditions. Join labor unions. Provide ground rules that guide exchanges made in labor markets. Decide who to hire, promote or fire. Look for the best job as much as possible. Deliver safe and better working conditions Let’s Check Your Understanding!

31. Labor supply curve is upward sloping. Labor demand curve is downward sloping. Equilibrium is where the supply and demand curves intersect. Graphical Analysis of the Labor Market

32. Hourly Wage Graphical Analysis of the Labor Market • Labor supply curve is upward sloping • Labor demand curve is downward sloping. • Equilibrium is where the supply and demand curves intersect. LS 100 LD 2,000 Number of Workers

33. Most of us will spend 30-40 years of our life working for an income so labor markets help determine our Wealth Goods that we can afford Who we associate with? Vacations Which schools we will attend? Maybe, even who we will marry? Human resources allocate substantial time and energy to labor markets A major decision that household members make is the decision to work (career decisions, the amount of hours or effort, human capital acquisition, location) One of the most important decisions that businesses make are employment decisions. Why We Study Labor Economics?

34. Learning labor economics can help us have a better understanding of the real labor economics problems and predict the labor market outcomes. It also helps us understand and address many social and economic problems facing modern societies. More important, public policy issues also need sophisticated analyses of the labor market. The policy issues include but not limited to the following. The change of labor force participation over time in many industrialized countries The impact of immigration on the wage and employment opportunities of local/native workers The rising wage inequality The impact of union on the welfare of both members and non-members Why We Study Labor Economics?