Introduction to Labor Economics Give a brief overview of the presentation. Describe the major focus of the presentation and why it is important. Introduce each of the major topics. To provide a road map for the audience, you can repeat this Overview slide throughout the presentation, highlighting the particular topic you will discuss next. Chapter 1 © 2016 McGraw-Hill Education. All Rights Reserved,

© 2016 McGraw-Hill Education. All Rights Reserved. “Observations always involve theory.” -Edwin Hubble © 2016 McGraw-Hill Education. All Rights Reserved.

Why Study Labor Economics Human resources allocate substantial time and energy to labor markets. Labor economics studies how labor markets work. Labor economics helps us understand and address many social and economic problems facing modern societies. © 2016 McGraw-Hill Education. All Rights Reserved.

© 2016 McGraw-Hill Education. All Rights Reserved. -Importance of labor market: ① The current big issue of job shortage ② Wage income as a major source of income for most people ③ Labor income ratio = 2/3 GDP in most OECD countries ④ Fundamental competitiveness of a country and labor market : the importance of human capital © 2016 McGraw-Hill Education. All Rights Reserved.

© 2016 McGraw-Hill Education. All Rights Reserved. -Some Examples of current labor problems: ① Job creation is not enough ② Too many non-regular workers ③ Wage inequality : polarization ④ Wage peak system ⑤ Minimum wage ⑥ Labor union ⑦ Discrimination: gender. age, educational, college, major © 2016 McGraw-Hill Education. All Rights Reserved.

Basics of the Labor Market Participants are assigned motives: Workers look for the “best” job. Firms look for profits. Government uses regulation to achieve goals of public policy. Minimum wages Occupational safety © 2016 McGraw-Hill Education. All Rights Reserved.

© 2016 McGraw-Hill Education. All Rights Reserved. Three “Actors” Workers The most important actor; without workers, there is no “labor”. Desire to maximize utility (i.e., to optimize by selecting the best option from available choices). Supplies more time and effort for higher payoffs, causing an upward sloping labor supply curve. © 2016 McGraw-Hill Education. All Rights Reserved.

© 2016 McGraw-Hill Education. All Rights Reserved. Three “Actors” Firms 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. © 2016 McGraw-Hill Education. All Rights Reserved.

© 2016 McGraw-Hill Education. All Rights Reserved. Three “Actors” Government Imposes taxes, regulations. Provides ground rules that guide exchanges made in labor markets. © 2016 McGraw-Hill Education. All Rights Reserved.

© 2016 McGraw-Hill Education. All Rights Reserved. Why Do We Need a Theory Explain and understand how labor markets work. Focus on the essential variables while leaving out other, less crucial, factors. Create a model that helps explain the theory. © 2016 McGraw-Hill Education. All Rights Reserved.

Positive vs. Normative Economics Positive economics Addresses the facts Focus on “what is” Questions answered with the tools of economists Normative economics Addresses values Focus on “what should be” Requires judgments © 2016 McGraw-Hill Education. All Rights Reserved.

Supply and Demand in the Engineering Labor Market Equilibrium 50,000 40,000 30,000 20,000 10,000 Labor Supply Curve Labor Demand Earnings ($) Employment © 2016 McGraw-Hill Education. All Rights Reserved.

The Alaskan Labor Market and Construction of the Oil Pipeline Earnings ($) Employment w1 E1 E0 w0 © 2016 McGraw-Hill Education. All Rights Reserved.

Wages and Employment in the Alaskan Labor Market, 1968-1984 © 2016 McGraw-Hill Education. All Rights Reserved.

© 2016 McGraw-Hill Education. All Rights Reserved. Summary Labor economics studies how labor markets work. Models in labor economics typically contain three actors: workers, firms, and governments. A good theory should have realistic assumptions and can be tested with real-world data. The tools of economics are helpful in answering positive questions. © 2016 McGraw-Hill Education. All Rights Reserved.

© 2016 McGraw-Hill Education. All Rights Reserved. Where Are We Going? Worker supply decisions Firm demand decisions Labor market equilibrium Differences in job characteristics Differences in worker characteristics Labor mobility Labor marker discrimination Unionization Incentive pay schemes Unemployment This provides the student with the big picture of the course, assuming the instructor stays with the organization of the text. If some adjustments are needed, you can edit the slide to fit your schedule of topics or add/subtract topics. © 2016 McGraw-Hill Education. All Rights Reserved.

Appendix: Regression Analysis Log Wage Slope = b Change in log wage Years of Schooling Change in schooling a © 2016 McGraw-Hill Education. All Rights Reserved.

Scatter Diagram: Wages and Schooling by Occupation, 2001 © 2016 McGraw-Hill Education. All Rights Reserved.

Choosing Among Lines Summarizing Trends in Data © 2016 McGraw-Hill Education. All Rights Reserved.

The Best-Fit Regression Line © 2016 McGraw-Hill Education. All Rights Reserved.

© 2016 McGraw-Hill Education. All Rights Reserved. Multiple Regression Extending regression analysis to include multiple independent variables Each estimated coefficient shows the impact of a particular variable on the dependent variable, other things constant Standard errors of the regression coefficients are used to evaluate significance of the relations between each particular variable and the dependent variable © 2016 McGraw-Hill Education. All Rights Reserved.