1. Labor Economics
Barcelona GSE
Spring 2014

2. The Course Instructor: Libertad González TA: María Lombardi Evaluation
Final exam (June 23), 50%.
Referee report, 20%.
Research proposal, 30%.

3. The referee report
2-3 pages with a critical assessment of a recent research paper in labor economics (due May 5).
In groups of 2 students.
Structure: summary, recommendation, comments.
Where to choose the paper from:
NBER wp in Labor Studies.

4. Recent NBER working papers
w19979 Sandra Black, Paul J. Devereux, Kjell Salvanes: “Does grief transfer across generations? In-utero deaths and child outcomes”
w19962 Petra Moser, Alessandra Voena, Fabian Waldinger: “German-Jewish Emigres and U.S. Invention”
w19936 Casey B. Mulligan: “The Economics of Work Schedules under the New Hours and Employment Taxes”
w19944 Tom Chang, Joshua S. Graff Zivin, Tal Gross, Matthew J. Neidell: “Particulate Pollution and the Productivity of Pear Packers”
w19932 Andri Chassamboulli, Giovanni Peri: “The Labor Market Effects of Reducing Undocumented Immigrants”
w19884 Jessamyn Schaller, Ann Huff Stevens: “Short-run Effects of Job Loss on Health Conditions, Health Insurance, and Health Care Utilization”

5. The project Obviously the course project will not be a finished paper.
But it should represent some progress.
You should have your theoretical background, your identification strategy, and some preliminary empirical analysis.
The in-class presentations will take place in early June, and the final written version will be due June 16.
8 pages max (1 page intro, 1 methods, 1 data, 2 results, 1 conclusions and references, 2 tables and figures).

6. Textbooks
George Borjas, Labor Economics, McGraw Hill, 6th edition (2012).
Ronald G. Ehrenberg and Robert S. Smith, Modern Labor Economics, Pearson, 11th edition (2011).
Pierre Cahuc and André Zylbergerg, Labor Economics, The MIT Press (2004).

7. Outline of Topics Lectures 2, 3. Labor Supply.
Lectures 4, 5. Labor Demand.
Lectures 6, 7. Labor Market Equilibrium.
Lectures 8, 9. Education and Human Capital.
Lectures 10, 11. Changes in the Wage Structure.
Lectures 12, 13. Labor Mobility
Lectures 14, 15. Discrimination
Lecture 16. Unions
Lectures 17, 18. Unemployment

8. Goals of the course Understanding research in labor economics
Being able to generate your own research in labor economics

9. Today’s Outline The field of Labor Economics.
Overview of the labor market.

10. Today’s Reading List Borjas, Chapter 1.
Ehrenberg & Smith, Chapters 1 & 2.
Cahuc & Zylberberg, Introduction.

11. 1. Labor Economics
“Labor economics studies how labor markets work” (Borjas)
“The study of the workings and outcomes of the market for labor” (Ehrenberg)
“The study of the markets in which labor services are exchanged for wages” (Cahuc).

12. Why Do We Study Labor Economics?
Income earned by working is a large fraction of total income.
Most of the population are wage-earners.
Many social policy issues concern the labor market experience of certain workers or the employment relationship between workers and firms.

13. A Brief History of the Discipline
Adam Smith.
Labor Economics as an autonomous discipline, US 1940’s.
Profound transformation in the last 3 decades of the 20th century.
Labor Economics today.
Theory, testable implications, empirical analysis.

14. 2. Overview of the Labor Market
Agents: workers and firms (and government).
Households. Households decide how much labor to supply.
Firms. Firms decide where, what and how much to produce, and whom to hire.
The labor market allocates workers to jobs and coordinates employment decisions.
See Chapter 2 of Ehrenberg & Smith for an overview of demand, supply and equilibrium.

15. Households

16. Households
demand
for goods

17. Households
Firms
demand
for goods
supply of
goods

18. Households
Firms
MARKET
demand
for goods
prices of goods
(D=S)
supply of
goods

19. Households
Firms
MARKET
demand
for goods
prices of goods
(D=S)
supply of
goods
demand for hours
by occup., as a f. of
wages, p. of K, r
supply of hours
to diff. occupations,
as a f. of wage

20. Households
Firms
MARKET
demand
for goods
prices of goods
(D=S)
supply of
goods
Labor
market
equilibrium
D=S
demand for hours
by occup., as a f. of
wages, p. of K, r
supply of hours
to diff. occupations,
as a f. of wage

21. Households
Firms
MARKET
demand
for goods
prices of goods
(D=S)
supply of
goods
Labor
market
equilibrium
D=S
demand for hours
by occup., as a f. of
wages, p. of K, r
supply of hours
to diff. occupations,
as a f. of wage
Level of employment
Wage distribution
Frictional unemployment

22. Households
Firms
MARKET
demand
for goods
prices of goods
(D=S)
supply of
goods
Labor
market
equilibrium
D=S
demand for hours
by occup., as a f. of
wages, p. of K, r
supply of hours
to diff. occupations,
as a f. of wage
Level of employment
Wage distribution
Frictional unemployment
Non-competitive
features and
institutions

23. Households
Firms
MARKET
demand
for goods
prices of goods
(D=S)
supply of
goods
Labor
market
equilibrium
D=S
demand for hours
by occup., as a f. of
wages, p. of K, r
supply of hours
to diff. occupations,
as a f. of wage
Level of employment
Wage distribution
Frictional unemployment
market power
(unions,
monopsony)
Non-competitive
features and
institutions
wage barriers
discrimination

24. Main outcomes
Wages
Employment
Unemployment

25. Data and recent trends
How to measure the aggregate levels of wages and employment?
Household survey data
CPS (US), EPA (Spain), …
Administrative data
Social Security, etc.
Firm survey data

26. i) Wages
Terminology: wages, earnings and income.

27. The wage distribution
The wage distribution is usually quite asymmetric, with a long right tail.
Dispersion varies a lot across countries and over time.

28. Weekly earnings distribution, US (CPS, April 2013, ft men 25-64)

29. Weekly earnings distribution, US (CPS, April 2013, ft men 25-64)
Median = 640

30. Weekly earnings distribution, US (CPS, April 2013, ft men 25-64)
Median = 640
Mean = 780

31. Weekly earnings distribution, US (CPS, April 2013, ft men 25-64)
Median = 640
Mean = 780
10th
Percentile
= 370

32. Weekly earnings distribution, US (CPS, April 2013, ft men 25-64)
Median = 640
Mean = 780
10th
Percentile
= 370
90th percentile
= 1280

33. Yearly earnings distribution, Spain (EES 2010, full-time workers)

34. Yearly earnings distribution, Spain (EES 2010, full-time workers)
Median =
p10 =
Mean =
p90 =

35. Measures of wage inequality
Gini coefficient
Percentile ratios
90/10
90/50
50/10

36. Examples US 2013 (weekly) Spain 2010 (yearly) 90/10: 3.5 90/50: 2
90/10: 3.5
90/50: 2
50/10: 1.7
Spain 2010 (yearly)
90/10: 4.6
90/50: 2.2
50/10: 2.1

37. Why do wages vary so much?
The human capital model as a starting point.
Wage regressions à la Mincer.
Age, education.
Augmented with: region, sex, ethnicity, marital status…

38. How much can we explain? “Explained” fraction of total wage variance:
Years of education

39. How much can we explain?
“Explained” fraction of total wage variance:

40. How much can we explain?
“Explained” fraction of total wage variance:

41. How much can we explain?
“Explained” fraction of total wage variance:

42. How much can we explain?
“Explained” fraction of total wage variance:

43. Average annual earnings by education (Spain, 2010)

44. Changes over time
In some rich countries (USA, UK), large increases in wage inequality since the 1970’s.
Not so much in others (France, Germany, Japan, Spain).

45. The case of the USA
Between 1980 and 2000, wage inequality increased dramatically.
Between workers with different education levels, years of experience, and age.
But also between workers with the same demographic characteristics.
Education, experience, sex, occupation, industry.

46. What can explain these trends?
Supply changes?
International trade?
“Skill-biased technological change”?
Institutional changes?
Unions, minimum wage.

47. ii) Employment
In equilibrium, the labor market determines the level of employment.
The number of people working.
In different regions, industries and occupations.
This level can be affected by different factors.
Both supply and demand factors.

48. Recent trends
One of the most pronounced international trends in the past few decades has been the dramatic increase in female employment.

50. What can explain this trend?
Technological progress
Household appliances, processed foods…
Falling fertility
Modern contraceptive methods.
The increasing weight of the services sector.
Higher salaries
Less discrimination (both via legislation and changes in social norms).

51. iii) Unemployment
Definition
Measurement
Trends

52. Working-age
population

53. Labor force
Working-age
population
Inactives

54. Employed
Labor force
Working-age
population
Unemployed
Inactives

55. Employed
Labor force
Working-age
population
Unemployed
Inactives

56. Employed
Labor force
Working-age
population
Unemployed
30 m
Inactives

57. Employed
22.5 m
Labor force
Working-age
population
Unemployed
30 m
Inactives
7.5 m

58. 16.6 m
Employed
22.5 m
Labor force
Working-age
population
5.9 m
Unemployed
30 m
Inactives
7.5 m

59. The unemployment rate UR = N. Unemployed / Labor Force
= N. Unemp. / (N. Employed + N. Unemployed)
Spain 4th q. 2013: UR = 5.9/22.5 = 26.1%
But: the unemployed are 19.6% of the working-age population.
44.6% of the working-age population are not working (unemployed+inactives).

60. How do we measure it?
How do we “count” the employed, unemployed and inactive?
Labor Force Surveys:
Periodic surveys to a representative sample of households.
Spain: “Encuesta de Población Activa”.
A quarterly survey to a representative sample of households.
Who “counts” as unemployed?
Those not working, but “actively” looking for a job.
Otherwise, “inactive”.

61. Unemployment rate in Spain, 1980-2012
Fluctuation between 8 and 25% at the national level (much more at the regional level). 61

62. Unemployment rate by province, Spain 2012
Give some specific numbers, min and max? 62

63. Unemployment rate by characteristics (Spain, 1st q. 2013)63 63 63

64. Unemployment rate, USA 1950-2013

65. International unemployment rates, 1983-2013

66. Next: Labor Supply