Chapter 1: Introduction

Transcription

1 Econ 31 Labor Economics Chapter 1: Introduction Instructor: Hiroki Watanabe Fall 1 Watanabe Econ 31 1 Introcution 1 / 3 1 Methodology Labor Market 3 Groundwork Now We Know Watanabe Econ 31 1 Introcution / 3 1 Methodology The Way We See It Labor Market 3 Groundwork Now We Know Watanabe Econ 31 1 Introcution 3 / 3

2 The Way We See It Definition 1.1 (Positive & Normative Analysis) 1 Positive analysis: price, equilibrium etc. Normative analysis: efficiency etc. Income tax discourages labor supply. Income tax rate should be less than % (what for?) Watanabe Econ 31 1 Introcution / 3 The Way We See It Economic model is distillation of reality. Precise description of St. Louis labor market doesn t carry over. Watanabe Econ 31 1 Introcution 5 / 3 The Way We See It Why do we use mathematics? 1 Communication Assumptions made clear. 3 Error-proof More result 5 More applications Watanabe Econ 31 1 Introcution / 3

3 1 Methodology Labor Market Labor-Market Equilibrium 3 Groundwork Now We Know Watanabe Econ 31 1 Introcution 7 / 3 Aggregate supply of labor hours is L s hours. L s is a product of 1 wage, W size of labor force, N 3 wage in alternative industries W A. Watanabe Econ 31 1 Introcution / 3 Definition.1 (Aggregate Labor Supply Function) Aggregate labor supply function S(W, N, W A ) tells you the length of total labor hours supplied for a given combination of (W, N, W A ). Watanabe Econ 31 1 Introcution 9 / 3

4 Aggregate Labor Supply S(W, N=, W A =) Labor Supply L s (hours) Watanabe Econ 31 1 Introcution / 3 Example. (What s On It and What Not) W S August September How? Is graph on p.13 useless? Watanabe Econ 31 1 Introcution 11 / 3 Labor Force N Labor Supply L s (hours) Watanabe Econ 31 1 Introcution 1 / 3

5 The chart in Example. should have been: W S N W A August September 1 Watanabe Econ 31 1 Introcution 13 / 3 Definition.3 (Movement along a Curve vs Shift) August September October W S N 1 W A Ceteris Paribus Reference Month No Yes On p.13 Curve Shift Along a Curve Watanabe Econ 31 1 Introcution 1 / 3 Question. (Ceteris Paribus) Why do we have to worry about ceteris paribus? 1 There is an increase in labor supply from August to October because... There is an increase in labor supply from August to September because... Watanabe Econ 31 1 Introcution 15 / 3

6 1 Alternative Wage W A Labor Supply L s (hours) Watanabe Econ 31 1 Introcution 1 / 3 Definition.5 (Aggregate Labor Demand Function) Aggregate labor demand function D(W, Q, R) tells you the aggregate demand for labor hours L d for a given combination of (W, Q, R), where Q is quantity demanded of cheesecake and R is rent on kitchen. Watanabe Econ 31 1 Introcution 17 / 3 Labor demand D(W, Q, R) is a derived demand. Watanabe Econ 31 1 Introcution 1 / 3

7 Assumption. (Labor Demand) 1 W L d Q L d 3 R L d if chefs and kitchen are gross substitutes. L d if chefs and kitchen are gross complements. Watanabe Econ 31 1 Introcution 19 / 3 On ➌ in Assumption. : Definition.7 (Substitution & Scale Effect) Upon W 1 Substitution effect: bakeries substitute away from labor toward kitchen. Scale effect: bakeries scale down its operation, including both labor and kitchen. a a Analogous to income effect in consumer theory. If substitution effect overwhelms scale effect, chefs and kitchen are gross substitutes. Otherwise, they re gross complements. Watanabe Econ 31 1 Introcution / 3 Labor-Market Equilibrium Definition. (Equilibrium) 1 Labor market is in equilibrium if L s = L d. Equilibrium wage rate W is such a rate that S(W = W, N, W A ) = D(W = W, Q, R). Watanabe Econ 31 1 Introcution 1 / 3

8 Labor-Market Equilibrium Aggregate Labor Supply S(W, N, W A ) 9 Aggregate Labor Demand D(W, Q, R) Labor Supply L s, Labor Demand L d (hours) Watanabe Econ 31 1 Introcution / 3 Labor-Market Equilibrium Example.9 (Platinum) Listen to the Marketplace Audio Clip platinum off-take hasn t kept up with the supply. How does this affect labor demand? How does the shooting affect aggregate labor supply? 3 How does the shooting affect equilibrium wage? Watanabe Econ 31 1 Introcution 3 / 3 Labor-Market Equilibrium Aggregate Labor Supply S(W, N, W A ) Aggregate Labor Demand D(W, Varying Q, R) Labor Supply L s, Labor Demand L d (hours) Watanabe Econ 31 1 Introcution / 3

9 Labor-Market Equilibrium Aggregate Labor Supply S(W, Varying N, W A ) Aggregate Labor Demand D(W, Q, R) Labor Supply L s, Labor Demand L d (hours) Watanabe Econ 31 1 Introcution 5 / 3 1 Methodology Labor Market 3 Groundwork Neoclassical Economics These Will Come in Handy New Institutional Economics Now We Know Watanabe Econ 31 1 Introcution / 3 Neoclassical Economics Key concepts in neoclassical economics: 1 rational choice equilibrium 3 Pareto efficiency Watanabe Econ 31 1 Introcution 7 / 3

10 Neoclassical Economics Definition 3.1 (Rational Choice) 1 Rational choice: all agents will choose the best alternative among what is affordable. Consumers Firms Watanabe Econ 31 1 Introcution / 3 Neoclassical Economics Definition 3. (Equilibrium) Equilibrium: The economy is in equilibrium if the resulting allocation is feasible and involved agents decision is rational. Watanabe Econ 31 1 Introcution 9 / 3 Neoclassical Economics Definition 3.3 (Pareto Efficiency) 3 Pareto efficiency: If there is no feasible allocation of resources that makes Liz happier without hurting Kenneth, then the current allocation is Pareto efficient. No price involved. Watanabe Econ 31 1 Introcution 3 / 3

11 Neoclassical Economics Discussion 3. (Efficiency and Equity) Suppose there is a whole cheesecake in the economy. Which allocation ( L, K ) is Pareto efficient? 1 ( L, K ) = (.5,.5). ( L, K ) = (.,.). 3 ( L, K ) = (.,.). ( L, K ) = (.1,.99999). 5 ( L, K ) = (1, ). ( L, K ) = (.5,.5), throw away.1. 7 ( L, K ) = (1.,.). Watanabe Econ 31 1 Introcution 31 / 3 These Will Come in Handy Marginal condition: Is this additional chef worth hiring? Comparative statics: comparison of two equilibrium states. Watanabe Econ 31 1 Introcution 3 / 3 These Will Come in Handy Aggregate Labor Supply S(W, Varying N, W A ) Aggregate Labor Demand D(W, Q, R) Labor Supply L s, Labor Demand L d (hours) Watanabe Econ 31 1 Introcution 33 / 3

12 These Will Come in Handy Btw, make sure you hold other variables still (Recall Question. ) Watanabe Econ 31 1 Introcution 3 / 3 New Institutional Economics Neoclassical economics: firms and families are regarded as a single decision maker. New institutional economics regards firms and families as a collection of individual decision makers. assumes bounded rationality. Watanabe Econ 31 1 Introcution 35 / 3 1 Methodology Labor Market 3 Groundwork Now We Know Watanabe Econ 31 1 Introcution 3 / 3

13 Positive vs normative Labor market Three assumptions of neoclassical economics Watanabe Econ 31 1 Introcution 37 / 3 aggregate demand for labor hours, 17 aggregate supply of labor hours, bounded rationality, 35 ceteris paribus, 1, 15 comparative statics, 3 derived demand, 1 equilibrium, 1, 7, 9 equity, 31 gross complements, 19, gross substitutes, 19, L d, see aggregate demand for labor hours L S, see aggregate supply of labor hours marginal condition, 3 movement along a curve, 1 N, see size of labor force neoclassical economics, 7 new institutional economics, 35 normative analysis, Pareto efficiency, 7, 3 Pareto efficient, 31 positive analysis, Q, see quantity demanded of cheesecake quantity demanded of cheesecake, 17 R, see rent on kitchen rational choice, 7, rent on kitchen, 17 scale effect, shift, 1 size of labor force, substitution effect, W, see wage W A, see wage in alternative industries wage,, 17 wage in alternative industries,