Labour Economics Flashcards

Flashcards for reviewing Labour Economics lecture notes.

Labour Economics

Examines how labour markets work.

Workers Objective

Individuals want to maximise their well-being, considering utility from consumption, leisure, health and constraints like limited hours and income.

Firms Objective

Firms want to maximise their profits, considering labour as an input of production, and constraints like limited workers, consumer demand and regulations.

Government Objective

Governments wants to maximise social welfare, considering constraints like tax income and elections and policy tools such as regulations, taxation, and public finance.

Unemployment rate

Share of the labor force without work but available for and seeking employment.

Labour force (LF)

Everyone who is either employed or unemployed and actively looking for a job: LF = E + U.

Employed (E)

Everyone who is (self-)employed and worked for at least 1 hour for pay/profit, or worked for at least 15 hours on a nonpaid job.

Unemployed (U)

Everyone who is over the age of 16 and below the retirement age, was either without a job or on a temporary layoff, and available plus actively seeking work.

Temporary layoffs

Workers who are suspended from work but have a date to return or expect to return within six months.

Non labour force

Individuals who are neither employed, nor actively looking for work are classified as outside of the labour force.

Hidden unemployment

Individuals who have given up searching for a job due to negative experiences and expectations.

Labour force participation rate

LFPR = LF / P Fraction of the working age population (P) that is in the labour force.

Employment rate

ER = E / P Fraction of the working age population that is employed.

Unemployment rate

UR = U / LF Fraction of the labour force that is unemployed.

Descriptive analysis

Establish facts about economic patterns we observe in the real world, provide basis for theory.

Causal analysis

Test theoretical predictions with real world data, quantify effect sizes.

Ideal experiment

Compare outcomes of an individual who received treatment X to outcomes had they not received said treatment.

Univariate regression

Expresses the dependent variable Yi as a linear combination of an intercept ↵, the explanatory variable Xi and an error term ui : Yi = ↵ + ⇤ Xi + ui.

Multivariate regression

A multivariate regression that can control for observable omitted variables by including them in the regression.

Utility function

Agent derives utility from two sources, consumption (C) and leisure time (L). U = f(C, L)

Marginal rate of substitution

The slope of the IC measures the rate at which an agent is willing to give up leisure time in exchange for additional consumption while holding utility constant: 4C / 4L = - MUL / MUC

Reservation wage

There exists a wage wres below which working always reduces an agent’s utility.

Normal good

Commodity whose consumption increases with income (at constant prices).

Income effect

Agents become wealthier, increasing their demand for labour and reducing hours worked.

Substitution effect

The opportunity costs of not-working increase, making leisure more expensive and raising hours worked.

Household production function

Assuming that a HH is formed of two agents who can both divide their work time between market and non-market labour, they can pool their hours and skills to achieve the optimal HH outcome

Unitary model

Assume that HH decides as one unit (no bargaining).

Individual LS curve

Predicted relation between hours of work and the wage rate.

Aggregate LS curve

Total hours of work in the economy (or a given market) at each wage rate.

Labour supply elasticity

The responsiveness of hours of work to the wage rate. = %change in work hours / %change in wage rate = 4H/H / 4w/w = 4H / 4w ⇤ w / H

Labour participation elasticity

Percentage change in the likelihood of agents working if the wage rate increases by 1 percent.P = %change in participation likelihood / %change in wage rate = 4P(H>0)/P(H>0) / 4w/w

Social security programmes

Social security programmes provide cash transfers to low income families to avoid (extreme) poverty.

Unconditional cash transfer

The government pays individuals who are out of work a certain amount regardless of whether or not they are looking for work.

Universal Basic Income

Basic income guarantee for all citizens. No means testing, no work requirements or ban.

Earned Income Tax Credit (EITC)

Cash transfer that low income workers receive when they are working.

Life cycle models

Dynamic labour supply choices.

Intertemporal substitution hypothesis

Hours of work move with the wage rate over the life-cycle!

Evolutionary wage change

No income effect, only substitution effect across periods.

Frisch elasticity of labour supply

Variation in labour supply due to anticipated wage changes that leave lifetime income unaffected.

Marshallian elasticity of labour supply

Income and substitution effect variation in labour supply due to a wage change that shifts lifetime income.

Added-worker effect

Labour force participation rate is counter-cyclical.

Discouraged worker effect

Labour force participation rate is pro-cyclical

Intertemporal labour supply elasticity

Percentage change in hours worked year to year in response to a 1% wage increase from one year to the next.

Labour demand

Firm side: how many workers (work hours) are firms willing to hire.

Production function

The technology that firms use to produce goods. q = f(E,K)

Marginal product of labour (MPE)

The change in output resulting from hiring an additional worker (or worker-hour), holding constant the quantities of all other inputs. MPE = q / E

Total product of labour (TPE)

Total amount of output that can be produced with a given number of workers (worker hours). TPE = q | E=E’

Average product of labour (APE)

Amount of output produced by the average worker. APE = q / E

Objective Function

Firms want to maximise profits: Profits = pq / wE / rK

Short run labour demand

Firm chooses labour input that maximises profit given capital K (+ technology & prices).

Value Marginal Product of Employment (VMPE)

The dollar increase in revenue generated by an additional worker (at constant K). VMPE = p ⇤ MPE

Short run demand curve

What happens to firm’s employment if market wages change, holding constant K?

Industry

Industry: group of firms that produces the same output.

Short run elasticity of labour demand

Percentage change in short run employment resulting from a one percent change in the wage rate:SR = %change in employment / %change in wage = 4ESR/ESR / 4w/w

Isoquant

Gives all combinations of labour and capital that produce a given level of output q0.

Isocost line

All capital labour combinations that cost the same amount of money.

Marginal Rate of Technical Substitution

What is the slope of the isoquant?

Long run elasticity of labour demand

Percentage change in long run employment resulting from a one percent change in the wage rate: LR = %change in long term employment / %change in wage = 4ELR/ELR / 4w/w

Skill biased technological change (SBTC)

The increased usage of machines, particularly computers, in the production of output decreases demand for low skilled labour and increases demand for high skilled labour.

Job Polarisation

Employment and wages fall particularly in the middle of the income and education distribution.

Elasticity of substitution

Percent change in the capital/labour ratio resulting from a 1% change in the relative price of labour, holding output constant K/L = %change in K/E / %change in w/r

Perfect substitutes

An hour of work provided by an employee can be replaced by a machine hour without any loss of productivity.

Perfect complements

An hour of work provided by an employee cannot be replaced by a machine.

Substitutes

An increase in the price of input x will increase demand for input y.

Complements

An increase in the price of input x will decrease demand for input y.

Cross-elasticity of factor demand

Percentage change in the demand for input i resulting from a one percent change in the wage of input j. ij = %4xi / %4wj

Instrumental Variables

replace the endogenous explanatory variable with an “instrument” that will shift the explanatory variable but is not correlated with the dependent variable.

Relevance

the IV needs to be correlated (strongly) with the explanatory variable it is instrumenting.

Validity

the IV cannot be correlated with the error term (conditional on control variables).

Labour market equilibrium

At the competitive wage w, the labour market clears at employment level E.

Wage convergence hypothesis

Over time, wages in different regions, sectors, etc. will converge if there is free movement of workers/’rms.

Uncertainty

Migrants usually do not know the exact conditions, economic or otherwise, they will encounter in the host country

Roy model

Workers choose their location by comparing the earnings prospects each place offers for their skill set and move where the relative skill payoff is highest.

Positive selection

high skill workers (in expectation) gain from moving whereas low skill workers lose income in expectation.

Negative selection

low skill workers (in expectation) gain from moving whereas high skill workers lose income in expectation.

Present value

The discounted value of a payment y received t years in the future. PV(y) = y / ((%+r)^t)