Académique Documents
Professionnel Documents
Culture Documents
Lecture notes
Dan Anderberg
Royal Holloway College
January 2003
Introduction
Definition 1 Labour economics is the study of the workings and outcomes of the market for labour.
Most require compensation to work (work for pay).
The agents: buyers and sellers of labour services.
An abstraction: What constitutes a market (geography, sector etc).
1.1
Workers may have discretion over the quality they supply ! Design of contracts.
Wage setting to induce eort (eciency wages) ! Explanation for unemployment.
Quality improvement: Investment in human capital.
Signs of disequilibrium: Involuntary unemployment.
Concern for inequality makes us want to understand how incomes from labour are determined.
This naturally also bring us to a feature of labour markets. Institutions play a key role.
Role of institutions:
Unions
Tax policy
Minimum wages
1.2
Where do we Start?
1.3
What Else?
Web page:
Lecture notes and gures (downloadable).
Seminar material.
Essay topic.
Midterm test (sixth teaching week).
Seminar format
Review questions + student presentation.
My oce hours: ____
U = U (C; L)
Indierence curves
Fig 1.1
Properties:
Downward sloping
Do not cross
Convex to the origin (preferences for balanced bundles).
4.1
4.2
Budget Constraint
4.3
4.4
4.5
4.6
Question: How can the model be used to analyse the participation decision?
Think of non-participation as a corner solution (choosing the endowment point).
Definition 2 The reservation wage is the wage where the worker is indierent between participating
and not participating.
Insight: Reservation wage = slope of indierence curve at endowment point.
Fig 1.6
Question: How does the participation decision vary with the wage?
Participation decision is monotonic in the wage!
Fig 1.7
Empirical prediction: The probability that a worker participates is increasing in her wage.
Note that this contrasts the interior solution a wage increase can lead to lower labour supply.
Definition 3 Labour supply curve: The predicted relationship between the wage and hours of work.
Zero below reservation wage.
5
h=h
h w
=
w=w
w h
Measuring the wage: measurement errors, not observed for those not participating.
1,292,600 families and lone parents claim WFTC in the scal year 2001-2002, so its a very large
program.
7.1
The maximum weekly rate of WFTC is made up of an adult credit, credits for each child, childcare
credits (if applicable) and 30 hour bonus. (See table).
If income is less than 94.50 per week, the maximum WFTC will be paid.
If (net) income is greater than 94.50, a taper of 55 per cent of the excess is subtracted from the
maximum WFTC to nd the amount payable.
7.2
An Example
Sue has a (net) wage of 5/hour and works 24 hours/week. She lives alone with her child, aged 6.
Since she works more than 16 hours she is eligible for WFTC. She gets the adult element 62.50
plus one child credit 26.45.
However, she earns 5 24 = 120 per week which is above the applicable amount of 94.50.
Hence she gets
62:50 + 26:45 :55 (120 94:50) = 74:92
in WFTC per week.
7
7.3
7.4
Theoretical Predictions