Course Outline for “Labour Economics” (EC3311) – 2005-2006

Fall Term

/

Spring Term

Lecturer: Dr Dan Anderberg

Office: H218
Phone : 01784-414082
E-mail:
Consultation hours: TBA /

Lecturer: Dr Andrew Seltzer

Office: H301
Phone : 01784-443475
E-mail:
Consultation hours: TBA

Course Overview

This is a full year course examining the economic issues of labour markets. The first term will focus primarily on the operation of labour markets (labour demand and supply, labour market equilibrium), the role of labour market institutions (trade unions, minimum wages), and labour market disequilibrium (unemployment, efficiency wages). The second term, taught by Dr Andrew Seltzer, will focus more on topics relating to wage formation, earnings inequalities, pay and productivity, intergenerational mobility, and topics on personnel economics.

Aims

This course will analyse topics of behaviour and outcomes in labour markets and other related markets. We will discuss the way in which labour markets are organized and what implications this has for individual outcomes. We begin by considering the behaviour of firms (labour demand) and workers (supply) and examine how a labour market equilibrium is obtained. After that, we turn to the issue of unemployment and examine various approaches that attempt to explain the co-existence of unemployment and vacancies at equilibrium. We then look at the role of some labour market institutions, particularly trade unions and minimum wages. The main analytical tools will be theoretical but we will also be using real-world examples and applied techniques in order to evaluate the theoretical models and relate them to topical issues in public policy. You will need to refresh your memory of microeconomics, algebra, and basic econometrics.

Learning Outcomes

Upon completion of the course students should:

  • understand the basic theoretical models of labour economics and how these can be applied to policy issues;
  • understand the underlying empirical approaches used to evaluate these models and be familiar with the empirical work conducted to test their predictions;
  • be able to manipulate these models, and be able to analytically solve problems relating to labour markets;
  • be able to apply the models to important policy areas whilst being aware of the limitations of the theory;
  • be able to apply the models to firms personnel practices;
  • have a overview of the main areas in labour economics and be able to read journal articles and understand the main issues presented.

Course Delivery

The course will be delivered through a one-hour lecture and a one-hour seminar each week. Specific learning outcomes and readings are provided for each week. Seminars will be used both to present new material and to solve problems. The lecturer will be available for consultations during the advertised office hours or by appointment.

Course Assessment

A three-hour unseen exam for this course will be given during the summer term and will count for the entire mark. The exam will test your knowledge and understanding of the material covered in the course; your ability to manipulate and solve algebraic versions of the models you have learned; your ability to apply these models to “real” economics situations. You will be required to demonstrate an understanding of important debates within labour economics and the techniques used to analyse the issues contained in these debates.Formative assessment will consist of a one-hour unseen test and an assignment each term. The dates for these assessments are listed in the student handbook. You will be provided with the standardised feedback on these pieces of work. Students are required to regularly attend seminars and seriously attempt at least three of the four pieces of formative assessment in order to sit the final exam.

Readings

The primary text for the course will be Ronald Ehrenberg and Robert Smith, Modern Labor Economics, Seventh Edition, New York: HarperCollins, 2000 (hereafter this will be referred to as E&S). However, this book does not cover all the topics of the current course. Other standard labour economics texts that you might wish to refer to include Borjas, G.J. Labor Economics (2nd edition), 1999, McGraw-Hill and Smith, S.W., Labour Economics, Routledge 1994. We will also be using a couple of more specialised texts, mainly Booth, A. The Economics of the Trade Union, Cambridge University Press, 1994 and Layard, R., S. Nickell, and R. Jackman, Unemployment, Oxford University Press, 1991. In addition there will be assigned readings from various journals. These articles will tend to be somewhat technical, and although you may not fully understand the techniques, it is important to understand the main issues being addressed by these articles. Most of these articles (those marked with an asterisk) will be available online at UK – JSTOR ( - please see the Information Services’ Information Sheet 51 for more information). Others, as well as book chapters, will be available on reserve at the library. All other materials will be available on short-reserve at the library.

Course Outline – Fall Term

I.Labour Supply

This lecture will introduce the main topics to be covered in the course and give an introductory overview of the labour market. You will find useful to read E&S, ch.2, and Borjas, ch.1

This lecture will cover the standard theory of individual and aggregate labour supply. We will examine the decision to work, the supply of work-hours and aggregate labour supply, and review the issues of labour supply of households and labour supply over the life-cycle.

Readings: E&S, ch 6; Borjas, chs 2 & 3

Richard Blundell, “Welfare-to-Work: Which Policies Work and Why?” Keynes Lecture in Economics, 2001,

II.Labour Demand

In these lectures we will examine how the demand for labour is derived and how it differs between competitive and monopsonistic markets and between the short- and long-run. We will further look at demand elasticities and the role of technological change, foreign trade (open economies), and qasi-fixed labour costs.

Readings: E&S, chs 3, 4, 5; Borjas, ch 4

George Johnson, “Changes in Earnings Inequality: The Role of Demand Shifts”, Journal of Economic Perspectives, 11, 1997, pp. 41-54.

III.Unemployment

These lectures will examine the issue of unemployment in the labour markets. We will look at the various types of unemployment, the theory of the natural rate of unemployment, and the Philips and Wage Curves. We will also cover topics relating to job mismatch, search models, and efficiency and reservation wages.

Readings: E&S, ch 15

Nickell, S., Nunziata, L., Ochel, W. & Quintini, G. (2002), ‘The Beveridge curve, unemployment andwages in the OECD from the 1960s to the 1990s’. Mimeo, Centre for Economic Performance, LondonSchool of Economics and Political Science.

IV. Efficiency Wages

In this lecture will examine theories of how pay structures can affect worker effort, and how this in turn can generate unemployment. We will also consider empirical aspects of efficiency wages.

Readings: E&S, ch 11

Akerlof, G. (1982), ‘Labor contracts as partial gift exchange’, Quarterly Journal of Economics 87, 543–569

Akerlof, G. & Yellen, J. (1986), E¢ciency Wage Models of the Labor Market, Cambridge UniversityPress, Cambridge.

Krueger, A. (1991), ‘Ownership, agency, and wages: An examination of franchising in the fast-food industry’, Quarterly Journal of Economics 106, 75–101.

Shapiro C. and Stiglitz J., “Equilibrioum Unemployment as a Worker Discipline Device” American Economic Review, 74, 1984, pp.433-444.

V.Unions

In this lecture we will examine the economics of trade unions. We will review briefly the history of trade unions and the determinants of union membership and examine in detail the determination of labour market equilibrium with trade unions. Further, we will cover the theoretical models relating to the objectives of unions, union bargaining, and strikes, and review empirical evidence on the economic effects of unionism in Europe.

Readings: E&S ch 13; Borjas ch 11.

Booth, A. The Economics of the Trade Union, CambridgeUniversity Press, 1994

Oswald A., “The Economic Theory of Trade Unions: an introductory survey” Scandinavian Journal of Economics, 87, 1985, pp. 160-193.

Lindbeck A. and Snower D., “Insiders versus Outsiders” Journal of Economic Perspectives, 15, 2001, 165-188.

VI.Unemployment Insurance

In this lecture we will consider the role of unemployment insurance. We will consider its role as a consumption smoothing device. We will also consider how it affects the incidence of unemployment. Finally we will consider the empirical evidence.

Readings: E&S ch 15; Borjas, ch 13;

Woodbury, S. & Spiegelman, R. (1987), ‘Bonuses to workers and employers to reduce unemployment: Randomized trials in illinois’, American Economic Review 77, 513–530.

Meyer, B. D. (1995), ‘Lessons from the u.s. unemployment insurance experiment’, Journal of Economic Literature 33, 91–131.

Gruber, J. (1997), ‘The consumption smoothing bene…ts of unemployment insurance’, American Economic Review 87, 192–205.

VII.Active Labour Market Policy

In this lecture we will look at policies designed to improve the workings of the labour market, including job broking, direct job creation, and training. We will consider the how ALMP can affect the matching process, as well as wage setting. We will use the New Deal for Young People as example.

Readings:

Reenen, J. V. (2001), ‘No more skivvy schemes? active labour market policies and the British New Deal for young unemployed in context’. The Institute for Fiscal Studies WP01/09.

Calmfors, L., Forslund, A. & Hemström, M. (2001), ‘Does active labour market policy work? Lessons from the Swedish experiences’, Swedish Economic Policy Review 85, 61–124.

VIII.Job Turnover and Income Mobility

In this lecture we will explore two dimensions of mobility:Job turnover

Income mobility. We will consider the role of specific human capital and the problems of testing the specific human capital model using measured returns to tenure. We will also consider how much mobility there is in the income distribution

Readings: E&S ch 10. Borjas ch 9

Jarvis, S. & Jenkins, S. P. (1997), ‘Low income dynamics in 1990s Britain’, Fiscal Studies 18, 123–142.

IX.Marriage and Divorce

In this lecture we will consider family formation and dissolution from an economics perspective. We will consider the assortative mating and its implications for inequality. We will also consider macro-economic implication of e.g. marital instability.

Readings:

Becker, G. S. (1991), A Treatise on the Family, 2’nd edn, Harvard University Press, Cambridge, Mass.

Course Outline – Spring Term (more information will be added in due course)

I.Human Capital Markets (week 1)

Readings: E&S, ch 9; Borjas, ch 7; Smith, ch 4

Rosenzweig, M, “Why are there returns to schooling?” American Economics Review,85(2), 1995, pp. 153-158.

* Evans, Oates and Schwab, “Measuring Peer Group Effects” Journal of Political

Economy, 100(5), 1992, pp. 966-991.

II.Returns to Education and Training: Human Capital and Signalling (weeks 2-3)

Readings: E&S, ch 9

*Paul Miller, Charles Mulvey, and Nick Martin, "What do Twins Studies Reveal Aboutthe Economic Returns to Education?: A Comparison of Australian and US Findings",American Economic Review, 85, 1995, pp.586-599.

*George Psacharopoulos, “Returns to Education: A Further International Update and Implications,” Journal of Human Resources, 20, 1985, pp. 583-604.

*Andrew Weiss, "Human Capital vs. Signalling Explanations of Wages," The Journal of Economic Perspectives9:4 (Fall 1995), 133-154.

III.Pay and Productivity: The Principal Agent Relationship, Bonuses, Piece rates, Deferred Compensation, Tournaments (weeks 4-6)

Readings: E&S, ch 11

Edward Lazear, Personnel Economics, Cambridge, MA: MIT Press, 1995, chapter 3, “Relative Compensation”, pp. 25-38 and chapter 4, “Work-Life Incentive Schemes”, pp. 39-46.

Edward Lazear, “Performance Pay and Productivity”, American Economic Review, 90 (December 2000), 1346-1361.

Canice Prendergast, “The Provision of Incentives in Firms”, Journal of Economic Literature, 37, 1999, pp. 7-63.

*George Baker, Michael Gibbs, and Bengt Holmstrom, “The Wage Policy of a Firm”, Quarterly Journal of Economics, 99, November 1994, 921 - 55.

*Andrew Seltzer and David Merrett, “Personnel Practices at the Union Bank of Australia: Panel Evidence from the 1887-1900 Entry Cohorts”, Journal of Labor Economics, 18, October 2000, pp. 573-613.

IV.TBA (weeks 7-8)

V.Inequality in Earnings (week 9)

Readings: E&S, ch 14; Borjas, ch 8

VI.Intergenerational Mobility (week 10)

Readings:

Becker, G.S., A Treatise on the Family, 1991, Harvard University Press (ch 7)

* Becker G. and N. Tomes, 1986, Human Capital and the Rise and Fall of Families,

Journal of Labor Economics 4 (1986): S1-S39 – Reprinted in Becker’s book.

* Solon, G., 1992, Intergenerational Income Mobility in the United States. American

Economic Review 82, 393-408.

Dearden, L., S. Machin, and H. Reed, 1997, Intergenerational Mobility in Britain, The

Economic Journal 107, 47-66.

* Carneiro, P. and J.J. Heckman, 2002, The Evidence on Credit Constraints in Post-

Secondary Schooling, CESifo Discussion Paper No. 518.