Chapter 5
Labor Economics
5.1 Introduction
Economists study “markets,” and “labor economics” can be viewed as the study of a market with specific, unique characteristics. What makes this market unique is the fact that the “sellers” are the employees who sell their labor services, whereas the “buyers” are the firms that buy or, more correctly, rent the employees' labor services. Indeed, because employers do not “own” their employees and “work” cannot be separated from the “worker,” the human aspect becomes a central issue in labor economics. This is what makes the study of labor markets different from the study of other, more standard, markets. Yet, much of the framework used in modern labor economics is the same framework that is employed in other fields of economics, namely microeconomic theory.
Most of the research in labor economics is devoted to “supply-side” considerations (i.e., the provision of labor services by workers).1 Important questions include how wages and labor conditions affect individuals' decisions concerning occupational choice and the amount of time they want to spend at work; when and why do workers quit their jobs and decide to switch to another job; how do workers search for a job, and how do they decide when to accept or reject a job offer. Another line of research in labor economics concerns the determinants of wages. Here are examples of two typical questions that have been of central interest in labor economics:
- Why do different individuals ...
