Labour economics
H1: Introduction to labour economics
What is labour economics?
What is labour economics?
- Labour economics examines how labour markets work
- Why do we care about labour markets?
o 1. Work (paid and unpaid) makes up an important part of each individual’s life
▪ It is the main source of income for most people, determining their
consumption
▪ It is intertwined with other important dimensions of life such as education,
health, partnership or fertility
o 2. Labour is a key factor of production, effecting innovation or economic growth
o 3. The labour market is the subject of many social policies such as social security
systems, taxation, immigration legislation
Actors
- Workers – supply labour:
o Objective: want to maximise their well-being
▪ Utility from consumption, leisure, health, job satisfaction
o Constraints: limited number of hours in the day, income, job offers
o Sample Decisions:
▪ Which occupation/sector to work in
▪ How much effort to exert at work
▪ Which skills to acquire and when
▪ When to change jobs and where to
- Firms – demand labour:
o Objective: want to maximise their profits
▪ Labour is an input of production which creates revenue but comes at a cost
o Constraints: limited number of (qualified) workers or available capital, consumer
demand, competition, government regulations
o Sample Decisions:
▪ How many workers to hire
▪ Which wages and other benefits to offer workers
▪ How much to invest in technology
▪ How to develop workforce
- Government – rules of the game:
o Objective: wants to maximise social welfare
o Constraints: tax income (, elections)
o Sample policy tools:
▪ Regulations: minimum wages, health and safety, equal job opportunities,
immigration legislation
▪ Taxation: Income, payroll
▪ Public finance: social security, public education, employment subsidies
1
,Interaction: supply-demand model
- Supply curve: upwards sloping, workers are willing to
work more if they receive higher wages
- Demand curve: downwards sloping, firms are willing
to hire more workers if they accept lower wages
- No government intervention: the intersection of the
supply and demand curves determines market clearing
wages and equilibrium
How do we assess labour market performance?
Example: unemployment rate
- Can see increase/decrease
- Can compare countries
- Problem: informal work
o When they look at the administered data, or paid taxes
How do we measure unemployment rates?
- Frequent data sources: labour force surveys administered by statistical agencies
o Households are surveyed once a month about the labour activities of their members
in the last week (= reference week)
- The working age (16 years and older) population is classified into 3 groups:
o 1. Employed individuals (E)
o 2. Unemployed individuals (U)
o 3. Individuals outside the labour force: unemployed + not looking for a job
o 1 + 2: labour force (LF)
2
,Labour force
- 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 in the 4 weeks prior to the reference
week (= last week)…
o Worked for at least 1 hour for pay/profit, or...
o Worked for at least 15 hours on a nonpaid job
o Includes individuals who are temporarily absent from their job due to vacations or
illness
o Can include temporary layoffs in the EU
- Unemployed (U): everyone who is over the age of 16 and below the retirement age, and in
the 4 weeks prior to the reference week...
o Was either without a job or on a temporary layoff, and...
o Available plus actively seeking work
o Includes seasonal workers in the off season
o Classification is independent of receiving unemployment benefits
▪ (not) receiving an unemployment benefit doesn’t make you unemployed
o Always includes temporary layoffs in the US and Canada
Measurement differences: temporary layoffs
- Temporary layoffs = workers who are suspended from work but have a date to return or
expect to return within 6 month
- In the EU, workers are still classified as employed if they...
o Have an assurance to return to work within 3 months, or...
o Continue to receive >50% of salary from the employer
- In the US and Canada, laid off workers are always classified as unemployed
- Example: During the Covid-19 pandemic, temporary and partial layoffs spiked
o Different countries arrived at very different unemployment measures
Non labour force
- = Individuals who are neither employed, nor actively looking for work are classified as outside
of the labour force
- Examples:
o Full time students
o Retirees
o Homemakers
o Discouraged job seekers
- Hidden unemployment = individuals who have given up searching for a job due to negative
experiences and expectations are classified as outside the labour force, yet could also fall
under unemployed
o Someone who actually wants to work, but got so discouraged that they stopped
actively seeking and thus are considered outside of the LF
3
, Labour market indicators
- Labour force participation rate: LFPR = LF/P
o = labour force/population
o Fraction of the working age population (P) that is in the labour force
- Employment rate: ER = E/P
o = employees/population
o Fraction of the working age population that is employed
- Unemployment rate: UR = U/LF
o = unemployed/labour force
o Fraction of the labour force that is unemployed
Unemployment rate measurement
- There are several challenges in accurately measuring the unemployment rate:
o 1. Seasonality: UR fluctuates over the year, may want to distinguish cyclical and
structural U with seasonally adjusted UR
o 2. Underemployment: part-time workers may want to work additional hours
o 3. Recessions: particularly bad economic situation prompts individuals to drop out of
the labour force long term
▪ UR underestimates problem
- Different measures depending on exact question: long term unemployment rate,
unemployed job losers
Commonly used data sources
- Cross-sectional household surveys:
o = Random household gets interviewed
o Current population survey (US)
o European labour force survey
o Census
- Longitudinal household surveys:
o = Same household gets interview each year
o Panel study of income dynamics
o British cohort study
o German socioeconomic panel
- Administrative data:
o Taxation data
o Social registry data
o Problem: informal work
4
H1: Introduction to labour economics
What is labour economics?
What is labour economics?
- Labour economics examines how labour markets work
- Why do we care about labour markets?
o 1. Work (paid and unpaid) makes up an important part of each individual’s life
▪ It is the main source of income for most people, determining their
consumption
▪ It is intertwined with other important dimensions of life such as education,
health, partnership or fertility
o 2. Labour is a key factor of production, effecting innovation or economic growth
o 3. The labour market is the subject of many social policies such as social security
systems, taxation, immigration legislation
Actors
- Workers – supply labour:
o Objective: want to maximise their well-being
▪ Utility from consumption, leisure, health, job satisfaction
o Constraints: limited number of hours in the day, income, job offers
o Sample Decisions:
▪ Which occupation/sector to work in
▪ How much effort to exert at work
▪ Which skills to acquire and when
▪ When to change jobs and where to
- Firms – demand labour:
o Objective: want to maximise their profits
▪ Labour is an input of production which creates revenue but comes at a cost
o Constraints: limited number of (qualified) workers or available capital, consumer
demand, competition, government regulations
o Sample Decisions:
▪ How many workers to hire
▪ Which wages and other benefits to offer workers
▪ How much to invest in technology
▪ How to develop workforce
- Government – rules of the game:
o Objective: wants to maximise social welfare
o Constraints: tax income (, elections)
o Sample policy tools:
▪ Regulations: minimum wages, health and safety, equal job opportunities,
immigration legislation
▪ Taxation: Income, payroll
▪ Public finance: social security, public education, employment subsidies
1
,Interaction: supply-demand model
- Supply curve: upwards sloping, workers are willing to
work more if they receive higher wages
- Demand curve: downwards sloping, firms are willing
to hire more workers if they accept lower wages
- No government intervention: the intersection of the
supply and demand curves determines market clearing
wages and equilibrium
How do we assess labour market performance?
Example: unemployment rate
- Can see increase/decrease
- Can compare countries
- Problem: informal work
o When they look at the administered data, or paid taxes
How do we measure unemployment rates?
- Frequent data sources: labour force surveys administered by statistical agencies
o Households are surveyed once a month about the labour activities of their members
in the last week (= reference week)
- The working age (16 years and older) population is classified into 3 groups:
o 1. Employed individuals (E)
o 2. Unemployed individuals (U)
o 3. Individuals outside the labour force: unemployed + not looking for a job
o 1 + 2: labour force (LF)
2
,Labour force
- 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 in the 4 weeks prior to the reference
week (= last week)…
o Worked for at least 1 hour for pay/profit, or...
o Worked for at least 15 hours on a nonpaid job
o Includes individuals who are temporarily absent from their job due to vacations or
illness
o Can include temporary layoffs in the EU
- Unemployed (U): everyone who is over the age of 16 and below the retirement age, and in
the 4 weeks prior to the reference week...
o Was either without a job or on a temporary layoff, and...
o Available plus actively seeking work
o Includes seasonal workers in the off season
o Classification is independent of receiving unemployment benefits
▪ (not) receiving an unemployment benefit doesn’t make you unemployed
o Always includes temporary layoffs in the US and Canada
Measurement differences: temporary layoffs
- Temporary layoffs = workers who are suspended from work but have a date to return or
expect to return within 6 month
- In the EU, workers are still classified as employed if they...
o Have an assurance to return to work within 3 months, or...
o Continue to receive >50% of salary from the employer
- In the US and Canada, laid off workers are always classified as unemployed
- Example: During the Covid-19 pandemic, temporary and partial layoffs spiked
o Different countries arrived at very different unemployment measures
Non labour force
- = Individuals who are neither employed, nor actively looking for work are classified as outside
of the labour force
- Examples:
o Full time students
o Retirees
o Homemakers
o Discouraged job seekers
- Hidden unemployment = individuals who have given up searching for a job due to negative
experiences and expectations are classified as outside the labour force, yet could also fall
under unemployed
o Someone who actually wants to work, but got so discouraged that they stopped
actively seeking and thus are considered outside of the LF
3
, Labour market indicators
- Labour force participation rate: LFPR = LF/P
o = labour force/population
o Fraction of the working age population (P) that is in the labour force
- Employment rate: ER = E/P
o = employees/population
o Fraction of the working age population that is employed
- Unemployment rate: UR = U/LF
o = unemployed/labour force
o Fraction of the labour force that is unemployed
Unemployment rate measurement
- There are several challenges in accurately measuring the unemployment rate:
o 1. Seasonality: UR fluctuates over the year, may want to distinguish cyclical and
structural U with seasonally adjusted UR
o 2. Underemployment: part-time workers may want to work additional hours
o 3. Recessions: particularly bad economic situation prompts individuals to drop out of
the labour force long term
▪ UR underestimates problem
- Different measures depending on exact question: long term unemployment rate,
unemployed job losers
Commonly used data sources
- Cross-sectional household surveys:
o = Random household gets interviewed
o Current population survey (US)
o European labour force survey
o Census
- Longitudinal household surveys:
o = Same household gets interview each year
o Panel study of income dynamics
o British cohort study
o German socioeconomic panel
- Administrative data:
o Taxation data
o Social registry data
o Problem: informal work
4
