Summary of the course Seminar Labor Economics for the Master Economics at Tilburg University.
Summary contains lecture notes, lecture slides and literature, both book and articles.
Content is from academic year .
Lecture 1A: introduction ......................................................................................................................................... 4
Labor market status ........................................................................................................................................ 4
discouraged worker effect .............................................................................................................................. 4
added worker effect ........................................................................................................................................ 5
Institutions ...................................................................................................................................................... 5
income and substitution effect ....................................................................................................................... 5
institutions and the labor market ................................................................................................................... 5
The lump of labor fallacy ................................................................................................................................. 6
reduce hours worked ...................................................................................................................................... 6
Chapter 1: introduction ....................................................................................................................................... 6
Lecture 1B: the great recession .............................................................................................................................. 8
Labor hoarding ................................................................................................................................................ 8
decomposition P and Q ................................................................................................................................... 8
Self employment ............................................................................................................................................. 8
wage regidity ................................................................................................................................................... 8
long term unemployment – article Krueger .................................................................................................... 9
Hysterisis ......................................................................................................................................................... 9
Short term working schemes (STW) .............................................................................................................. 10
Flexible contracts and the business cycle ..................................................................................................... 10
Great recession is over: what is next? .......................................................................................................... 10
Article 1: Krueger .............................................................................................................................................. 10
Lecture 2: welfare state and insurance ................................................................................................................. 11
The welfare state .......................................................................................................................................... 11
Insurance – basics ......................................................................................................................................... 11
unemployment benefits ................................................................................................................................ 12
Chapter 11 ......................................................................................................................................................... 14
Lecture 3: man and machine ................................................................................................................................. 17
Lump of labor market fallacy ........................................................................................................................ 17
How does technology affect the labor market? ............................................................................................ 17
trends on the labor market ........................................................................................................................... 17
Job polarization: increase in employment in H and L skill occupations relative to middle-skill (M) ............ 18
Stretching the race between education and technology .............................................................................. 18
the canonical model: set up .......................................................................................................................... 18
1
, The canonical model: production function ................................................................................................... 18
The canonical model: wages ......................................................................................................................... 19
The canonical model: Relative wages and skill premium .............................................................................. 19
The canonical model: Technological change ................................................................................................. 20
The canonical model: Key lessons and shortcomings ................................................................................... 20
The canonical model: Recap ......................................................................................................................... 20
task framework ............................................................................................................................................. 21
Job polarization ............................................................................................................................................. 22
ongoing research ........................................................................................................................................... 22
Recap ............................................................................................................................................................. 22
Acemoglu .......................................................................................................................................................... 23
Autor ................................................................................................................................................................. 23
Lecture 4: retirement ............................................................................................................................................ 24
Retirement and funding ................................................................................................................................ 24
financial incentives ........................................................................................................................................ 25
Earlier retirement .......................................................................................................................................... 26
Current policy issues ..................................................................................................................................... 27
Wage and productivity .................................................................................................................................. 27
Chapter 6 – retirement ..................................................................................................................................... 27
Lecture 5A: active labor market policies ............................................................................................................... 29
Equity and efficiency arguments for ALMPs ................................................................................................. 29
Micro and macro evidence............................................................................................................................ 29
Types of ALMPs ............................................................................................................................................. 29
Wrapping up.................................................................................................................................................. 31
Card ................................................................................................................................................................... 31
Bolhaar .............................................................................................................................................................. 32
Chapter 12 - ALMPs ........................................................................................................................................... 32
Lecture 5B: human capital .................................................................................................................................... 34
MINCERIAN WAGE EQUATION ...................................................................................................................... 34
Specific capital and hold-up .......................................................................................................................... 34
measures ....................................................................................................................................................... 35
Perfect labor market – education ................................................................................................................. 35
Imperfect labor market – education ............................................................................................................. 35
perfect labor market – general training ........................................................................................................ 35
imperfect labor market – general training .................................................................................................... 36
acemoglu & Pischke – on the job training..................................................................................................... 36
policy issue .................................................................................................................................................... 36
2
, the life cycle perspective ............................................................................................................................... 36
policy problem .............................................................................................................................................. 37
Chapter 8 – human capital ................................................................................................................................ 37
Lecture 6A: flexible employment and self-employment ....................................................................................... 39
employment protection legislation (EPL) ...................................................................................................... 39
flexible employment and self-employment .................................................................................................. 42
Chapter 10 ......................................................................................................................................................... 43
Lecture 6B: disability reform in the Netherlands .................................................................................................. 46
background and problem analysis ................................................................................................................ 46
policy reforms ............................................................................................................................................... 48
theory on welfare reform.............................................................................................................................. 48
policy evaluation ........................................................................................................................................... 49
Lecture 7A: microsimulations of tax-benefit reforms ........................................................................................... 51
motivation ..................................................................................................................................................... 51
background ................................................................................................................................................... 51
EMTR and PTR ............................................................................................................................................... 52
empirical analysis .......................................................................................................................................... 52
policy ............................................................................................................................................................. 54
limitations ..................................................................................................................................................... 54
conclusion ..................................................................................................................................................... 55
Lecture 7B: minimum wage and income inequality .............................................................................................. 56
Institution: the minimum wage..................................................................................................................... 56
BEHAVIORAL ECONOMICS............................................................................................................................. 57
behavioural economics and the retirement age ........................................................................................... 58
wrap up ......................................................................................................................................................... 58
3
,LECTURE 1A: INTRODUCTION
LABOR MARKET STATUS
- Employed
- Unemployed → actively searching for a job and available
- Inactive → not actively searching for a job or not available
DISCOURAGED WORKER EFFECT
According to the neoclassical model, labour supply depends on: wage rate, utility of leisure
Poor job finding opportunities → withdraw from the labor market (=less search effort)
In order to understand business cycle effects, one also needs:
- Dynamics → the current status and future expectations
- Uncertainty → the probability of finding a job
- Search costs → time and effort
- Labor demand
If economy is not doing so well labor demand is low
With low labor demand, the probability of finding a job becomes small, such that
(Expected) utility of leisure > net present value of future wages – search costs
Then it is not optimal for you to enter the labor market and have leisure time.
The utility of ‘leisure’ might be relatively high for: older workers, women, young jobseekers
Micro evidence in NL
Job opportunities ↓ search effort ↓
Counter effect is added worker effect
Dw>Aw
During the great recession: dw effect seems relevant but exact size is hard to tell.
Actual dw effect is likely between two studies (0.7%-7%), as participation trend is still positive:
- Women cohorts (the pill)
- Older workers (early retirement, state pension age)
- Social security reforms (disability insurance, participation law)
Between 60.000 and 600.000 workers
Relatively strong for:
1. Lower educated workers
2. Young workers
Hardly any for:
1. Higher educate workers
2. Older workers
Effect men vs women unclear
4
,ADDED WORKER EFFECT
Within the neoclassical framework: an income effect
Household income ↓→ household labor supply↑
This is because of spousal insurance, in practice often women because men already participate.
Leisure complementary: opposite effect, if men have more leisure time, women want to enjoy it with them.
INSTITUTIONS
An institution is a system of laws, norms or conventions resulting from a collective choice, and providing
constraints or incentives which alter individual choices over labor and pay.
A labor market is a market where labor services (specified in a vacant job) are sold for a remuneration (wage or
profit).
Institutions create a wedge between the value of marginal labor and its remuneration.
Income effect (IE): income goes up, buy more leisure (if leisure is a normal good), and reduce working hours
Substitution effect (SE): price of leisure goes up, consumption goes down, more working hours.
In theory → higher taxes could lead to less/zero/higher labor supply, depending on the relative size of income
and substitution effect.
However, most of the literature suggests that the net effect of higher taxation on participation is either
negative or zero.
Examples of income and substitution effect: winning the lottery, higher wages, an earned income tax credit
(EITC), child allowance.
INSTITUTIONS AND THE LABOR MARKET
Why labor market institutions?
1. Efficiency
a. Imperfect information (e.g. about skills or productivity)
b. Irrational behavior (e.g. short-sightedness)
c. Externalities (e.g. risk bearing by external parties)
d. Capital market imperfections (e.g. borrowing constraint against future human capital;
insurance against macro-correlated risks)
e. Market failures (e.g. no private insurance possible due to adverse selection)
2. Equity
a. poverty alleviation
b. fairness considerations, income distribution
→ however distortions in the economy (in the absence of lump-sum taxes)
3. Policy failures
a. lobbying
b. not well-informed decision makers
c. political setting / opportunistic behavior
5
, THE LUMP OF LABOR FALLACY
The misconception that there is a fixed amount of work—a lump of labour—to be done within an economy
which can be distributed to create more or fewer jobs.
REDUCE HOURS WORKED
Idea: reduce hours worked of those currently working → increase number of employed persons
Either less hours per worker or less workers
However:
i. Hourly wage may rise. Mechanically, if monthly wages unadjusted. As a result of the scarcity being
created.
ii. Productivity might fall
iii. Capital utilisation may fall.
Labor is not a uniform production factor. Idea requires perfect substitution!
This is an example of an quantity-policy → q-policy. Based on quantity of labor.
Why do q-policies often not work?
- Price (wages) as an adjustment mechanism
- Long-term unemployment rate is determined by institutions, not by the amount of labor supply
→ acting on quantities has mostly temporary effects (if any)
CHAPTER 1: INTRODUCTION
Labor market: a market where a quantity of labor services (L) is offered in exchange for a price or remuneration
(W).
- U: number of unemployed workers
- L: number of employed workers
- O: Inactivity
LF → Labor force: L+U → employed and unemployed
N → Working age population: LF+O=U+L+O
u → unemployment rate = U/LF
e → Employment rate = L/N
p → participation rate = LF/N
together this leads to the following→ e = p(1-u)
Steady state equilibrium: inflow and outflow of unemployment is equal.
Y → Value of a job: the value of the labor product obtained when a firm and a worker engage in production
Marginal product of labor: the price of the good multiplied by the increase in output made possible by hiring an
additional worker
w’ → reservation wage: the lowest wage at which the worker is willing to accept a job offer.
Two types of labor market:
- Perfect labor market: a market where there is no total surplus associated with the marginal job
o Y=w
o W=w’
o Y=w’
6
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