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MODERN LABOR ECONOMICS
THEORY AND PUBLIC POLICY 11TH EDITION
CHAPTER 2
Overview of the Labor
Market
Modern Labor Economics: Theory and Public Policy, Eleventh Edition Copyright 2012 by Pearson Education, Inc.
Ronald G. Ehrenberg Robert S. Smith All rights reserved.
Discussions in labor economics?
Sudies how labor market works
Determination of income distribution
Impacts of unions
Allocation of a workers time to the labor market
Hiring/firing decision of firms
Labor market discrimination
Determinants of unemployment
Investment in human capital
Cont.
We participate in labor market
Workers and firms
the exchange is restricted by the rules set
by the government
Theory, facts and real-world phenomena
Social policy issues
Actors in the labor market
Workers maximize well-being
Firms maximize profits
The government rules of the game, tax,
subsidy etc.
National and local labor markets
International labor market
national labor market
local labor market
Internal labor market
A firm uses an internal labor market if:

external hiring is used primarily for entry-
level jobs, and
higher level positions are filled by
promotion from within the firm.
Internal labor market
Internal labor markets exist because the use of such

markets:
reduces hiring and training costs,

improves employee morale and
motivation, and
reduces the effect of uncertainty.
Labor force and unemployment
labor force = non-institutionalized
individuals aged 16 or above who are
either working or actively seeking work.
unemployed = those who are not working
but are actively seeking work
Primary vs. Secondary labor
markets
primary labor market - high wages and
stable employment relationships.
secondary labor market - low wages and
unstable employment relationships.
Unemployment rate
Figure 2.1 Labor Force Status of the U.S. Adult Civilian Population, April 2010 (seasonally adjusted)
Labor force participation rate
Nominal and real wages
Nominal wages are not adjusted for inflation and
are said to be expressed in terms of current
dollars.
Real wages are wages that have been adjusted
to take into account the effect of inflation. Real
wages are expressed in terms of dollars from a
given base year and are said to be expressed in
constant dollars.
Price index
Wages, earnings, total compensation,
and income
wage = payment per unit of time
earnings = wage x hours
total compensation = earnings + fringe benefits
fringe benefits = payments-in-kind + deferred
compensation
income = total compensation + unearned
income (or income = earnings + unearned
income)
Figure 2.4 Relationship among Wages, Earnings, Compensation, and Income
Labor Market in Malaysia
Demogaphic of Malaysia
Table 2.1 Labor Force Participation Rates by Gender, 19502010
Figure 2.2 Unemployment Rates for the Civilian Labor Force, 19462009 (detailed data in table inside front cover)
Figure 2.3 Employment Distribution by Major Nonfarm Sector, 19542010 (detailed data in table inside front cover)
Table 2.2 Nominal and Real Hourly Earnings, U.S. Nonsupervisory Workers in the Private Sector, 19802009
Figure 2.5 The Markets in Which Firms Must Operate
Table 2.3 Labor Demand Schedule for a Hypothetical Industry
Figure 2.6 Labor Demand Curve (based on data in Table 2.3)
Figure 2.7 Shift in Demand for Labor Due to Increase in Product Demand
Figure 2.8 Possible Shifts in Demand for Labor Due to Fall in Capital Prices
Figure 2.9 Market Supply Curve for Paralegals
Figure 2.10 Shift in Market Supply Curve for Paralegals as Salaries of Insurance Agents Rise
Figure 2.11 Supply of Paralegals to a Firm at Alternative Market Wages
Figure 2.12 Market Demand and Supply
Figure 2.13 Demand and Supply at the Market and Firm Levels
Figure 2.14 New Labor Market Equilibrium after Demand Shifts Right
Figure 2.15 New Labor Market Equilibrium after Supply Shifts Left
Figure 2.16 New Labor Market Equilibrium after Supply Shifts Right
Figure 2.17 Effects of an Above-Market Wage
Figure 2.18 Effects of a Below-Equilibrium Wage
Figure 2.19 Labor Supply to the Military: Different Preferences Imply Different Rents
Table 2.4 Unemployment and Long-Term Unemployment, Selected European and North American Countries, 2007

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MODERN LABOR ECONOMICS

THEORY AND PUBLIC POLICY 11TH EDITION

A firm uses an internal labor market if:

Internal labor markets exist because the use of such

reduces hiring and training costs,

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