Modern Labor Economics: 

Its Roots, Development, and Recent Trends

• Neoclassical Economics• Emphasis on “economics”

Two Traditions of Labor Economics

Deductive (theoretical) approach, based on profit- and utility maximization in face of constraints

Focus on prices, underlying supply and demand conditions

Looks for “systematic” part of behavior, with little regard for cultural differences or unusual behavior

Institutionalism

Emphasis on “labor” Inductive (descriptive, fact-based)

approach Focus on problems and remedies

Institutionalists:

“Generalization is especially difficult when each problem that arises may be unique because it presents a slightly different combination of factors or a new set of circumstances.”

Neoclassical approach is “barren,”

“dry bones”

Neoclassical economist (commenting on the institutionalists):

“Without a theory they had nothing to pass on except a mass of descriptive material waiting for a theory, or a fire.”

Time Lines of the Two Traditions

• Neoclassical: Alfred Marshall: groundwork for modern labor economics (Principles of Economics, 1890)

• Institutionalists: first “labor economics” text published in 1886

(by Richard Ely) reacting to “dry bones” economics of 1870s and

1880s, University of Wisconsin turned into a center for institutionalism by Ely, Commons (1892).

1900s-1920s: Institutionalism Dominant

• Institutional text published by Commons (1905) with a focus on “Evils” (child labor, immigration, poverty, sweatshops) and “Remedies” (unions, profit-sharing, education, labor laws)

• First book with “Labor Economics” in title (1926): was institutional in approach, rejecting “deductive” approach to focus on “groups of men creating (and being variously affected by) economic institutions.”

1930s: Two Neoclassical Works • Theory of Wages by Paul Douglas (1934): theory with

empirical analysis and attention to policy. Tried to steer between “sterile” approach of pure theory and the “theoretical blind alley” of institutionalism

• Depression: “There has been no date in this century to which the theory that I was putting out could have been more inappropriate” (Hicks) 再没有其他任何时候比我现在提出这些理论不合时宜了。

• Both Hicks and Douglas leave labor economics (Hicks for pure theory, Douglas for politics)

1940s and 1950s: • Institutionalist scholars trained in economics and

in economics departments, but deeply suspicious of theory (Lester, Kerr, Dunlop, Reynolds)

• Lately, this group has referred to themselves as “neoclassical revisionists” – as neoclassical economists with “realistic” interests.

• But in fact they did not use theory, did not revise theory, and were not cited by the early “modern” labor economists.

Debates Between the Two Approaches

• Debate on the Marginal Productivity Theory of Demand

Institutionalists: Decision-makers do not talk (or collect data) in terms of marginal costs and benefits Neoclassical group: But they may act instinctively “as if” they understand theory

• Debate on Modeling Institutionalists: world is complex

and models do not take account of that. Neoclassical group: Purpose of models

is to remove complexity so underlying forces can be studied. 模型的作用在于化繁为简从

而可以考察潜在的因素 Judge assumptions by quality of

predictions, not “realism” Predictions hold “other things” equal.

Examples of Early “Modern” Research in

1960s-1970s • Relative wage effects of unions (Lewis)

• Discrimination (Becker)

• Human capital (Becker)

• Household production, labor force participation (Becker)

• Search theory: unemployment, wage differentials; law of one price (Stigler)

Explaining Anomalies

• Wages that do not fall: implicit contracts and signaling, unemployment insurance, compensating wage differentials

• “Law of one price” does not hold: search costs, “efficiency wages,” internal labor markets, considerations of status

Explaining Anomalies

• Why older workers may be paid more than their marginal product

• Why small differences in productivity among executives result in large pay differences

New Areas of Research

• Personnel economics: understanding decisions within firms: hiring, training, motivating, promoting (Lazear)

• Use of longitudinal data matching information from employer and employee (Abowd)

• Cross-country comparisons

Policy Areas with Potential Influence from Neoclassical Labor Economists

• Military draft• Minimum wage• Welfare programs• Unemployment insurance• Workers’ compensation

insurance

• Education• Discrimination• Safety and health

regulation• Immigration• Program evaluation

Labor Economics: Undergraduate Courses

ILRLE 140 Development of Economic InstitutionsILRLE 240 Economics of Wages & Employment (also

Econ 341)ILRLE 340 Economic Security (also Econ 451)ILRLE 440 Special Topics In Labor EconomicsILRLE 441 Income Distribution (also Econ 455)ILRLE 442 The Economics of Employee Benefits (also

Econ 456)ILRLE 444 The Evolution of Social Policy In Britain &

AmericaILRLE 445 Women In The Economy (also Econ 457

also Womns 446)ILRLE 446 Economic History of British Labor 1750-

1940 (also Econ 459)

Labor Economics: Undergraduate Courses

ILRLE 448 Topics In Twentieth-Century Economic History: The Economics of Depression and The Rise of The Managed Economy (also Econ 458)

ILRLE 495 Honors ProgramILRLE 497-498 InternshipILRLE 499 Directed StudiesILRLE 540 Labor EconomicsILRLE 544 Labor Market and Personnel Economics ILRLE 642 Economic Analysis of The Welfare State

(also Econ 460)ILRLE 648 Economic Analysis of The University (also

Econ 342)

Ph.D. Program in Labor Economics

• Minimum: two semesters of calculus plus one of linear algebra

• Preferred: a background in differential equations, real analysis, or mathematics courses in probability and statistics

• A student must at least be comfortable working with limits, continuity, vectors, matrices, series, differentiation, partial differentiation and integration

• A mathematics refresher course is offered during August. In our experience most entering students can benefit significantly from that course, though it is not required

Prerequisites in Mathematics:

Ph.D. Program in Labor Economics • Usually takes 5 years• The first year:

Fall semester: Micro-economics I, Macro-economics I,Econometrics I, and a course in mathematics for

economics Spring semester: Micro II & III, Macro II, and

Econometrics II. Students must pass Qualifying Exams in Micro &

Macro. A student is permitted to take the examinations twice, and must pass both by the end of the second year of study.

Ph.D. Program in Labor Economics • Second Year:

Three or four courses each semester in major and minor subjects

To establish expertise in an area of study generally requires two semesters of an advanced course sequence.

Some subjects may also administer qualifying examinations at the conclusion of the course sequence

Ph.D. Program in Labor Economics • Third year:

Increase knowledge in the major subject

Expand into other fields of interest

Broaden tools such as mathematics

Search for a dissertation topic, and to start dissertation research

Become active in research seminars: Applied Microeconomics (Industrial Organization and related topics), Macroeconomics,

Econometrics, Economic Development, Economic Theory, Public Economics, International Economics, Labor Economics, and Financial Economics

Oral "Admission to Candidacy" examination, by student’s Special Committee (typically focuses on the student’s dissertation research proposal)

Submitting a doctoral dissertation (fourth or fifth year)

Passing an oral final examination on the dissertation which is conducted by the student's Special Committee

In final year student is on the Ph.D. Job market. As part of the placement process we meet with students to address preparing for the market and to facilitate their job search.

School of Industrial and Labor Relations