Introduction to Labour Economics

TL;DR

Labour economics studies how labour markets work, focusing on the interactions between workers and employers. It helps us understand wages, employment, and income distribution. This field examines decisions like whether to work, how much to work, and what skills to acquire.

1. The Mental Model

Think of the labour market like any other market, but instead of trading goods, you're trading your time and skills. Workers are the 'suppliers' of labour, and firms are the 'demanders' of labour. Their interactions determine wages and how many people are employed.

2. The Core Material

Labour economics investigates the supply and demand for labour services. We'll look at what drives individuals' decisions to work and what drives firms' decisions to hire.

2.1 Labour Supply: Your Decision to Work

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Your decision to work, and for how many hours, is a classic trade-off between leisure and income. More income means you can buy more goods and services, but it comes at the cost of less free time.

• Substitution Effect: As wages rise, the "price" of leisure (the income you give up by not working) increases, making you want to substitute leisure for work. You work more.
• Income Effect: As wages rise, your income increases, making you feel richer. You might then demand more of all normal goods, including leisure. You work less.

Usually, the substitution effect dominates at lower wages, leading you to work more. But at very high wages, the income effect can dominate, potentially leading to a backward-bending labour supply curve where higher wages mean you work less because you can afford more leisure.

2.2 Labour Demand: Firms' Hiring Decisions

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