Labor Economics I

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					Labor Economics I

Instructor            CHAU, Tak Wai (周德威)
Office                School of Economics Building Room 307
Office Phone          6590 2119
Office Hours          Monday, Thursday: 10:30-11:30am, or by appointment
TA                    张二华

Class Webpage

Class Time            Thursday, 13:20-16:10; Week 3 - 17
Class Venue           Room 4308

Please send me an email after the first class so that I can collect your email addresses for a class
email list. Please check your email box and class webpage regularly for important notice.

October 1 and 8 are National Day Holidays. We will have class on Oct 10 (Saturday) for the Oct 8
class. I may need to reschedule a class in December. Details will be announced later.

The reading materials of this course are in English. You should expect the problem sets and exams
are also written in English. You may answer your problem sets and exams in mixed Chinese and
English, as long as they are legible and understandable. (I can generally read simplified Chinese if
typed or written legibly, but I cannot write simplified Chinese.) For the term paper, I expect you to
write in pure Chinese or English.

Course Objectives

This course aims at introducing students more advanced theoretical and empirical work that labor
economists have done to understand the labor market. This class focuses on labor supply and
demand and various reasons for earnings inequality, such as human capital investment and
education, compensating wage differentials, search friction, contracting and incentive. We also look
at the studies about trends in earnings inequality and long run inequality. Finally, empirical
strategies commonly used by labor economists will be discussed.

Students are expected to understand the tools and arguments used in labor economics and equip
themselves to develop and carry out research of their own interests.


You are expected to have background in microeconomic theory and econometrics at graduate level.
Further skills on model solving, data analysis and statistical software will be introduced in class if

Course Grading
Problem Sets          20%
Exam                  40%
Presentation          10%
Term Paper            30%
Problem Sets: There are a few problem sets that are either theoretical model solving exercises or
empirical data analysis exercises. You may discuss with your classmates, but each of you should
write up their own answers. Copying is strictly prohibited. Hand in your answers before the class
begins unless otherwise specified.

Exam: There will be one final exam during the end of the semester. Details will be announced later.

Presentation: Each student is required to present a paper of their choice, with the consent of the
instructor. You should introduce the content of the paper so that your classmates can understand its
key concepts, tricks and results. Instructor and students can interrupt in a reasonable way to seek
clarification. You may want to add some of your comments and further research proposal briefly.
The paper can be one related to the course but not discussed in class, or research applying the
theory or techniques discussed in class to China. The length of presentation is about 45 minutes. It
will be done near the end of the semester.

Paper: Each student is required to write a term paper. Students can choose a topic of their interest,
with the consent of the instructor, and write a review of literature, including the strengths and
weaknesses of the existing work. You should also write about what you can propose to improve it.
You are not required to work out the paper in your proposal in this class, but you have to specify
what you need to do, the theoretical setup and/or the empirical model, and the data you need
(whether it exists so far or not). You are also required to make proper citation as in a published
work. Please typeset your paper. The paper should be about 7-10 pages long with reasonable font
size and double line spacing. This limit excludes tables, figures or mathematical proves, if any.
These should be put in an Appendix. You are expected to write the paper in pure English or pure
Chinese. Due date is the last day of the class (tentatively Dec 31).
As a device to discipline your progress, you should discuss with your instructor about your topic by
Nov 13 and hand in your literature review by Dec 11. The earlier the better, as long as you are well-
prepared. Grades will be deducted if you fail any of the above deadlines.

Textbooks and Reading Materials

I am not going to following one textbook in this class. I will follow certain chapters in the following
books and some research papers listed in the reading list.

Labor Economics, by Pierre Cahuc and Abdre Zylberberg, MIT Press
This is the only textbook available in the western world in labor economics at graduate level. I will
take a few chapters in it for class.

Handbook of Labor Economics, edited by Orley Ashenfelter and Richard Layard (Vol. 1,2) , and by
Orley Ashenfelter and David Card (Volume 3a, 3b and 3c)
These are survey papers by the experts of various topics in labor economics. The chapters are very
useful in understanding what has been done in the field, though it may be a little old as the Volume
3 was published back in 1999.

Lecture Notes for Graduate Labor Economics, by Daron Acemoglu
Acemoglu is a great applied theorist who models in a lot of fields. This is a set of lecture notes of
selected topics in labor economics available online for his MIT class.

You may consult undergraduate labor economics text, such as the one by Borjas, or the one by
Ehrenberg and Smith for a more elementary, less mathematical treatment of the topics.
The class also involves some empirical techniques. You may consult these books for references:
Introductory Econometrics: A Modern Approach, by Jeffery Wooldridge
This is an undergraduate econometrics textbook, with chapters on more advanced techniques useful
here, especially on panel data and limited dependent variables.

Econometrics Analysis of Cross-section and Panel Data, by Jeffery Wooldridge
Microeconometrics, by Cameron and Trivedi
These are more advanced textbooks in econometrics with techniques used in labor economics.

Mostly Harmless Econometrics, by Joshua Angrist and Jorn-Steffen Pischke
A more practical treatment of empirical techniques used in labor economics.

Topics and Reading List

This reading list is for reference only. It is too long to read entirely. Selected chapters and papers
will be discussed in class.

I. Labor Supply

Cahuc and Zylberberg Ch.1.

Killingsworth, M (1983) Labor Supply, Cambridge University Press.

Pancavel, J. (1986) “Labor Supply of Men: A Survey” in O. Ashenfelter and R. Layard, eds.,
Handbook of Labor Economics, Vol.1, Ch.1.

Killingsworth, M. and J. Heckman (1986) “Female Labor Supply: A Survey”” in O. Ashenfelter
and R. Layard, eds., Handbook of Labor Economics, Vol.1, Ch.2.

Blundell, R. and MaCurdy, M. (1999) “Labor Supply: A Review of Alternative Approaches,” in O.
Ashenfelter and D. Card, eds., Handbook of Labor Economics, 3A, Ch.27, 1559-1695.

Mroz, T. A. (1987) “The Sensitivity of an Empirical Model of Married Women‟s Hours of Work to
Economic and Statistical Assumptions,” Econometrica, 55(4), 765-799.

MaCurdy, T.E. (1981) “An Empirical Model of Labor Supply in a Life-Cycle Setting,” Journal of
Political Economy, 89(6), 1059-1085.

Imbens, Guido W., Donald Rubin, and Bruce I. Sacerdote (2001), “Estimating the effect of
unearned income on Labor Supply, earnings, savings, and consumption: Evidence from a survey of
Lottery winners players,” American Economic Review, 91(4): 778-794.

Blau, Francine D. and Lawrence M. Kahn (2007), “Changes in the Labor Supply Behavior of
Married Women: 1980–2000,” Journal of Labor Economics, 25(3): 393-438.

Gronau, R. (1986) “Home Production: A Survey” in O. Ashenfelter and R. Layard, eds., Handbook
of Labor Economics, Vol.1, Ch.4.

Chiappori, Pierre-André (1988), “Rational household labor supply”, Econometrica, 56(1), 63-90.

Chiappori, Pierre-André (1992), “Collective labor supply and welfare”, Journal of Political
Economy, 100(3), 437-67.
Bourguignon, Francois & Chiappori, Pierre-Andre, (1992)."Collective models of household
behavior : An introduction," European Economic Review, 36(2-3), 355-364.

II. Labor Demand

Cahuc and Zylberberg Ch. 4

Hamermesh, D (1993) Labor Demand, Princeton University Press.

Hamermesh, D (1986) “The Demand for Labor in the Long Run,” in O. Ashenfelter and R. Layard,
eds., Handbook of Labor Economics, Vol 1, Ch. 8, 429-471.

Nickell, S.J. (1986) “Dynamic Models of Labor Demand,” in O. Ashenfelter and R. Layard, eds.,
Handbook of Labor Economics, Vol 1, Ch. 9, 473-522.

Oi, W (1962) “Labor as a Quasi-Fixed Factor,” Journal of Political Economy, 538-555.

Abowd, J. and F. Kramarz, (2003) “The Costs of Hiring and Separations,” Labour Economics, 10,

Card, D, and A. B. Krueger. (1994). “Minimum Wages and Employment: A Case Study of the Fast-
Food Industry in New Jersey and Pennsylvania.” American Economic Review 84(4): 772-93.

Neumark, D., and W. Wascher (2000). “Minimum Wages and Employment: A Case Study of the
Fast-Food Industry in New Jersey and Pennsylvania: Comment” American Economic Review, 90(5):

Card, D., and A. B. Krueger (2000). “Minimum Wages and Employment: A Case Study of the Fast-
Food Industry in New Jersey and Pennsylvania: Reply.” American Economic Review, 90(5): 1397-

Card, D., and A. B. Krueger (1994). Myth and Measurement. Princeton.

Neumark, D., and W. Wascher (2008) Minimum Wage. MIT Press.

III. Reasons for Wage Inequality

a. Human Capital Investment

Cahuc and Zylberberg Ch. 2.1, 2.2

Acemoglu Lecture Notes Part I, III

Becker, Gary (1993) Human Capital, 3rd Edition. Boston, MA: NBER.

Ben-Porath Y (1967), “The Production of Human Capital and Life Cycle Earnings”, Journal of
Political Economy, 75, 352-365.

Flavio Cunha & James Heckman, (2007)."The Technology of Skill Formation," American
Economic Review, 97(2), 31-47.
Abraham, K. and H. S. Farber (1987), “Job Duration, Seniority and Earnings,” American Economic
Review, 77, 278-97.

Topel, R. (1992), “Specific Capital, Mobility and Wages: Wages Rise with Job Seniority,” Journal
of Political Economy, 99, 145-76.

Dustmann C and C. Meghir (2005) “Wages, Experience and Seniority,” The Review of Economic
Studies, 72(1), 77-108.

Schönberg, U., (2007) “Wage Growth Due to Human Capital Accumulation and Job Search: A
Comparison between the United States and Germany” Industrial and Labor Relations Review, 60(4),

b. Return to Education

Cahuc and Zylberberg Ch. 2.4

Card, D (1999) “The Causal Effect of Education and Earnings” in O. Ashenfelter and D. Card (eds)
Handbook of Labor Economics, 3a, Ch.30, North Holland.

Card, D (2001) “Estimating the Return to Schooling: Progress on Some Persistent Econometric
Problems”, Econometrica, 69(5), 1127-60.

Willis R. and S Rosen (1979) “Education and Self-Selection,” Journal of Political Economy, 87(5),

Angrist J.D. and A.B. Krueger (1991) “Does Compulsory Schooling Attendance Affect Schooling
and Earnings?” Quarterly Journal of Economics, 106(4), 979-1014.

Ashenfelter, O. and A. B. Krueger (1994) “Estimates of the Economic Return to Schooling Using a
New Sample of Twins.” American Economic Review, 84, 1157-1173.

Heckman J. J. and L. Lochner and P. Todd (2006) "Earnings Functions, Rates of Return and
Treatment Effects: The Mincer Equation and Beyond", E. Hanushek and F. Welch (eds), Handbook
of the Economics of Education, Vol. 1.

c. Compensating Wage Differential

Cahuc and Zylberberg Ch. 5

Rosen, S (1986) “The Theory of Equalizing Differences,” in O. Ashenfelter and R. Layard (eds.),
Handbook of Labor Economics, Vol. 1, Ch. 12, 641-692.

Brown, C (1980) “Equalizing Differences in the Labor Market” Quarterly Journal of Economics,
94(1), 113-134.

d. Discrimination

Altonji, J. and R. Blank (1999), “Race and Gender in the Labor Market,” in O. Ashenfelter and D.
Card (eds.), Handbook of Labor Economics, 3C, 3143-3259.
Cain, G. and D. Aigner (1977), “Statistical Theories of Discrimination,” Industrial and Labor
Relation Review, 30, 175-87.

Becker, G. (1971) The Economics of Discrimination, 2nd ed., University of Chicago Press.

Bertrand. M. and S. Mullainathan, (2004) "Are Emily and Greg More Employable Than Lakisha
and Jamal? A Field Experiment on Labor Market Discrimination," American Economic Review,
94(4), 991-1013.

Goldin, C. and C. Rouse (2000) “Orchestrating Impartiality: The Impact of „Blind‟ Auditions on
Female Musicians”, American Economic Review, 90, 715-741.

Knowles, J., N. Persico and P. Todd, (2001). "Racial Bias in Motor Vehicle Searches: Theory and
Evidence," Journal of Political Economy, 109(1), 203-232.

Anwar. S. & H. Fang, (2006). "An Alternative Test of Racial Prejudice in Motor Vehicle Searches:
Theory and Evidence," American Economic Review, 96(1), 127-151.

e. Search Frictions

Cahuc and Zylberberg Ch.3

Rogerson, R, R. Shimer and R. Wright, (2005) "Search-Theoretic Models of the Labor Market: A
Survey," Journal of Economic Literature, 43(4), 959-988.

Eckstein, Z. and van den Berg, G. J., (2007) "Empirical labor search: A survey," Journal of
Econometrics, 136(2), 531-564

Jolivet, G., F. Postel-Vinay and J.-M. Robin (2006), “The Empirical Content of the Job Search
Model: Labor Mobility and Wage Distributions in Europe and the US", European Economic Review,
50(4), 877-907.

Mortensen, D. T. (2003), Wage Dispersion: Why Are Similar Workers Paid Differently? MIT Press.

Postel-Vinay, F. and J.-M. Robin (2002), “Equilibrium Wage Dispersion with Worker and
Employer Heterogeneity", Econometrica, 70 (6), 2295-350.

Cahuc, P., F. Postel-Vinay and J.-M. Robin (2006), “Wage Bargaining with On-the-job Search:
Theory and Evidence", Econometrica, 74(2), 323-64.

Flinn, C. and Mabli, J. (2009) “On-the-Job Search, Minimum Wages, and Labor Market Outcomes
in an Equilibrium Bargaining Framework”, mimeo.

f. Contracting and Incentive

Cahuc and Zylberberg Ch. 6
Acemoglu Lecture Notes Part 2

Lazear, E.P (1979) “Why is there Mandatory Retirement?” Journal of Political Economy, 87, 1261-
Harris, M. and Holmstrom, B. (1982) “A Theory of Wage Dynamics”, Review of Economic Studies,
49, 315-33.

Lazear, E. and S. Rosen (1981) “Rank-Order Tournaments as Optimum Labor Contracts,” Journal
of Political Economy, 89(5) 841-864.

Prendergast, C (2002) “The Tenuous Trade-off between Risk and Incentives,” Journal of Political
Economy, 110, 1071-1102.

IV. Measuring Degree and Trends in Wage Inequality

a. Wage Structure and Trends in Wage Inequality

Cahuc and Zylberberg Ch. 10

Katz, L.F and Autor, D.H. (1999) “Changes in the Wage Structure and Earnings Inequality,” in O.
Ashenfelter and D. Card (eds), Handbook of Labor Economics, 3a, Ch. 26, 1463-1555.

Katz, L. F. and K. Murphy (1992) “Changes in Relative Wages, 1963-1987: Supply and Demand
Factors,” Quarterly Journal of Economics, 107(1), 35-78.

Gordon, R.J. and I. Dew-Becker (2008) “Controversies about the Rise of American Inequality: A
Survey” NBER Working Paper 13982.

Kopczuk, W., E. Saez and J. Song (2009) “Earnings Inequality and Mobility in the United States:
Evidence from Social Security Data Since 1937.” Quarterly Journal of Economics, forthcoming.

Goldin, C. and L. F. Katz (2007) “Long-Run Changes in the Wage Stucture: Narrowing, Widening,
Polarizing”, Brookings Papers on Economic Activity, 2, 135-165.

Autor D.H., Katz L.F. and Kearney M.S. (2008) “Trends in US wage Inequality: Revising the
Revisionists” Review of Economics and Statistics, 90(2): 300–323.

Lemieux T. (2006) "Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or
Rising Demand for Skill?", in The American Economic Review, 96, 1- 64.

Gordon R.J. (2009) “Has the Rise in American Inequality Been Exaggerated?” mimeo.

Moretti E. (2009) “Real Wage Inequality”, mimeo, UC Berkeley.

Saez, E. and Thomas Piketty (2007) "Income Inequality in the United States, 1913-2002" in A.B.
Atkinson and T. Piketty eds., Top Incomes over the Twentieth Century: A Contrast between
European and English-Speaking Countries. Oxford University Press.

Atkinson, A.B. and T. Piketty and E. Saez (2009) "Top Incomes in the Long Run of History"
forthcoming in A.B. Atkinson and T. Piketty eds., Top Incomes: A Global Perspective, Oxford
University Press.

Dustmann, C., J. Ludsteck and U. Schonberg (2009) “Revisiting the German Wage Structure”,
Quarterly Journal of Economics, 142(2), 843-881.
b. Earnings Dynamics, Mobility and Long Run Inequality

Gottschalk, P. and R. Moffitt (1994) "The Growth of Earnings Inequality in the US Labor Market,"
Brookings Papers on Economic Activity, 2, 217-72.

Moffitt, R.A. and P. Gottschalk (2008) "Trends in the Transitory Variance of Earnings in the
United States, 1970-2004" Working Paper.

Baker, M. (1997) "Growth-Rate Heterogeneity and the Covariance Structure of Life-Cycle
Earnings," Journal of Labor Economics, 15(2), 338-75.

Haider, S. (2001) "Earnings Instability and Earnings Inequality of Males in the United States:
1967-1991", Journal of Labor Economics, 19(4), 799-836.

Flinn, C (2002) "Labour Market Structure and Inequality: A Comparison of Italy and the U.S.",
Review of Economic Studies, 69, 611-645.

Bowlus, A.J. and J-M Robin (2004) "Twenty Years of Rising Inequality in U.S. Lifetime Labour
Income Values", Review of Economic Studies, 71, 709-742.

Bonhomme S. and J-M. Robin (2009) "Assessing the Equalizing Force of Mobility Using Short
Panels: France, 1990-2000," Review of Economics Studies, 76, 63-92.

Bowlus, A.J. and J-M Robin (2008) "An International Comparison of Lifetime Labor Income
Values and Inequality: A Bounds Approach", Working Paper.

Altonji, J., A. Smith and I. Vidangos (2009) "Modeling Earnings Dynamics," NBER Working
Paper No. 14743.

Krueger, D and F. Perri (2006), "Does Income Inequality Lead to Consumption Inequality?
Evidence and Theory," Review of Economic Studies, 73, 163-193.

Blundell, R., L. Pistaferri and I. Preston (2008) "Consumption Inequality and Partial Insurance,"
American Economic Review, 98(5), 1887–1921.

V. Empirical Strategies

Angrist, J. D. and Krueger, A. B. (1999) “Empirical Strategies in Labor Economics” O. Ashenfelter
and D. Card (eds.), Handbook of Labor Economics, 3A, Ch. 23, 1277-1366.

Hamermesh D. S., (2000). "The Craft of Labormetrics," Industrial and Labor Relations Review,
53(3), 363-380.

Angrist, J and Pischke, J-S. (2009) Mostly Harmless Econometrics, Princeton University Press.

Keane, M.P. (2006) “Structural vs. Atheoretical Approaches to Econometrics”, mimeo.

Rust, J. (2007) “Comments on „Structural vs. Atheoretical Approaches to Econometrics‟”, mimeo.

Deaton A. (2009) “Instruments of development: Randomization in the tropics, and the search for the
elusive keys to economic development”, mimeo, Princeton University.
Heckman J.J. and Urzua (2009) “Comparing IV With Structural Models: What simple IV Can and
Cannot Identify,” NBER Working Paper No. 14706.

Imbens, G.W. (2009) “Better LATE than Nothing: Some Comments on Deaton (2009) and
Heckman and Urzua (2009)” mimeo, Harvard University.

Heckman J. and E. J. Vytlacil, (2007) "Econometric Evaluation of Social Programs, Part I: Causal
Models, Structural Models and Econometric Policy Evaluation," Handbook of Econometrics, in: J.J.
Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 70

Heckman J. and E. J. Vytlacil, (2007) "Econometric Evaluation of Social Programs, Part II: Using
the Marginal Treatment Effect to Organize Alternative Econometric Estimators to Evaluate Social
Programs, and to Forecast their Effects in New," Handbook of Econometrics, in: J.J. Heckman &
E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 71

Abbring, J.H. and J. Heckman (2007) "Econometric Evaluation of Social Programs, Part III:
Distributional Treatment Effects, Dynamic Treatment Effects, Dynamic Discrete Choice, and
General Equilibrium Policy Evaluation," Handbook of Econometrics, in J.J. Heckman & E.E.
Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 72.

(The above three Handbook of Econometrics chapters put together the recent contribution of James
Heckman and his coauthors in empirical methodology. But they are not easy to understand.)