Labor Economics

Course Overview

This undergraduate course provides a comprehensive introduction to labor economics, examining how labor markets function, how wages are determined, and how institutions shape employment outcomes. The course draws on both theoretical frameworks and empirical evidence, with particular attention to labor market issues in developing economies.

Textbook: Borjas, G. J. Labor Economics (8th edition), McGraw-Hill.

Chapter 1: Introduction to Labor Economics

Overview of the labor market, key facts, and the economist’s approach to understanding labor market outcomes.

Ch.1 Slides (PDF)

Chapter 2: Labor Supply

The income-leisure tradeoff, reservation wages, labour force participation, and the backward-bending supply curve.

Key Topics

• Utility maximization and the budget constraint
• Income and substitution effects
• Labour force participation decisions
• Empirical evidence on labour supply elasticities

Chapter 3: Labor Demand

The firm’s hiring decision, marginal productivity, and labor demand under perfect competition and monopsony.

Key Topics

• Short-run and long-run labor demand
• Marginal revenue product
• Elasticity of labor demand (Marshall’s rules)
• Monopsony and wage-setting power

Ch.3 Demand Handouts (PDF)

Chapter 4: Labor Market Equilibrium

Competitive equilibrium, the cobweb model, efficiency wages, and compensating differentials.

Key Topics

• Equilibrium in a single labor market
• The cobweb model and dynamic adjustment
• Compensating wage differentials
• Efficiency wages

Chapter 5: Compensating Wage Differentials

Theory and evidence on compensating differentials, hedonic wage models, and the value of non-wage job attributes.

Key Topics

• The theory of compensating differentials
• Hedonic wage functions
• Value of a statistical life
• Empirical evidence

Chapter 6: Human Capital

Schooling decisions, returns to education, the Mincer equation, on-the-job training, and signalling.

Key Topics

• The schooling model (costs vs. benefits)
• Returns to education: Mincer equation
• On-the-job training: general vs. specific
• Signalling and screening

Chapter 7: Wage Inequality and Discrimination

The wage structure, skill premium, discrimination models (Becker, statistical), and decomposition methods.

Key Topics

• Trends in wage inequality
• College wage premium
• Taste-based and statistical discrimination
• Oaxaca-Blinder decomposition

Chapter 8: Labor Market Institutions

Unions, minimum wages, labor regulations, and their effects on employment and wages.

Key Topics

• Union models: monopoly union, efficient bargaining
• Minimum wage: theory and evidence
• Employment protection legislation
• Labour market institutions in India

Chapter 9: Informality, Platform Work, and the Future of Work

Informal employment in developing economies, gig/platform work, AI and automation, and the future of labor markets.

Key Topics

• Defining and measuring informality
• Dual labor markets
• Platform/gig economy
• AI, automation, and task displacement

Chapter 10: Unemployment

Types of unemployment, search and matching models, unemployment duration, and policy responses.

Key Topics

• Frictional, structural, and cyclical unemployment
• Job search models and reservation wages
• Unemployment insurance and moral hazard
• The Phillips curve and the natural rate

Job Jungle: Labour Market Simulation Game

An interactive classroom game where students experience labour markets first-hand — negotiating wages as workers and making hiring decisions as employers. Six rounds, real-time wage negotiation, and a leaderboard with prizes.

Concepts covered: Labour supply (Ch. 2), labour demand (Ch. 3), market equilibrium and wage determination (Ch. 4).

Launch Job Jungle

Getting Started

1. Go to the game link above and click Join Game.
2. Enter the room code provided by the instructor.
3. Enter your Student ID and select your Section (A or B).
4. You will be assigned a starting balance (your endowment) and start as a Pink (unskilled) worker.
5. Wait in the lobby until the instructor starts Round 1.

The Setting

You are in the town of Job Jungle. Firms produce kites and sell them at $15 each. Firms need workers to produce kites. Workers want wages. The market decides who gets hired and at what wage.

Your goal as a worker: Maximise your total earnings across 6 rounds.

Your goal as an employer: Maximise your total profit across 6 rounds.

Production Schedule

Employers use these schedules to decide how much a worker is worth. The P x MP column is the maximum a firm should pay — any wage below this number is profitable.

Blue (Skilled) Workers

Pink (Unskilled) Workers

Key insight: Blue workers produce more kites and are worth higher wages. The skill premium is real.

Round-by-Round Guide

Each round lasts 7 minutes. There are 6 rounds in total.

Round 1: Learning the Market

This is your first time. Expect some chaos.

If you are a Worker:

1. Look at the list of firms on your screen.
2. Pick a firm you want to work for.
3. Enter a wage demand (the dollar amount you want to be paid).
4. Click Send Offer. Your offer goes to the employer’s queue.
5. Wait for the employer to Accept or Reject your offer.
6. If accepted — you are hired. Your balance increases by the wage amount. You are done for this round.
7. If rejected — you can withdraw and send a new offer to a different firm.
8. If no one hires you by the end of the round — you receive Public Assistance (PA): $10 for Pink workers, $25 for Blue workers.

If you are an Employer:

1. You will see incoming wage offers from workers on your screen.
2. Each offer shows: worker ID, their skill (Pink or Blue badge), and the wage they are asking.
3. The screen highlights offers in green (profitable) or red (loss-making) based on the production schedule.
4. Click Accept to hire a worker, or Reject to pass.
5. You can hire multiple workers per round.
6. Your profit = Revenue from kites produced minus total wages paid.

Rules:

• You can only have one pending offer at a time (withdraw first to send another).
• Employers can hold max 5 pending offers in their queue. If full, wait or try another firm.
• Once a deal is accepted, it is final — no take-backs.

Round 2: Finding Your Price

By now you have a sense of the market. Wages should start converging toward the production schedule values.

Workers — think about:

• What is the highest wage an employer will accept? (Hint: look at the P x MP schedule above.)
• If you ask too much, you get rejected and end up on PA.
• If you ask too little, you leave money on the table.
• The sweet spot is just below the employer’s P x MP for their next hire.

Employers — think about:

• Hire workers whose wage demand is below your next P x MP.
• The difference (P x MP minus wage) is your profit per worker.
• Hiring too many workers at high wages destroys your profit margin.

Between Rounds 2 and 3 — Upgrade available — Education ($25):

• Pink workers with balance of $25 or more can buy education to become a Blue (skilled) worker.
• This is permanent. Blue workers can demand higher wages from Round 3 onward.
• Cost: $25. Should you invest? Compare the cost to the wage difference between Pink and Blue schedules.

Round 3: The Skill Premium Emerges

Some workers are now Blue. The market splits into two segments.

Blue workers: You can now demand higher wages. The first Blue hire is worth $120 to a firm. Use this leverage.

Pink workers still Pink: Your maximum value to a firm is $75 (first hire) and drops fast. Consider upgrading between rounds if you can afford it.

Employers: You now face a choice — hire one expensive Blue worker or two cheaper Pink workers? Compare the total kites produced.

Between Rounds 3 and 4 — New upgrade — Become an Employer ($100 threshold):

• Workers with a cumulative balance of $100 or more can convert to an employer.
• You start your own firm and begin hiring workers from Round 4.
• This is permanent — you cannot go back to being a worker.
• You keep your balance but now earn from profits, not wages.
• This is free entry — a key concept from Ch. 4 (market equilibrium).

Round 4: Competition Intensifies

New firms may have entered. More employers means more competition for workers.

Workers: More firms competing for you means stronger bargaining power. Wages may rise.

New employers: You are now hiring for the first time. Study the production schedule carefully. Do not overpay.

Existing employers: New competitors are bidding for your workers. You may need to offer better wages to keep hiring.

Round 5: Profits Compress

With more employers in the market, profit margins shrink. This is the zero-profit equilibrium from Chapter 4 in action.

Workers: The market may be near its equilibrium wage. Large gains are harder to find.

Employers: Margins are thin. Every dollar of overpayment matters. Be selective.

Round 6: Final Round

Last chance to earn. All cards collected at the end.

Workers: Maximise your final-round wage. No reason to hold back — there is no Round 7.

Employers: Same logic — hire profitably one last time.

After Round 6: The game ends. The instructor will display:

• Leaderboard (top-earning workers and top-profit firms)
• Wage convergence charts
• Skill premium over time
• Whether your starting endowment predicted your final income (spoiler: it often does)

Key Concepts You Will Experience

Rules Summary

1. One offer at a time. Withdraw before sending to another firm.
2. Deals are final. No renegotiation after acceptance.
3. Record everything on your worker card (employer name + wage each round).
4. No back-to-back rehiring — you cannot work for the same employer in consecutive rounds.
5. Role changes are permanent — once you become Blue or an employer, you stay that way.
6. Falsified records = automatic zero on rule compliance.

Grading

Prize: Gift card to the top-earning worker and top-profit employer pair.