I. LABOR ECONOMICS AS A DISCIPLINE

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CHAPTER 1

Labor Economics: Introduction and Overview

I. LABOR ECONOMICS AS A DISCIPLINE

• Socioeconomic Issues
• Quantitative Importance
• Unique Characteristics

II. THE “OLD” AND THE “NEW”

III. ECONOMIC PERSPECTIVE

• Relative Scarcity
• Purposeful Behavior
• Adaptability

IV. OVERVIEW

V. PAYOFFS

• Personal Perspective
• Social Perspective

WORLD OF WORK

1. Gary Becker: Nobel Laureate

2. Lotto Winners: Who Quit?

LEARNING OBJECTIVES

After learning the material in Chapter 1 of Contemporary Labor Economics, the student should be able to:

• explain why labor economics is justified as a special field of inquiry
• describe how the economic perspective can be applied to analysis of labor markets
• list and explain the basic assumptions underlying the choice-theoretic approach to labor

economics

• identify those topics in labor economics that are mainly “microeconomic” and those that are

primarily “macroeconomic”

• describe several benefits that derive from understanding labor economics

ANSWERS TO SELECTED END -OF-CHAPTER QUESTIONS

• Statements (a) and (c) pertain to macroeconomics; (b), (d), and (e) pertain to microeconomics.
• With respect to labor supply, it is impossible to separate the labor services provided from the

worker: the worker cares not only about the price, but all of the non-wage characteristics of the job as well. On the demand side, labor is demanded because of its productivity in creating goods and services, not for its own sake.(Contemporary Labor Economics, 11e Campbell McConnell, Stanley Brue, David Macpherson) (Solution Manual all Chapters) 1 / 4

© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.2

• The “old” labor economics focused on descriptive and historical accounts of labor markets and

related institutions. The “new” labor economics uses the economic perspective—relative scarcity, purposeful behavior, and adaptability—to describe the operation of labor markets.

• The primary assumptions are a) the scarcity of resources relative to wants and desires; b)

purposeful behavior, comparing expected costs and benefits; c) changes in behavior in response to changes in expected costs and benefits

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1 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

CHAPTER 2

The Theory of Individual Labor Supply

I. THE WORK-LEISURE DECISION: BASIC MODEL

• Indifference Curves
• Negative Slope
• Convex to Origin
• Indifference Map
• Different Work-Leisure Preferences
• Budget Constraint
• Utility Maximization

D. Wage Rate Changes: Income and Substitution Effects

• Income Effect
• Substitution Effect
• Net Effect
• Graphic Portrayal of Income and Substitution Effects
• Rationale for Backward-Bending Supply Curve
• Empirical Evidence
• Elasticity versus Changes in Labor Supply

II. APPLYING AND EXTENDING THE MODEL

• Nonparticipants and the Reservation Wage
• Standard Workday
• Overemployment
• Underemployment
• Premium Pay versus Straight Time
• Income Maintenance Programs
• Three Basic Features
• The Income Guarantee or Basic Benefit, B
• The Benefit-Reduction Rate, t
• The Break-Even Level of Income, Yb
• Illustration
• Controversy
• The End of Welfare as an Entitlement

WORLD OF WORK

• Work Hours Linked to Pollution
• The Carnegie Conjecture
• Labor Supply of Florida Lobster Fishermen
• The Labor Supply Impact of the Earned Income Tax Credit

GLOBAL PERSPECTIVE

• Annual Hours of Work per Employee 3 / 4

2 © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

LEARNING OBJECTIVES

After learning the material in Chapter 2 of Contemporary Labor Economics, the student should be able to:

• graph an indifference map for a person who values leisure and income
• explain how the slope of the indifference curve relates to the marginal rate of substitution of

leisure for income

• explain why there is a diminishing marginal rate of substitution of leisure for income, which

results in convex indifference curves

• explain why indifference curves farther from the origin represent higher levels of utility
• relate personal differences in work-leisure preferences to personal differences in the shapes of

indifference curves

• graph an income-leisure budget constraint and explain how its slope relates to the wage rate
• identify, using the basic income-leisure model, an individual’s optimal combination of income

and leisure

• distinguish between the income effect and substitution effect of a wage change and isolate each

on a graph

• explain, in terms of income and substitution effects, the rationale for a backward-bending labor

supply curve

• Correctly define and calculate the wage elasticity of labor supply
• explain why a person with non-labor income may choose not to participate in the labor force,

relating this decision to the concept of the reservation wage

• explain why a person may choose to “moonlight” or to work part-time
• show in a graph how unpaid absenteeism may be related to requirements that people work a

standard 40-hour week

• show graphically that a person’s utility-maximizing number of work hours may increase in

response to a premium wage for overtime work

• examine an income maintenance plan and determine the basic benefit, the benefit-reduction rate,

and the break-even level of income

• show, using the income-leisure model, why an income maintenance plan may reduce incentives

to work

• Relate provisions of the Temporary Assistance for Needy Family program to the drop in welfare

caseloads over the past 10 years

ANSWERS TO SELECTED END -OF-CHAPTER QUESTIONS

• Work more hours in (a) and (b); fewer hours in (c) and (d).

• The outcome assumes the substitution effect is stronger than the income effect. The statement

reflects empirical evidence that the substitution effect strongly dominates the income effect for females, but they roughly offset each other for males.

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