LABOR ECONOMICS SIXTH EDITION GEORGE J. BORJAS Confirming Pages Labor Economics Sixth Edition George J. Borjas Harvard University bor23208_fm_i-xvi.indd i 11/12/11 10:04 AM Confirming Pages LABOR ECONOMICS, SIXTH EDITION Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY 10020. Copyright © 2013 by The McGraw-Hill Companies, Inc.
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Donnelley All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. Library of Congress Cataloging-in-Publication Data Borjas, George J. Labor economics / George J. Labor market—United States.com bor23208_fm_i-xvi.indd ii 12/14/11 1:06 PM Confirming Pages About the Author George J.
Borjas is the Robert W. Scrivner Professor of Economics and Social Policy at the John F. Kennedy School of Government, Harvard University. He is also a research associate at the National Bureau of Economic Research.
Professor Borjas received his Ph. in economics from Columbia University in 1975. Professor Borjas has written extensively on labor market issues. He is the author of several books, including Wage Policy in the Federal Bureaucracy (American Enterprise Institute, 1980), Friends or Strangers: The Impact of Immigrants on the U.
He has published more than 125 articles in books and scholarly journals, including the American Economic Review, the Journal of Political Economy, and the Quarterly Journal of Economics. Professor Borjas was elected a Fellow of the Econometric Society in 1998, and a Fellow of the Society of Labor Economics in 2004. In 2011, Professor Borjas was awarded the IZA Prize in Labor Economics. He was an editor of the Review of Economics and Statistics from 1998 to 2006.
He also has served as a member of the Advisory Panel in Economics at the National Science Foundation and has testified frequently before congressional commit- tees and government commissions. iii bor23208_fm_i-xvi.indd iii 11/12/11 10:04 AM Confirming Pages bor23208_fm_i-xvi.indd iv 12/15/11 9:32 AM Confirming Pages To Sarah, Timothy, and Rebecca bor23208_fm_i-xvi.indd v 11/12/11 10:04 AM Confirming Pages Preface to the Sixth Edition The original motivation for writing Labor Economics grew out of my years of teaching labor economics to undergraduates. After trying out many of the textbooks in the market, it seemed to me that students were not being exposed to what the essence of labor economics was about: to try to understand how labor markets work. As a result, I felt that students did not really grasp why some persons choose to work, while other persons withdraw from the labor market; why some firms expand their employment at the same time that other firms are laying off workers; or why earnings are distributed unequally in most societies.
The key difference between Labor Economics and competing textbooks lies in its philosophy. I believe that knowing the story of how labor markets work is, in the end, more important than showing off our skills at constructing elegant models of the labor market or remem- bering hundreds of statistics and institutional details summarizing labor market conditions at a particular point in time. I doubt that many students will (or should!) remember the mechanics of deriving a labor supply curve or the way that the unemployment rate is officially calculated 10 or 20 years after they leave college. However, if students could remember the story of the way the labor market works—and, in particular, that workers and firms respond to changing incentives by altering the amount of labor they supply or demand—the students would be much better prepared to make informed opinions about the many proposed government policies that can have a dramatic impact on labor market opportunities, such as a “workfare” program requiring that welfare recipients work or a payroll tax assessed on employers to fund a national health care program or a guest worker program that grants tens of thousands of entry visas to high-skill workers.
The exposition in this book, therefore, stresses the ideas that labor economists use to understand how the labor market works. The book also makes extensive use of labor market statistics and reports evidence obtained from hundreds of research studies. These data summarize the stylized facts that a good theory of the labor market should be able to explain, as well as help shape our think- ing about the way the labor market works. The main objective of the book, therefore, is to survey the field of labor economics with an emphasis on both theory and facts.
The book relies much more heavily on “the economic way of thinking” than competing textbooks. I believe this approach gives a much better understanding of labor economics than an approach that minimizes the story-telling aspects of economic theory. Requirements The book uses economic analysis throughout. All of the theoretical tools are introduced and explained in the text.
As a result, the only prerequisite is that the student has some familiarity with the basics of microeconomics, particularly supply and demand curves. The exposure acquired in the typical introductory economics class more than satisfies this pre- requisite. All other concepts (such as indifference curves, budget lines, production func- tions, and isoquants) are motivated, defined, and explained as they appear in our story. The book does not make use of any mathematical skills beyond those taught in high school algebra (particularly the notion of a slope).
vi bor23208_fm_i-xvi.indd vi 11/12/11 10:04 AM Confirming Pages Preface to the Sixth Edition vii Labor economists also make extensive use of econometric analysis in their research. Although the discussion in this book does not require any prior exposure to econometrics, the student will get a much better “feel” for the research findings if they know a little about how labor economists manipulate data to reach their conclusions. The appendix to Chapter 1 provides a simple (and very brief) introduction to econometrics and allows the student to visualize how labor economists conclude, for instance, that wealth reduces labor supply, or that schooling increases earnings. Additional econometric concepts widely used in labor economics—such as the difference-in-differences estimator or instrumental variables—are introduced in the context of policy-relevant examples throughout the text.
Changes in the Sixth Edition Users of the textbook reacted favorably to the substantial rearrangement of material (mainly of labor supply) that I carried out in the previous edition. The Sixth Edition continues this new tradition by further tightening up the discussion on labor supply so that the chapter now contains material that can be roughly done in a week of lectures. In order to maintain the labor supply discussion at a tractable length (and in keeping with my philosophy that textbooks are not meant to be encyclopedias), some material that had been a staple in ear- lier editions is now omitted (specifically, the models of household fertility and household specialization). The Sixth Edition continues and expands other traditions established in earlier editions.
In particular, the text has a number of new detailed policy applications in labor economics and uses the evidence reported in state-of-the-art research articles to illustrate the many uses of modern labor economics. As before, the text makes frequent use of such econometric tools as the difference-in-differences estimator and instrumental variables—tools that play a cen- tral role in modern research in labor economics. In fact, the Sixth Edition introduces students to yet another tool in our econometric arsenal, the method of fixed effects—a technique that is widely used to ensure that the empirical analysis is indeed holding “other things equal.” Most important, a number of users of the textbook have repeatedly requested a more technical presentation of some of the basic models of labor economics. To accommodate this request, I have written a Mathematical Appendix that appears at the end of the text- book.
This appendix presents a mathematical version of some of the canonical models in labor economics, including the neoclassical model of labor-leisure choice, the model of labor demand, a derivation of Marshall’s rules of derived demand, and the schooling model. It is very important to emphasize that the Mathematical Appendix is an “add-on.” None of the material in this appendix is a prerequisite to reading or understanding any of the discussion in the 12 core chapters of the textbook. Instructors who like to provide a more technical derivation of the various models can use the appendix as a takeoff point for their own discussion and presentation. This is the first time that such an appendix appears in the textbook, so I would particularly welcome any suggestions or reactions that would be useful in the presentation and organization of the material in the next edition (including suggestions for additional models that should be discussed).
Among the specific applications included in the Sixth Edition are: 1. Several new “Theory at Work” boxes. The sidebars now include a discussion of the impact of weather on the consumption of leisure, the link between the human capital bor23208_fm_i-xvi.indd vii 11/12/11 10:04 AM Confirming Pages viii Preface of kindergarteners and their socioeconomic outcomes decades later, how the exodus of renowned Jewish scientists from Nazi Germany affected the productivity of the doc- toral students they left behind, the economic consequences of political discrimination in Hugo Chavez’s Venezuela, the link between teachers’ unions and student outcomes, and a discussion of the long-run consequences of graduating from school during a recession. A careful updating of all the data tables presented in the text, and particularly the data on unemployment trends in the United States since the financial crisis of 2008.
An introduction to the method of fixed effects by noting how this methodology is used to estimate the key parameter that summarizes how a worker reacts to wage changes in a model of labor supply over the life cycle. An expanded discussion of the “new” monopsony literature, including estimates of the labor supply elasticity at the firm level. As in previous editions, each chapter contains “Web Links,” guiding students to Websites that provide additional data or policy discussions. There is an updated list of “Selected Readings” that include both standard references in a particular area and recent applications.
Finally, the Sixth Edition adds one additional end-of-chapter problem in each chapter. Organization of the Book The instructor will find that this book is much shorter than competing labor economics textbooks. The book contains an introductory chapter, plus 11 substantive chapters. If the instructor wished to cover all of the material, each chapter could serve as the basis for about a week’s worth of lectures in a typical undergraduate semester course.
Despite the book’s brevity, the instructor will find that all of the key topics in labor economics are covered. The discussion, however, is kept to essentials as I have tried very hard not to deviate into tangential material, or into 10-page-long ruminations on my pet topics. Chapter 1 presents a brief introduction that exposes the student to the concepts of labor supply, labor demand, and equilibrium.
