Overview

Most of us trade our time for money. Labor economics studies this exchange. It asks: Why do doctors earn more than janitors? Does the minimum wage kill jobs? Why is there a gender pay gap?

Core Idea

Marginal Revenue Product of Labor (MRPL): A firm will hire a worker as long as the value of what they produce is greater than their wage.

Formal Definition (if applicable)

Human Capital Theory: Education and training are investments that increase a worker’s productivity and thus their future wages.

Intuition

The labor market is a market like any other, but the “commodity” is human time.

  • Supply: You (workers).
  • Demand: Companies.
  • Price: Wage.

Examples

  • Minimum Wage: A price floor on labor.
  • Unions: A cartel of workers bargaining for higher wages (monopoly power).
  • Gig Economy: Uber/DoorDash changing the nature of employment.

Common Misconceptions

  • “Immigrants steal jobs.” (Lump of Labor Fallacy: There isn’t a fixed number of jobs. Immigrants also consume goods, creating demand for new jobs.)
  • “Robots will take all our jobs.” (Technology destroys some jobs but creates others. The challenge is transition.)
  • Frictional Unemployment: Time spent looking for a job.
  • Structural Unemployment: Mismatch between skills and jobs.
  • Monopsony: A market with only one buyer (e.g., a factory town where everyone works for the same company).

Applications

  • HR: Compensation and hiring strategies.
  • Public Policy: Education, immigration, and welfare reform.
  • Personal Career: Deciding whether to go to grad school.

Criticism / Limitations

Labor markets are not perfectly competitive. Discrimination, social norms, and power dynamics play a huge role.

Further Reading

  • Borjas, Labor Economics
  • Goldin, Understanding the Gender Gap