Question

1. What is Labor Economics and Why is it Important?

2.         Discuss the three key actors of labor economics. Give Examples.

3.         Distinguish between Positive Economics and Normative Economics. Give Examples.

Answer 1

1] Labour economics is a study of the labour force as an element in the process of production. The labour force comprises all those who work for gain, whether as employees, employers, or as self-employed, and it includes the unemployed who are seeking work. Labour economics involves the study of the factors affecting the efficiency of these workers, their deployment between different industries and occupations, and the determination of their pay. In developing models for the study of these factors, this section deals with the labour force of contemporary industrialized economies. The economist cannot study the capabilities, jobs, and earnings of men and women without taking account of psychology, social structures, cultures, and the activities of government. Productivity of an economy depends upon labour.

2] Three main actors of labour market are

1) workers 2) Firms 3) Government

1) Workers -  The most important actor; without workers, there is no labour. Desire to optimize to maximize well-being. Workers decide: Whether to work or not; how many hours to work; how much effort to put into work; which skills to acquire and how much effort to put into work; which skills to acquire and when; which occupation to enter; when to quit a job; etc. - Workers will want to supply more time and effort for higher payoffs, (usually) causing an upward sloping labor supply curve.

2) Firms -  Decide who to hire and fire; the length of the workweek; how much capital to employ (thereby affecting worker productivity); whether to offer a risky or a safe working environment, etc. Motivated to maximize profits. A firm decides how much to produce to maximize profits. This determines how much labour it hires (therefore demand for labour is derived demand). Relationship between price of labour and the number of workers a firm is willing to hire generates the labour demand curve. It has a negative slope, i.e. workers and firms enter the labour market with conflicting interests.

3) Government - Imposes taxes (e.g. income tax), subsidizes education and training, imposes regulations (hours worked, minimum wage, equal opportunity, health and safety, migration etc.). The government’s actions provide the ground rules that guide exchanges made in labour markets exchanges made in labour markets.

3] Positive Economics-

Positive economics is the study of what and why an economy operates as it does. It is also known as Descriptive economics and is based on facts which can be subjected to scientific analysis in order for them to be accepted. It is based on factual information and uses statistical data, and scientific formula in determining how an economy should be. It deals with the relationship between cause and effect and can be tested. Positive economic statements are always based on what is actually going on in the economy and they can either be accepted or rejected depending on the facts presented.

Normative Economics -

Normative economics is the study of how the economy should be. It is also known as Policy economics wherein normative statements like opinions and judgments are used. It determines the ideal economy by discussion of ideas and judgments.

In normative economics, people state their opinions and judgments without considering the facts. They make distinctions between good and bad policies and the right and wrong courses of action by using their judgments.

Normative economic statements cannot be tested and proved right or wrong through direct experience or observation because they are based on an individuals opinion.

Although these two are distinct from each other, they complement each other because one must first know about economic facts before he can pass judgment or opinion on whether an economic policy is good or bad.

To sum up the difference

Positive economics is based on facts and purely objective. It is is sometimes also referred to as the economics of what is. By contrast, normative economics is based on values and therefore inherently subjective. Hence, it is sometimes also called the economics of what ought to be. Positive economics is also called descriptive economics while normative economics is called policy economics. Positive economic statements can be tested using scientific methods while normative economics cannot be tested.