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LABORECONOMICS
SIXTH EDITION
GEORGE J. BORJAS
,Labor Economics
Sixth Edition
George J. Borjas
Harvard University
,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. All rights reserved.
Printed in the United States of America. Previous editions © 2010, 2008, and 2005. No part of this publication
may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system,
without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any
network or other electronic storage or transmission, or broadcast for distance learning.
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United States.
This book is printed on acid-free paper.
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Library of Congress Cataloging-in-Publication Data
Borjas, George J.
Labor economics / George J. Borjas. — 6th ed.
p. cm.
ISBN 978-0-07-352320-0 (alk. paper)
1. Labor economics. 2. Labor market—United States. I. Title.
HD4901.B674 2013
331—dc23
2011038722
www.mhhe.com
,About the Author
George J. Borjas
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.D. 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.S. Economy
(Basic Books, 1990), and Heaven’s Door: Immigration Policy and the American Econ-
omy (Princeton University Press, 1999). 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
,
,To Sarah, Timothy, and Rebecca
,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
, 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
,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.
2. 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.
3. 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.
4. 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. The chapter uses the “real-world” example of the
Alaskan labor market during the construction of the oil pipeline to introduce these concepts.
In addition, the chapter shows how labor economists contrast the theory with the evidence,
as well as discusses the limits of the insights provided by both the theory and the data. The
example used to introduce the student to regression analysis is drawn from “real-world”
data—and looks at the link between differences in mean wages across occupations and
differences in educational attainment as well as the “female-ness” of occupations.
The book begins the detailed analysis of the labor market with a detailed study of labor
supply and labor demand. Chapter 2 examines the factors that determine whether a person
chooses to work and, if so, how much, while Chapter 3 examines the factors that deter-
mine how many workers a firm wants to hire. Chapter 4 puts together the supply decisions
of workers with the demand decisions of employers and shows how the labor market
“balances out” the conflicting interests of the two parties.
The remainder of the book extends and generalizes the basic supply-demand frame-
work. Chapter 5 stresses that jobs differ in their characteristics, so that jobs with unpleasant
working conditions may have to offer higher wages in order to attract workers. Chapter 6
, Preface to the Sixth Edition ix
stresses that workers are different because they differ either in their educational attainment
or in the amount of on-the-job training they acquire. These human capital investments help
determine the economy’s wage distribution. Chapter 7 discusses how changes in the rate
of return to skills in the 1980s and 1990s changed the wage distribution in many industri-
alized economies, particularly in the United States. Chapter 8 describes a key mechanism
that allows the labor market to balance out the interests of workers and firms, namely labor
turnover and migration.
The final section of the book discusses a number of distortions and imperfections in
labor markets. Chapter 9 analyzes how labor market discrimination affects the earnings
and employment opportunities of minority workers and women. Chapter 10 discusses how
labor unions affect the relationship between the firm and the worker. Chapter 11 notes
that employers often find it difficult to monitor the activities of their workers, so that the
workers will often want to “shirk” on the job. The chapter discusses how different types of
pay incentive systems arise to discourage workers from misbehaving. Finally, Chapter 12
discusses why unemployment can exist and persist in labor markets.
The text uses a number of pedagogical devices designed to deepen the student’s under-
standing of labor economics. A chapter typically begins by presenting a number of styl-
ized facts about the labor market, such as wage differentials between blacks and whites or
between men and women. The chapter then presents the story that labor economists have
developed to understand why these facts are observed in the labor market. Finally, the
chapter extends and applies the theory to related labor market phenomena. Each chapter
typically contains at least one lengthy application of the material to a major policy issue, as
well as several boxed examples showing the “Theory at Work.”
The end-of-chapter material also contains a number of student-friendly devices. There
is a chapter summary describing briefly the main lessons of the chapter; a “Key Concepts”
section listing the major concepts introduced in the chapter (when a key concept makes
its first appearance, it appears in boldface). Each chapter includes “Review Questions”
that the student can use to review the major theoretical and empirical issues, a set of 15
problems that test the students’ understanding of the material, as well as a list of “Selected
Readings” to guide interested students to many of the standard references in a particular
area of study. Each chapter then ends with “Web Links,” listing Web sites that can provide
more detailed information about particular issues.
The supplementary material for the textbook includes a Web site that contains much
of the material that students would ordinarily find in a Study Guide (www.mhhe.com/
borjas6e), a Solutions Manual that gives detailed answers to all of the end-of-chapter prob-
lems, PowerPoint presentations that instructors can adapt and edit to fit their own lecture
style and organization, a Test Bank that includes 30 multiple choice questions per chapter,
and a digital image library. Instructors should contact their McGraw-Hill sales representa-
tive to obtain access to both the Solutions Manual and the PowerPoint presentation.
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