What labour economics is about: who earns what and why?

Labour economics deals primarily with questions concerning the determinants of individual earnings power: Who works? What are their wages? What makes some destitute and others better off? With this knowledge we can better judge which policies will raise the national income and thereby help the average worker. We can also assess which policies to target towards particular groups, especially the least well off, and assist in reducing poverty.

As we will see, the wage system is an amazing and delicate system of prices. Table 1.1 shows how different these prices are for the various demographic groups. Women earn less than men, and black workers earn less than whites. For men, earnings increase with age, but at a decreasing rate. For women, earnings vary less with age. In addition, earnings and education are correlated, and earnings vary by occupation. The table even understates variation in pay because there seems to be wide differences in pay received by individuals working in the ‘same job’. Our aim is to explain earnings variation.

In a competitive economy, wages should act as guideposts informing people which occupation to take, for example, or how long to stay at school, or when to change jobs.