Labor supply decisions for economics majors

Students often struggle with the difference between the standard demand-supply model and the labour one. This exercise can be used after students are familiar with the labor market model. The aim of this exercise is for them to relate with the suppliers of labor and better understand how the model works. Students should be familiar with the following topics before doing this exercise : Supply and demand of labor, elasticity of demand and supply.

Overview

In this activity, students look at the options they have after they graduate with an economics degree and determine whether they should continue studying or enter the labor market. In the process of selecting their next move they will need to identify the factors that most strongly influence people's decision to enter the labor market. Students will connect their own decisions with the determinants of the supply curve in the labor market model. They will go through different supply ''shifters'' and apply the concept of elasticity of labor supply in practice.

Expected Student Learning Outcomes

Students will learn the difference between the standard D/S model for goods and services and the labor market demand-supply model. They will examine the choices that affect the decision to enter the labor market and they will compare different labor supply "shifters." They will also explore the different of the elasticity of labor supply.

Information Given to Students

You are about to graduate and you are discussing with your fellow classmates your future plans. You will be graduating with a degree in economics and are wondering whether to pursue a postgraduate degree or enter the job market immediately. Rank the following factors in the order from the one most likely to influence your near-term decision about entering the labor force or continuing your studies to the factors least likely to affect your decision.

A) News that the wage in a job requiring your current skills has risen from $60,000 to $65,000 per year.
B) News that student loan fees will be at a record low during the next 4 years
C) News that employers of MBA graduates prefer that hirees have substantial work experience along with their graduate degree.
D) News that wages in data science jobs which you can get with a postgraduate degree in that field are at a record high

Student handout for labor supply AE (Microsoft Word 2007 (.docx) 12kB Apr1 19)

Before this exercise, the instructor can review the basic concepts of labor supply and labor demand. It is important to make clear to students that in the product market the demand represents the buyer of the product and the supply represents the firms. In the labor market the demand represents the firm and the supply represents the workers. In this exercise students should identify with the suppliers of labor and their work in this exercise should link explicitly to the determinants of the labor supply curve.

After students simultaneously present their answers, the teacher can guide the conversation/discussion around the factors that shift the supply of labor and what determines the decision to enter the labor market.

Some questions that can be used to facilitate the discussion are:

• What is the most important factor that will determine whether you start looking for a job?
• The instructor should make sure to connect the various factors that students report to the corresponding shifts in the labor supply curve in the affected labor market. Some possible answers to focus on could be : current wage rate, non-work income, unemployment benefits etc. There should be a list of factors in any economic text book that discusses labor supply.
• What information about the labor market would you need in order to make a more informed decision?
• The instructor here can focus on non-wage determinants of labor supply and labor demand. The conversation can start from the current economic situation up to unemployment levels by sector.
• How do changes in wages of other fields affect your decision about education and work today?
• According to standard textbook theory higher wages in a sector will lead to an increase in labor supply in that sector and reduce supply in the sector students were going to enter. Instructors should discuss the long term effect on such increase in wages and the fact that in order to enter a different sector students should train for it. Training takes time and they might therefore not be able to benefit from the current higher wages.
• What are the factors that would increase the hours worked by all students in this classroom?
• Here the instructor can elaborate on the factor that most students mention as the decisive one for entering the labor market. It will most likely be the wages but hopefully some more creative ideas will come up from your students.
• Instructors can take this opportunity to talk to students about the job prospects of an economics graduate.
• A wide variety of information on career prospects, postgraduate options and salary earnings by occupation as an economist can be found here:https://www.aeaweb.org/resources/students/careers

Student learning can be assessed in subsequent homework and summative quizzes/exams.

Any introductory economics textbook that has a chapter on the labor market can be assigned as reading material to students with a special focus on the factors that affect the supply and demand of labor.

Students could also watch a video from MRUniversity to understand how supply and demand affect their career options: The economics of choosing the right career

For links to jobs and graduate school in economics see American Economic Association