Libertad Gonzalez and Thijs van Rens

Universitat Pompeu Fabra

Graduate Program in Economics


Labor Economics

Winter 2007


Course objectives

Labor economics, the study of labor markets, is a field populated by both micro- and macroeconomists. Broadly speaking, the questions we try to answer are "What determines differences in wages or labor supply between different people?" or "What determines differences in wages and labor supply between recessions and booms?". Traditionally, these questions have been approached with very different methods: largely data-driven (non-structural) microeconometrics on the one hand, and theory or model-based estimation on the other. But these differences are getting smaller and as a labor economist you need to be (somewhat) familiar with both views.

 In this course, we try to give you an overview of the field of labor economics, with a strong emphasis on theoretically motivated empirics or data-driven theory. We also tried to select topics that are at the edge of current research interests, so that you can start thinking about your own research topics. Since this is a second year Ph.D. course, the aim is not only to introduce you to the field, but also to prepare you to do your own research. For that reason, you will be evaluated not only in an exam, but also based on a research project that you present in class and write up as a paper (proposal).



In order to give you time to work on your project, we will try to concentrate the 'learning' part of the course in the first five weeks. This is reflected in the grading scheme. The first half will be concluded with a midterm exam, which counts for 40% of your final grade. The second half is evaluated on the basis of a shorter final exam early in the exam period (20%) and your project, due at the end of the exam period (40%). The grade for the project will be determined by your presentation in the last week of class as well as the final draft. Depending on the topic, your project is graded by Libertad or Thijs, but of course we will make sure that you neither benefit nor suffer from your choice.


Research project 

Your project may be either a critical evaluation of an existing paper related to the material covered in class or a research proposal for a paper of your own. In the first case, the paper should consist of a detailed summary of the article you are discussing, a critical evaluation of that article in the style of a referee report, plus a replication or extension of the results. If you decide to write a research proposal, you need to describe the contribution of your paper with respect to the literature, provide a detailed and precise description of the question you are planning to answer, plus show some preliminary results. In either case, the results may be empirical (cross-tabs, regressions) or theoretical (simulations, proofs). You will present your project in the last week of class, so that we can give you feedback on your idea.



Libertad, room 20.1E78,,

Thijs, room 20.1E32,,

This syllabus and other relevant information will be posted on web at


Reading List

1. Introduction (Lecture 1)

* Cahuc & Zylberberg, Labour Economics, 2004 (Introduction).

Ehrenberg & Smith, Modern Labor Economics, 2003 (Chapters 1 & 2).

Thomson, A Guide for the Young Economist, 2001 (Chapter 1).

Wooldridge, Introductory Econometrics, 2003 (Chapter 19).


2. The Roy Model (Lectures 2, 3)       

* A. Roy, “Some Thoughts on the Distribution of Earnings.” Oxford Economic Papers, pp 135-46, 1951.

* J. Heckman and B. Honore, “The Empirical Content of the Roy Model.” Econometrica, 58, pp. 1121-49, 1990.

J. Heckman and G. Sedlacek, “Heterogeneity, Aggregation, and Market Wage Fluctuations: An Empirical Model of Self-Selection in the Labor Force,” JPE 1985.

G. Borjas, “Self-Selection and the Earnings of Immigrants.” American Economic Review, 77.4 (September), 5531-53, 1987.

G. Borjas, “The Wage Structure and the Sorting of Workers into the Public Sector.” NBER Working Paper, No. 9313, 2000.

D. Neal and S. Rosen, “Theories of Labor Earnings” in the Handbook of Income Distribution, A.B. Atkinson and F. Bourguignon, eds. Amsterdam: Elsevier Science, 1999.

G. Borjas, “The Economics of Immigration.” Journal of Economic Literature, Vol. 32.4 (December), 1667-1717, 1994.

R. Friedberg, “You Can´t Take It With You? Immigrant Assimilation and the Portability of Human Capital.” Journal of Labor Economics, 18.2, 221-251, 2000.


3. Compensating Differentials (Lectures 4, 5)

(*) Cahuc & Zylberberg (2004) Labor Economics, Chapter 5.

(*) Ehrenberg & Smith (2003) Modern Labor Economics, Chapter 8.

* S. Rosen (1986). “The Theory of Equalizing Differences” in the Handbook of Labor Economics, vol. 1, pp 641-92.

S. Rosen (1974). “Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition” Journal of Political Economy, Vol. 82.1 (January-February), 34-55.

* J. Roback (1982) “Wages, Rent and the Quality of Life”. Journal of Political Economy. Vol. 90.6 (December) 1257-78.

* T. Bergstrom (1986) "Soldiers of Fortune?" in W. Heller, R. Starr, and D. Starrett (eds.), Equilibrium Analysis: Essays in Honor of K. J. Arrow, Vol II.

J. Abowd and O. Ashenfelter (1981) “Temporary Layoffs, Anticipated Unemployment and Compensating Wage Differentials” in S. Rosen ed. Studies in Labor Markets. Chicago: University of Chicago Press for the National Bureau of Economic Research.

D. Autor, J. Donohue, and S. Schwab (2002). “The Cost of Wrongful-Discharge Laws” NBER Working Paper No. 9425.

M. Bertrand, E. Duflo, and S. Mullainathan (2002). “How Much Should We Trust Differences-in Differences Estimates?” NBER Working Paper No. 8841.

C. Brown (1980). “Equalizing Differences in the Labor Market.” Quarterly Journal of Economics, vol. 1, pp 641-92.

G. Duncan and B. Holmlund (1983) “Was Adam Smith Right After All? Another Test of the Theory of Compensating Differentials.” Journal of Labor Economics Vol. 1.4 (October) 366-79.

I. Ekeland, J. Heckman, and L. Nesheim (2003). “Identification and Estimation of Hedonic Models.” NBER Working Paper No. 9910.

P. Fishback and S. Kantor (1995). “Did Workers Pay for the Passage of Workers´ Compensation Laws?” Quarterly Journal of Economics, Vol. 110.3 (August), 713-42.

J. Gruber (1994). “The Incidence of Mandated Maternity Benefits.” American Economic Review, Vol. 84.3 (June), 622-41.

J. Gyourko and J. Tracy (1989) "The Importance of Local Fiscal Conditions in Analyzing Local Labor Market Conditions." Journal of Political Economy, pp.1208-31.

D. Hammermesh (1999). “Changing Inequality in Markets for Workplace Amenities” Quarterly Journal of Economics, 114.4 (November), 1085-1123.

S. Kahn and K. Lang (1988). “Efficiency Estimation of Structural Hedonic Systems” International Economic Review, Vol. 29.1 (February), 157-66.

M. R. Killingsworth (1987) "Heterogeneous Preferences, Compensating Wage Differentials, and Comparable Worth." Quarterly Journal of Economics, Nov.: 727-742.

K. Murphy and R. Topel (1987). “Unemployment, Risk, and Earnings: Testing for Equalizing Differences in the Labor Market” in K. Lang and J. Leonard eds., Unemployment and the Structure of Labor Markets.

R. Smith (1979) "Compensating Wage Differentials and Public Policy: A Review." Industrial and Labor Relations Review, April 1979, pp. 339-353.

J. Stiglitz (1987) "The Causes and Consequences of the Dependence of Quality on Price," Journal of Economic Literature.

Thaler, R. and S. Rosen (1975) "The Value of Saving a Life: Evidence from the Labor Market." In Household Production and Consumption, ed. by N. Terleckyj. New York: National Bureau of Economic Research.

Topel, R. (1984) "Equilibrium Earnings, Turnover, and Unemployment: New Evidence." Journal of Labor Economics, pp. 500-22.

E. Villanueva (2005). "Compensating Wage Differentials and Voluntary Job Changes: Evidence from Germany." Mimeo, Universitat Pompeu Fabra.

Viscusi, W. Kip and Michael J. Moore (1987) "Workers' Compensation: Wage Effects, Benefit Inadequacies, and the Value of Health Losses", The Review of Economics and Statistics, 69:249-261.

S. Woodbury (1983) "Substitution Between Wage and Nonwage Benefits." American Economic Review.


4. Discrimination (Lecture 6 and 7)

(*) Cahuc & Zylberberg (2004) Labor Economics, Chapter 5 (sections 2.1, 3.2, 4.2)

(*) Ehrenberg & Smith (2003) Modern Labor Economics, Chapter 12.

* J. Altonji and R. Blank (1999) “Race and Gender in the Labor Market” in O. Ashenfelter and D. Card, eds. Handbook of Labor Economics, vol. 3C North Holland, 3143-3259.

* J. Altonji and C. R. Pierret (2001) “Employer Learning and Statistical Discrimination” QJE 116(1): 313-350.

K. Arrow (1972) "Models of Discrimination," and "Some Mathematical Models of Race in the Labor Market," in A.H. Pascal (ed.), Racial Discrimination in Economic Life.

Ashenfelter, O. and Oaxaca, R. (1987) "The Economics of Discrimination: Economists Enter the Courtroom", AEA Papers and Proceedings, Vol 77, No. 2 (May 1987): 321-325.

(*) G. Becker, The Economics of Discrimination, 1971.

(*) M. Bertrand and S. Mullainathan (2003) “Are Emily and Greg more employable than Latisha and Jamal? A field Experiment on Labor Market Discrimination” NBER WP No. 9873.

G. Borjas and S. G. Bronars, "Consumer Discrimination and Self-Employment", JPE 97 no. 3 (June 1989): 581-605.

G. Cain (1987) "The Economic Analysis of Labor Market Discrimination: A Survey", in Handbook of Labor Economics. 1987, vol. 1, pages 693-781.

G. Cain and D Ainger (1977) “Statistical Theories of Discrimination” Industrial and Labor Relations Review, 30 January 175-87.

M. Killingsworth (1990) The Economics of Comparable Worth (Upjohn Institute).

(*) S. Levitt (2004) "Testing Theories Of Discrimination: Evidence From Weakest Link." Journal of Law and Economics 47(2).

Lundberg, S. and R. Startz (1983) "Private Discrimination and Social Intervention in Competitive Labor Markets," American Economic Review, June.

P. Riach and J. Rich (2002) “Field Experiments of Discrimination in the Market Place” Economic Journal, 112 (November) F480-F518.

J. Smith and F. Welch (1986) Closing the Gap, Rand Corp.


Black/White Differences

J. Donohue and J. Heckman (1991) “Continuous Versus Episodic Change: The Impact of Civil Rights Policy on the Economic Status of Blacks” JEL (December), 1603-42.

C. Juhn, K. M. Murphy, and B. Pierce (1989) "Accounting for the Slowdown in Black-White Wage Convergence", in Workers and Their Wages, Marvin Kosters, Ed.

G. Loury (2003) “Racial Stigma : Toward a New Paradigm for Discrimination Theory” AER (May) 334-7.

D. Neal and W. Johnson (1996) “The Role of Premarket Factors in Black-White Wage Differences” Journal of Political Economy 104 (October), 869-95.

J. O'Neill (1990) "The Role of Human Capital in Earnings Diferences Between Black and White Men", Joural of Economic Perspectives, 4(4): 25-45.


Evaluating Anti-Discrimination Policies

S. Coate and G. Loury (1993) "Will Affirmative-Action Policies Eliminate Negative Stereotypes?", AER 83(5): 1220-1240.

R. Ehrenberg (1989) "Econometric Analyses of the Empirical Consequences of Comparable Worth: What have we learned?", in Comparable Worth: Analyses and Evidence. (eds.) M. A. Hill and M. R. Killingsworth, pp. 90-107, ILR Press.

(*) R. Fryer and G. Loury (2005) “Affirmative Action and Its Mythology” Journal of Economic Perspectives, Summer 2005.

H. Holzer and D. Newmark (2000), “Assessing Affirmative Action” JEL 38 (Sept) 483-568.

G. Johnson and G. Solon (1986) "Estimates of the Direct Effects of Comparable Worth Policy", AER 76(5) December 1117-1125.

J. Leonard (1984) “The Impact of Affirmative Action on Employment” JOLE 2 (October).


Male/Female Differences

F. Blau and L. Kahn, "The Gender Earnings Gap: Some International Evidence", NBER 4224 (December 1992)

F. Blau and L. Kahn (2000), “Gender Differences in Pay” JEP 14 (Fall) 75-99.

C. Goldin (1986) “Monitoring Costs and Occupational Segregation by the Sexes: An Historical Analysis”, Journal of Labor Economics.

C. Goldin (1990) Understanding the Gender Gap. Oxford University Press, New York

C. Goldin and L. Katz (2002) “The Power of the Pill: Oral Contraceptives and Women´s Career and Marriage Decisions”, Journal of Political Economy 110 (August 730-70.

(*) C. Goldin and C. Rouse (2000) “Orchestrating Impartiality: The impact of ‘blind’ auditions on female musicians” AER 90: 715-736.

J. O’Neil (2003) “The Gender Gap in Wages, circa 2000” AER 93 (May), 309-14.


5. Employment fluctuations (lectures 8 – 12)

* Richard Rogerson, Robert Shimer and Randall Wright (2005). Search Theoretic Models of the Labor Market. Journal of Economic Literature, 43 (4): 959-988.

Christopher Pissarides (2000). Equilibrium Unemployment Theory, 2nd edition. Cambridge: MIT Press.

* Steven J. Davis, John C. Haltiwanger, and Scott Schuh (1997). Basic Facts about Job Creation and Destruction, chapter 2 in Job Creation and Destruction, Cambridge: MIT Press.

Davis and Haltiwanger (1990). Gross Job Creation and Destruction: Microeconomic Evidence and Macroeconomic Implications, NBER Macro annual.

Davis and Haltiwanger (1992). Gross Job Creation, Gross Job Destruction and Employment Reallocation, Quarterly Journal of Economics.

Steven J. Davis and John Haltiwanger (1999). On the Driving Forces behind Cyclical Movements in Employment and Job Reallocation, American Economic Review, vol. 89(5), pp.1234-1258.

* Mortensen, Dale T. and Christopher A. Pissarides (1994). Job Creation and Job Destruction in the Theory of Unemployment, Review of Economic Studies, 61(3), pp.397-415.

* Cole, Harold L. and Richard Rogerson (1999). Can the Mortensen-Pissarides Matching Model Match the Business-Cycle Facts? International Economic Review, 40(4), pp.933-959.

Pissarides (1992). Loss of Skill During Unemployment and the Persistence of Employment Shocks, Quarterly Journal of Economics, 107(4), pp. 1371-1391.

Hall, Robert E. (1995). Lost Jobs. Brookings Papers on Economic Activity, 1995(1), pp.221-256.

Michael J. Pries (2004). Persistence of Employment Fluctuations: A Model of Recurring Job Loss, Review of Economic Studies, 71 (1), 193–215.

* Shimer (2006). Reassessing the Ins and Outs of Unemployment, mimeo, University of Chicago.

* Robert Shimer (2005). The Cyclical Behavior of Equilibrium Unemployment and Vacancies, American Economic Review, 95(1): 25-49.

Shigeru Fujita and Garey Ramey (2006). The Cyclicality of Job Loss and Hiring, Philadelphia Fed Working Paper 06-17.

Shigeru Fujita and Garey Ramey (2007). Reassessing the Shimer Facts, Philadelphia Fed Working Paper 07-2.

Robert E. Hall (2005). Job Loss, job Finding, and Unemployment in the U.S. Economy over the Past Fifty Years, NBER Macro Annual.

Steve J. Davis (2005). Comments on “Job Loss, job Finding, and Unemployment in the U.S. Economy over the Past Fifty Years” by Robert E. Hall, NBER Macro Annual.

* Robert E. Hall (2005). Employment Fluctuations with Equilibrium Wage Stickiness, American Economic Review, vol. 95(1), pp.50-65.

* Shimer (2004). The Consequences of Rigid Wages in Search Models, Journal of the European Economic Association.


6. Earnings inequality I: skill-biased technological change (Lectures 13, 14)

* Cahuc & Zylberberg, Chapter 10.2.

* Ehrenberg & Smith, Chapter 14.

Acemoglu, D., “Technical change, inequality, and the labor market.” Journal of Economic Literature, 2002.

(*) Autor, D., L. Katz, and A. Krueger, “Computing Inequality: Have Computers Changed the Labor Market?” QJE 1998.

Autor, D., L. Katz, and M. Kearney, “The Polarization of the US Labor Market”, presented at the 2006 ASSA Meetings, Boston, January 2006.

Berman, E., J. Bound and S. Machin, “Implications of skill-biased technological change: International evidence” QJE 1998.

J. Bound and G. Johnson, "Changes in the Structure of Wages During the 1980's: An Evaluation of Alternative Explanations.” AER, 1992.

(*) Card, D. and J. DiNardo, “Skill biased technological change and rising wage inequality: Some problems and puzzles” Journal of Labor Economics, vol. 20, 2002.

DiNardo, Fortin and Lemieux, “Labor Market Institutions and the Distributions of Wages, 1973-1991: A Semiparametric Approach” Econometrica, 1996.

DiNardo, J. and S. Pischke, “The Returns to Computer Use Revisited: Have Pencils Changed the Wage Structure too?” Quarterly Journal of Economics, 1997.

Gottschalk, P. and T. Smeeding, “Cross national comparisons of earnings and income inequality” Journal of Economic Literature, 1997.

* C. Juhn, K. Murphy, and B. Pierce, "Wage Inequality and the Rise in Returns to Skill.," JPE 1993.

* L. Katz and D. Autor, “Changes in the Wage Structure and Earnings Inequality,” Handbook of Labor Economics, 1999.

* L. Katz and K. Murphy, "Changes in Relative Wages, 1963-87: Supply and Demand Factors," QJE 1992.

Krueger, A., “How Computers have Changed the Wage Structure? Evidence from Micro Data.” Quarterly Journal of Economics, 1993.

Levy, F. and R. Murnane, “U.S. Earnings Levels and Earnings Inequality” A Review of Recent Trends and Proposed Explanations,” Journal of Economic Literature, 30 1331-81, 1992.

Machin, S. and J. Van Reenen, “Technology and changes in skill structure: Evidence from seven OECD countries” QJE 1998.


7. Earnings inequality II: transitory inequality, consumption and welfare (Lectures 15, 16)

* Gottschalk, Peter and Robert Moffitt (1994). The Growth of Earnings Instability in the U.S. Labor Market. Brookings Papers on Economic Activity, 1994(2), pp. 217-254.

Moffitt, Robert A. and Peter Gottschalk (1995). Trends in the Autocovariance Struc- ture of Earnings in the U.S.: 1969-1987. John Hopkins Working Papers in Eco- nomics, June 1993, revised July 1995.

* Moffitt, Robert A. and Peter Gottschalk (2002). Trends in the Transitory Variance of Earnings in the United States. Economic Journal, 112, pp.C68-C73.

* Angus Deaton and Christina Paxson (1994). Intertemporal Choice and Inequality, Journal of Political Economy, 102(3), pp. 437-467.

* Richard Blundell and Ian Preston (1998). Consumption Inequality and Income Uncertainty, Quarterly Journal of Economics, 113(2), pp.603-40.

Heathcote, Jonathan, Kjetil Storesletten and Gianluca Violante (2005). Two Views of Inequality Over the Life-Cycle. Journal of the European Economic Association, 3(2-3), pp.765-775.

Orazio Attanasio (2004). What Really Happened to Consumption Inequality in the US? NBER Working Paper No. 10338.

Krueger, Dirk and Fabrizio Perri (2002). Does Income Inequality Lead to Consumption Inequality? Evidence and Theory. NBER Working Paper 9202.

Blundell, Richard, Luigi Pistaferri and Ian Preston (2005). Consumption Inequality and Partial Insurance. mimeo UCL-IFS/Stanford.

Guvenen, Fatih (2005a). Learning Your Earning: Are Labor Income Shocks Really Very Persistent. mimeo, University of Rochester.

Guvenen, Fatih (2005b). An Empirical Investigation of Labor Income Processes. mimeo, University of Rochester.

Primiceri, Giorgio and Thijs van Rens (2006). Predictable Life-Cycle Shocks, Income Risk and Consumption Inequality.

Huggett, Mark, Gustavo Ventura and Amir Yaron (2006). Sources of Lifetime Inequality.

Cunha, Flavio, James Heckman and Salvador Navarro (2005). Separating Uncertainty from Heterogeneity in Life Cycle Earnings.


8. Human capital and the return to schooling (Lectures 17, 18)

Gary S. Becker (1967). Human Capital and the Personal Distribution of Income, Woytinski Lecture No.1 Ann Arbor: University of Michigan Press.

Gary S. Becker (1975). Human Capital. New York: NBER.

Jacob Mincer (1958). Investment in Human Capital and Personal Income Distribution, Journal of Political Economy, 66(4), pp.281-302.

Zvi Grilliches (1977). Estimating the Returns to Schooling: Some Econometric Problems, Econometrica, 45(1), pp.1-22.

* David Card (1999). The Causal Effect of Education on Earnings. Chapter 30 in the Handbook of Labor Economics, volume 3, Orley Ashenfelter and David Card (eds). Elsevier.

Joshua D. Angrist and Alan B. Krueger (1991). Does Compulsory School Attendance Affect Schooling and Earnings? Quarterly Journal of Economics, 106(4), pp.979-1014.

John Bound and David A. Jaeger (1996). On the Validity of Season of Birth as an Instrument in Wage Equations: A Comment on Angrist & Krueger's "Does Compulsory School Attendance Affect Schooling and Earnings?" NBER WP 5835

Orley Ashenfelter and Cecilia Rouse (1998). Income, Schooling, and Ability: Evidence from a New Sample of Identical Twins, Quarterly Journal of Economics, 113(1), pp.253-284.

Eric A. Hanushek (1986). The Economics of Schooling: Production and Efficiency in Public Schools, Journal of Economic Literature, 24(3), pp.1141-1177.

David Card and Alan B. Krueger (1992). Does School Quality Matter? Returns to Education and the Characteristics of Public Schools in the United States, Journal of Political Economy, 100(1), p.1-40.

David Card and Alan B. Krueger (1996). School Resources and Student Outcomes: An Overview of the Literature and New Evidence from North and South Carolina, Journal of Economic Perspectives, 10(4), pp.31-50.


9. Project presentations (Lectures 19, 20)


Not covered:

Employment fluctuations II: Real Business Cycles

Kydland, Finn E. and Edward C. Prescott (1982). Time to Build and Aggregate Fluctuations. Econometrica, 50(6), pp.1345-1370.

King, Robert G. and Sergio T. Rebelo (1999). Resuscitating Real Business Cycles. In: John B. Taylor and Michael Woodford (eds), Handbook of Macroeconomics, volume 1B, pp.927-1007.

Backus, David K., Patrick J. Kehoe and Finn E. Kydland (1995). International Business Cycles: Theory and Evidence. In: Thomas F. Cooley (ed), Frontiers of Business Cycle Research, chapter 11.

Hall, Robert E. (1997). Macroeconomic Fluctuations and the Allocation of Time. Journal of Labor Economics, 15(1), pp.S223-S250.

Hansen, Gary D. (1985). Indivisible Labor and the Business Cycle. Journal of Monetary Economics, 16(3), pp.309-327,

Benhabib, Jess, Richard Rogerson and Randall Wright (1991). Homework in Macroeconomics: Household Production and Aggregate Fluctuations. Journal of Political Economy, 99(6), pp.1166-1187.

Cho, Jang-Ok and Thomas F. Cooley (1994). Employment and Hours over the Business Cycle. Journal of Economic Dynamics and Control, 18(2), pp.411-432.


Human Capital: International evidence and the social return

George Psacharopoulos (1994). Returns to Education: A Global Update, World Development, 22(9), pp.1325-1343.

Heckman, James J. and Peter J. Klenow (1997). Human Capital Policy. mimeo, University of Chicago.

Acemoglu, Daron and Joshua Angrist (1999). How large are Social Returns to Education? Evidence from Compulsory Schooling Laws. NBER WP 7444.

Moretti, Enrico (2004).Workers’ Education, Spillovers, and Productivity: Evidence from Plant-Level Production Functions. American Economic Review, 94(3), pp.656-690.

* Alan B. Krueger and Mikael Lindahl (2001). Education for Growth: Why and for Whom? Journal of Economic Literature, 39(4), pp.1101-1136.

Coen N. Teulings and Thijs van Rens (2007). Education, Growth and Income Inequality. Review of Economics and Statistics, forthcoming.

Ciccone, Antonio and Giovanni Peri (2006). Identifying Human-Capital Externalities: Theory with Applications. Review of Economic Studies, 73, pp. 381-412.


Further topics

·         Firing costs, European unemployment and labor hoarding

·         Wage rigidity

·         Wage posting (competitive search)

·         Participation and the decision to be out of the labor force

·         Program evaluation

·         Residual wage dispersion (search models with heterogeneity)

·         Search frictions in an RBC model

·         Regulated labor markets: professional licensing on the market for lawyers