Topics in Labor Economics


Fall Term 2010


Matthias Weiss


tuesday, 10:15 – 11:45, L9 1-2,  room 002 (starting September, 7th)



The course addresses current issues in labor economics. An emphasis will lie on macroeconomic issues and their microeconomic foundation, e.g. unemployment and inequality, labor market matching, technological change, globalization, population aging. We will cover some chapters of the book Labor Economics by Pierre Cahuc and André Zylberberg (2004).

Grading will be based on a final exam (50%), participation (17%) and occasional problem sets (33%).




Matthias Weiss



L13, 17, room 411








office hours:

by appointment


The following suggestive outline gives you an idea of what we plan to cover. The exact program is going to be a function of students’ preferences.


1.               Job Reallocation and Unemployment: The Matching Model (CZ: Ch. 9, B: Ch. 13-3)

            The Matching Model

                  Job Flows and Worker Flows (CZ: pp. 503 – 514)

                  The Matching Function (CZ: pp. 518 – 523)

                  The Behavior of Firms (CZ: pp. 532 – 525)

                  The Behavior of Workers (CZ: pp. 526)

                  Wage Bargaining (CZ: pp. 526 – 530)

                  Labor Market Equilibrium (CZ: pp. 530 – 534)

            Investment and Employment

                  Interest Rate, Investment, and Unemployment (CZ: pp. 537 – 542)

                  Investment in Specific Capital, “Holdup”, and Unemployment (CZ: pp. 542 – 545)

            The Efficiency of Market Equilibrium

                  Trading Externalities (CZ: pp. 550 – 551)

                  The Social Optimum (CZ: pp. 552 – 553)

                  Is Labor Market Equilibrium Necessarily Inefficient? (CZ: pp. 554 – 556)

                  Summary and Conclusion (CZ: pp. 557 – 558)

2.               Technological Change and Globalization: Effects on Employment and the Wage Structure (CZ: Ch. 10, B: Ch. 8)

            Does Technological Progress Destroy More Jobs than it Creates?

                  Technological Progress and Productivity (CZ: pp. 565 – 569)

                  The Capitalization Effect (CZ: pp. 569 – 573)

                  Creative Destruction (CZ: pp. 573 – 581)

            Globalization, Skill-Biased Technological Change, Inequality, and Unemployment

                  The Facts (CZ: pp. 582 – 587)

                  Skill-Biased Technological Change (CZ: pp. 587 – 595)

3.               Age, Experience, Seniority, Productivity, and Wages


            Productivity and Wages in a Shirking Model



            The Psychology of Increasing Wage Profiles



4.               Summary and Conclusion


Text Book:

Pierre Cahuc and André Zylberberg (2004): Labor Economics, Cambridge: The MIT Press.


Lecture 1, Sep, 7th

Homework: Read Sections 1 and 2 of Chapter 9, Cahuc and Zylberberg (2004) Labor Economics


Lecture 2, Sep, 21st

Problem 1:  Show that the Labor Demand schedule  describes a decreasing relation between θ and w.


Lecture 3, Sep, 28th

Problem 2:  Show that the Wage Curve , where , describes an increasing relation between the wage w and labor market tightness θ.


Lecture 4, Oct, 5th

No homework this week...


Lecture 5, Oct, 12th

No homework this week...


Lecture 6, Oct, 19th

Problem 3:  Show that , where   and .


Lecture 7, Oct, 26th

Problem 4:  Show that  defines a negative relationship between  and : .


Lecture 8, Nov, 2nd

No homework this week...


Lecture 9, Nov, 9th

No homework this week...


Lecture 10, Nov, 16th

No homework this week...


Lecture 11, Nov, 23rd

Weiss and Garloff (2011): “Skill-biased technological change and endogenous benefits: the dynamics of unemployment and wage inequality”, Applied Economics forthcoming. The model provides a theoretical explanation for diverging dynamics in wage inequality and unemployment under different social benefits regimes. Analysing the social legislation in 14 countries, we find that benefits are linked to the evolution of average income in Continental Europe but not in the US and the UK. Given this institutional difference, our model predicts that skill-biased technological change leads to rising unemployment in Continental Europe and rising wage inequality in the US and the UK. In Continental Europe, there is a link between social benefits and average income. In this case, an increase in the productivity of skilled workers, and hence their wage, leads to an increase in average income and hence in benefits. The increased fallback income, in turn, makes unskilled workers ask for higher wages. As higher wages are not justified by corresponding productivity increases, unemployment rises. Generally, we show that skill-biased technological change leads to increasing unemployment of the unskilled and to a moderately increasing wage inequality when benefits are endogenous.

Weiss (2008): “Skill-biased technological change: Is there hope for the unskilled?”, Economics Letters 100, 439-441.

This paper presents a model in which perpetual skill-biased technological change does not lead to ever increasing wage inequality. The model is consistent with the increase in wage inequality in the 1980s and the subsequent stabilization in the 1990s.


Lecture 12, Nov, 30th

Weiss (2009): “On the evolution of wage inequality in Acemoglu's model of directed technical change”, Applied Economics Letters 16, 591-595. In Acemoglu’s model of directed technical change, the skill-premium increases in consequence of an increase in the relative supply of skilled labor. In this article, I argue that other measures of wage inequality such as the Gini-coefficient do not necessarily rise as well. The Gini-coefficient depends positively on the skill-premium, but the effect of an increase in the relative supply of skilled labor is ambiguous. A simulation of Acemoglu’s model shows that the growth in the relative supply of skilled labor has led to increased wage inequality in the past, but will lead to decreasing wage inequality in the future.