Economics of labour EC3015

This course is about the economic analysis of how workers, firms and the government interact in shaping the outcomes in the labour market, primarily employment and earnings.

Prerequisites / exclusions

If taken as part of a BSc degree, courses which must be passed before this course may be attempted:

  • MN2028 Managerial economics or EC2066 Microeconomics.

Topics covered

Labour supply: 

  • Participation and hours of work, human capital formation, empirical evidence.

Labour demand: 

  • Labour demand as derived demand for goods and services, determinants of the sensitivity of the demand for labour with respect to the wage (assuming firms take wages as given), wage structure and its determination – market mechanisms, market clearing and efficiency.
  • Evidence on changes in wage structures over time, skilled versus unskilled, men versus women etc.

Policy issues and labour market dynamic: 

  • Why wage differentials exist amongst similar workers; information aspects and labour market frictions; dynamic monopsony, efficiency wages, discrimination, search and matching models, evidence. Institutional aspects of labour markets, trade unions and professional associations, minimum wages, equal pay acts etc.
  • Determinants of unemployment and potential policies: job subsidies/in work benefits, active labour market policies, work sharing.

Learning outcomes

If you complete the course successfully, you should be able to:

Explain, on the supply side, the factors that affect the decision of an individual:

  • to work
  • choose a particular job/ career path
  • to acquire education and on-the-job training to provide effort in a particular job.

Explain also how governments’ policies could affect the decisions of the individual.

Explain, on the demand side, the factors that affect the decision of a firm:

  • to hire and fire workers
  • to offer jobs with different characteristics (amenities and training for example)
  • to discriminate among different workers
  • to choose particular compensation policies and to offer different career paths.

Explain also how government policies and institutions (such as the unions) can affect the decisions of the firm.


Unseen written exam (3 hrs).

Essential reading

  • Borjas, G.J. Labor Economics. London: Irwin/McGraw-Hill.
  • Ehrenberg, R.G. and R.S. Smith. Modern Labor Economics: Theory and Public Policy. Reading, Mass.: Addison-Wesley.

Course information sheets

Download the course information sheets from the LSE website.