Chapter 10 - How labour markets really work

Abstract

I discuss some key issues raised by behavioural economics for better understanding the working of the labour market through the decisions made by employees and employers. Amongst the key points addressed in this chapter are: (i) a revised modelling of the labour supply curve, with a specific focus on the target income approach, (ii) elaborating on the importance of effort variability for understanding labour supply and demand, (iii) discussing some of the cognitive/informational/institutional factors affecting decision-making, including modelling the role of errors or biases in labour market decisions, and (iv) the importance of recognizing power relationships within the household and women's rights for better understanding the determinants of population growth. This chapter also compares the conventional to the errors and biases and the bounded rationality approaches to labour markets, their different underlying assumptions, and analytical predictions, with implications for public policy and institutional design.