Labor II: Firms, Frictions, and Institutions

Labor II is the second semester of the core labor-economics field sequence. It studies labor markets once firms, contracting, search frictions, labor market power, institutions, and economy-wide shocks are brought to the center of the analysis.

Where Labor I asks how workers choose, invest, sort, and respond, Labor II asks how those outcomes are shaped by labor demand, internal firm organization, wage-setting, regulation, macro adjustment, technology, and trade. The course is designed as both a continuation of Labor I and a shift toward firm-side and market-wide reasoning.

Course position in the sequence¶

Labor II builds directly on Labor I. The first semester supplies the worker-side foundations; the second studies firms, frictions, institutions, and shocks that determine how worker-side choices translate into equilibrium wages, employment, mobility, and welfare.

Expected background¶

• Labor I or an equivalent worker-side labor-economics background

• Graduate microeconomic theory and applied econometrics

• Readiness to move between firm-level intuition, equilibrium reasoning, and empirical identification

Learning goals¶

By the end of the course, students should be able to:

1. explain labor demand, internal firm organization, search frictions, wage-setting, and labor market power within one framework;

2. evaluate labor institutions and regulations from both firm and market perspectives;

3. analyze labor-market adjustment to aggregate, technological, and trade shocks across multiple margins;

4. distinguish partial-equilibrium intuition from equilibrium incidence and propagation;

5. frame research questions that connect workers, firms, institutions, and shocks.

Course format¶

The course is organized as weekly modules. Each chapter keeps the same layered structure used in Labor I: Bridge for intuition, Field Core for models and empirical designs, and Research Lab for frontier questions and extensions.

The weekly teaching rhythm follows a 3-hour core structure: one block for the organizing model, one for evidence and identification, and one for discussion, policy application, or reproducibility-oriented extension. Optional extensions appear where the topic naturally widens into frontier debates or adjacent literatures.

Weekly modules¶

• Week 1: Labor demand and production. The semester opens from the firm’s side with derived labor demand, production, and the classic own-wage response logic.

• Week 2: Dynamic labor demand and adjustment costs. The static target becomes a dynamic adjustment problem once hiring, firing, and timing frictions matter.

• Week 3: Personnel economics and internal labor markets. The course then moves inside the firm to incentives, promotions, monitoring, teams, and internal allocation.

• Week 4: Search, matching, turnover, and unemployment. Firm decisions are embedded in frictional labor markets with flows, vacancies, unemployment, and job ladders.

• Week 5: Wage posting, bargaining, and wage-setting. Search models become wage-setting models once surplus division and outside options enter.

• Week 6: Monopsony, measurement, and sources of power. Labor market power is introduced through modern monopsony frameworks, measurement, and worker mobility frictions.

• Week 7: Minimum wages and wage regulations. Wage floors are studied as policy interventions that reveal how competition, monopsony, and compliance interact.

• Week 8: Unions, collective bargaining, and worker voice. Collective institutions bring bargaining regimes, governance, and worker representation into the sequence.

• Week 9: Labor regulation, enforcement, and insurance. The policy block widens to labor standards, enforcement capacity, social insurance, and spillovers.

• Week 10: Aggregate fluctuations and labor market adjustment. The course scales up to cyclical adjustment through stocks, flows, mobility, and wage dynamics.

• Week 11: Technology, automation, AI, and labor market. Structural change is then studied through tasks, worker adaptation, firm redesign, and market-level incidence.

• Week 12: Trade, offshoring, and labor market adjustment. External shocks from trade and global production are traced through workers, firms, sectors, and places.

• Week 13: Synthesis and student research designs. The semester closes by integrating firms, frictions, institutions, and shocks into a unified research architecture.

Sequence bridge¶

Labor II completes the move from worker-side foundations to equilibrium labor economics. It is meant to be read after Labor I, and it returns repeatedly to Labor I objects while showing how firms, market structure, and shocks reshape them.