Labor Economics: Wage Determination, Employment, and Human Capital Theory

Abstract

This article reviews the core theories and empirical findings of labor economics, focusing on wage determination, employment, human capital investment, labor market institutions, and discrimination. It explains Becker’s human capital framework and Mincer’s earnings function, highlighting the role of education and experience in shaping wages and the methodological challenges involved in identifying causal returns to schooling. The article also examines how institutions such as minimum wages, trade unions, employment protection, and unemployment insurance influence labor market outcomes. Particular attention is given to Card and Krueger’s minimum wage research, which challenged the conventional prediction that wage floors necessarily reduce employment and emphasized the importance of monopsony power. In addition, evidence from audit studies and blind audition experiments demonstrates persistent gender and racial discrimination in hiring. Overall, the article shows how labor economics has moved beyond simple competitive models toward a more realistic analysis incorporating market power, information frictions, bargaining, and institutional constraints, while identifying automation, artificial intelligence, skill polarization, and worker displacement as important areas for future research.