1
The Players and the Goals
In this experiment, there are WORKERS and FIRMS.
WORKERS sell labor to the FIRMS.
FIRMS make and sell stuff.
2
The Players and the Goals
Two types of worker
• Red workers
• Blue workers
Each worker’s goal: Maximize happiness
One thing makes you happy: Money
3
The Players and the Goals
One type of firm
• Firms hire Red Labor and Blue Labor to produce their products.
• Firms automatically sell everything they produce for $2 per unit.
Each firm’s goal: Maximize profit
Profit = Sales – Cost of Labor
4
The Objects
= 1 hour of Blue labor
= 1 hour of Red labor
= 1 dollar
Labor
$
Labor
= 10 dollars (each)
5
Phases of Play
1. Labor market and production round
2. Utility and profits round
6
Phases of Play
1. Labor market and production round
Red workers and Blue workers sell as much labor as they can to firms for $.
Labor
$
Labor
$
7
Phases of Play
1. Labor market and production round
Red labor hired
Blu
e labor
hir
ed
Units of output produced
8
Phases of Play
2. Utility and profits round
Profit = Ending money – Starting money
Utility = Ending money
9
Example: Labor Round
Blue worker 1 Sells 6 to Firm 7 for $5 each.
Red worker 2 Sells 8 to Firm 7 for $5 each.
10
Example: Labor Round
Firm 7 manufactures 92 units of product.The product will be automatically sold for $2 per unit.
0 1 2 3 4 5 6 7 8 9 100 0 30 40 47 52 57 61 65 69 72 75
1 0 33 44 52 58 63 68 72 76 80 84
2 0 35 47 55 62 67 72 77 81 85 89
3 0 37 49 57 64 70 76 80 85 89 93
4 0 38 50 59 66 73 78 83 88 92 96
5 0 39 52 61 68 75 80 85 90 95 99
6 0 40 53 62 70 76 82 87 92 97 101
7 0 41 54 64 71 78 84 89 94 99 103
8 0 42 55 65 73 79 85 91 96 100 105
9 0 42 56 66 74 81 87 92 97 102 106
10 0 43 57 67 75 82 88 94 99 104 108
11 0 44 57 68 76 83 89 95 100 105 109
12 0 44 58 68 77 84 90 96 101 106 111
Units of H Purchased
92
11
Example: Utility and Profit Round
Worker 1
Ends the experiment with (6)($5) = $30. Utility = 30.
Worker 2
Ends the experiment with (8)($5) = $40. Utility = 40.
Firm 7
• spent $70 on labor, and
• produced and sold 92 output at a price of $2 each.
Firm 7’s profit is $184 – $70 = $114.
12
1. How much are you producing right now?
3 Blue and 1 Red 43 output
2. What happens if I hire 1 more Red worker?
Output increases from 43 to 53 + 10 output
3. What does that do to my revenue?
(10 output)($2) = + $20 revenue
4. What does it do to my costs?
Cost of 1 Red worker = $6 + $6 cost
5. What does it do to my profit?
+ $20 revenue & + $6 cost + $14 profit
Example: Cost/Benefit of Hiring More Labor
Suppose you can hire 1 Red hour for $6 or 1 Blue hour for $7.
So far, you have hired 1 Red hour and 3 Blue hours.
13
6. What happens if I hire 1 more Blue worker?
Output increases from 43 to 45 + 2 output
7. What does that do to my revenue?
(2 output)($2) = + $4 revenue
8. What does it do to my costs?
Cost of 1 Blue worker = $7 + $7 cost
9. What does it do to my profit?
+ $2 revenue & + $7 cost – $5 profit
Example: Cost/Benefit of Hiring More Labor
Suppose you can hire 1 Red hour for $6 or 1 Blue hour for $7.
So far, you have hired 1 Red hour and 3 Blue hours.
14
Trading Rules
Workers must remain in their seats.
Workers display cards indicating their ask prices.
Firms may only purchase 1 unit of labor at a time.
Runner purchases one unit, takes it to manager, goes back and purchase another unit, etc.
Manager calculates cost/benefit of hiring more labor of each type.
15
Ready to begin…
16
Labor Market and Production Round
Red workers sell your labor to firms for $.
Blue workers sell your labor to firms for $.
Firms: Every unit of output you produce is automatically sold for $2.
= Labor
17
Utility and Profits Round
1. Red workers report unsold labor and ending money.
2. Blue workers report unsold labor and ending money.
3. Firms report their labor hiring and ending money.
18
New Rules
The wage rate that some workers receive is too low. In the interest of assuring a minimum standard of living, we now impose a minimum wage.
LAW:Henceforth, no firm may pay less than per worker.
$6
19
Ready to begin…
20
Labor Market and Production Round
Red workers sell your labor to firms for $.
Blue workers sell your labor to firms for $.
Firms: Every unit of output you produce is automatically sold for $2.
= Labor
FIRMS MUST PAY NO LESS THAN PER UNIT LABOR.
$6
21
Utility and Profits Round
1. Red workers report unsold labor and ending money.
2. Blue workers report unsold labor and ending money.
3. Firms report their labor hiring and ending money.
22
Results…
23
Wage Rate
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
Round 1 Round 2
Blue Labor Red Labor
24
Total Profits (all firms combined)
$1,700
$1,750
$1,800
$1,850
$1,900
$1,950
$2,000
$2,050
Round 1 Round 2
25
Units of Output Produced (all firms combined)
1,460
1,480
1,500
1,520
1,540
1,560
1,580
1,600
1,620
1,640
1,660
Round 1 Round 2
26
Unemployment Rate
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Round 1 Round 2
Blue Labor Red Labor
27
Blue Worker Wage Income
$0
$10
$20
$30
$40
$50
$60
$70
Blue 1 Blue 2 Blue 3 Blue 4 Blue 5 Blue 6 Blue 7 Blue 8 Blue 9 Blue 10 Blue 11 Blue 12
Round 1 Round 2
28
Red Worker Wage Income
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
Red 1 Red 2 Red 3 Red 4 Red 5 Red 6 Red 7 Red 8 Red 9 Red 10 Red 11 Red 12
Round 1 Round 2
29
Price Controls
The intent of price controls is to provide relief to buyers (e.g., college tuition caps, credit card interest rate caps) or support to sellers (e.g., minimum wage, retail milk prices).
How do you cure a fever?
Prices are not levers that set value, they are metrics that respond to value.
Price controls fail on two counts: (1) legislating price does not legislate value, (2) legislating price prevents price from signaling value.
30
Price Controls
All things are scarce. Scarce resources will be rationed. The question is, by what mechanism?
In a free market, scarce resources are rationed by prices.
With price controls, scarce resources are rationed by non-price factors.
Capping interest rates rations credit toward less risky borrowers.
Capping tuition rations college toward smarter students.
A floor on wages rations jobs toward more productive workers.
Capping rent rations apartments toward people who know landlords or departing renters.
31
Minimum Wage
When we force an employer to pay a worker more than the job is worth, the job disappears.
40 years ago: telephone operators
30 years ago: gas station attendants
10 years ago: Fast food servers
Last year: Pizza deliverers
What happens to workers whose jobs are eliminated?
Those whose labor is worth more than minimum wage find new jobs.
Those whose labor is worth less than minimum wage remain unemployed.
32Source: Statistical Abstract of the United States, and Bureau of Labor Statistics
College Education (1984-2004)
y = 0.003x + 0.02
R2 = 0.0002p = 0.95
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44
Min Wage as Fraction of Avg Hourly Wage
Un
emp
loym
ent
Rat
e
33Source: Statistical Abstract of the United States, and Bureau of Labor Statistics
HS Education (1984-2004)
y = 0.23x - 0.03
R2 = 0.18p = 0.05
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44
Min Wage as Fraction of Avg Hourly Wage
Un
emp
loym
ent
Rat
e
34Source: Statistical Abstract of the United States, and Bureau of Labor Statistics
Less than HS Education (1984-2004)
y = 0.46x - 0.07
R2 = 0.26p = 0.02
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44
Min Wage as Fraction of Avg Hourly Wage
Un
emp
loym
ent
Rat
e
35Source: Bureau of Labor Statistics
Unemployment for Teenagers Relative to Adults (1964-2004)
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44 0.46 0.48Minimum Wage as Percentage of Average Hourly Earnings
Un
emp
loym
ent
Po
pu
lati
on
Rat
io f
or
16-1
9 Y
ear
Old
s as
Per
cen
tag
e o
f 20
-64
Yea
r O
lds
Minimum Wage as Percentage of Average Hourly Wage
Unem
plo
ym
ent
Popu
lati
on
Rati
o f
or
16-1
9
Year
Old
s as
a P
erc
enta
ge o
f R
ati
o f
or
20
-64
Year
Old
s
36
Source: Bureau of Labor Statistics
Minority vs. Non-Minority Household Income (1970-2001)
y = -0.33x + 0.73
R2 = 0.15
55%
57%
59%
61%
63%
65%
67%
69%
32% 34% 36% 38% 40% 42% 44% 46% 48%
Minimum Wage as Fraction of Average Hourly Earnings
Rat
io o
f M
edia
n H
ou
seh
old
In
com
es
(Bla
ck/W
hit
e)
37
Source: Bureau of Labor Statistics, California Department of Finance
Comparison of Minimum Wage to CA Inflation (1970-2004)
y = 0.44x - 0.14
R2 = 0.28p = 0.001
0%
2%
4%
6%
8%
10%
12%
14%
16%
35% 37% 39% 41% 43% 45% 47% 49% 51% 53%
Real CA Min Wage as % of Real US Avg Hourly Wage
CA
In
flat
ion
38
number of firms
number of blue workers
number of red workers
labor endowment per blue worker
labor endowment per red worker
output of a single firm
units of blue labor hired by a single fir
B
R
B
F
B
R
E
E
Q
L
ln ln ln
1
ln ln
m
units of red labor hired by a single firm
price of output
1
Profit maximizing hiring levels
e
e
R B R
B R
R
B R
P P PW W W
R
P PW W
B
L
P
Q L L
L
L
ln
1 1B
PW
39
number of firms
number of blue workers
number of red workers
labor endowment per blue worker
labor endowment per red worker
output of a single firm
units of blue labor hired by a single fir
B
R
B
F
B
R
E
E
Q
L
3 1711 11
m
units of red labor hired by a single firm
price of output
35, 0.15, 0.30, 2, 10, 12, 21
10.5 21Quantity demanded of
10.5Quantity demanded of
R
R B
RB R
BB
L
P
P E E R B N
L NW W
L NW
14 611 1121
1
Quantity supplied of
Quantity supplied of
Equilibrium $8.25
Equilibrium $3.51
R
R R
B B
R
B
W
L E R
L E B
W
W
40
Experiment Scenario
$2.00
$8.25
$3.51
Competitive Scenario
$2.34
$9.64
$4.10
Minimum Wage Competitive Scenario
$2.40
$9.30
$6.00
R
B
R
B
R
B
P
W
W
P
W
W
P
W
W
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