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