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Find your role and sit at the indicated seat.Don’t disturb the materials.

Name Role Name RoleAbdimajid Abdirahman Firm 1 Carlos Ormachea Firm 9Adriano Gianturco Gulisano Firm 1 Charlotte Rommerskirchen Firm 9Aida Ibricevic Firm 2 Chris Knudsen Firm 10Alejandro Komai Firm 2 Claire Litherland Firm 10Allen Mendenhall Firm 3 Coleman Drake Firm 11Anamaria Boioglu Firm 3 Colin Keesee Firm 11Andrew Seremetis Firm 4 Crane Sorensen Firm 12Ariel Goldring Firm 4 Daniel Piedra Firm 12Arya Morshed Firm 5 Daniel Suddes Firm 13Babatunde Rosanwo Firm 5 Daniel Sockwell Firm 13Benjamin Eisen Firm 6 Denis Clijsters Firm 14Brandon Peterson Firm 6 Dominic Foppoli Firm 14Brian Stacy Firm 7 Dustin Robinson Firm 15Bridgette Richey Firm 7 Eleanor Smith Firm 15Caitlin McLean Firm 8 Emilie Maes Firm 16Candice Malcolm Firm 8 Enrique Angulo Firm 16

Name Role Name RoleEric Sosnoff Red Worker 1 Theodore Dasher Blue Worker 1Jens Moens Red Worker 2 Mark Yager Blue Worker 2Joseph Corey Red Worker 3 David Hendricks Blue Worker 3Ryan Biese Red Worker 4 Michal Kuz Blue Worker 4Joseph Foutch Red Worker 5 Mike Tellier Blue Worker 5Julia Novitskaia Red Worker 6 Milko Markov Blue Worker 6Julio Padilla Red Worker 7 Nicholas Dunn Blue Worker 7Kareem Khalaf Red Worker 8 Oliver Cooper Blue Worker 8Kathryn Isaacson Red Worker 9 Patricio Echagüe Blue Worker 9Lai Xu Red Worker 10 Philippe Caeymaex Blue Worker 10Larisa Burakova Red Worker 11 Rossen Valchev Blue Worker 11Liliya Leontyeva Red Worker 12 Ryan Lynch Blue Worker 12Margaret Gales Red Worker 13 Yashua Bhatti Blue Worker 13


The Players and the Goals

In this experiment, there are WORKERS and FIRMS.

WORKERS sell labor to the FIRMS.

FIRMS make and sell stuff.



Two types of worker

• Red workers

• Blue workers

Each worker’s goal: Maximize happiness

One thing makes you happy: Money



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 = Ending $ – Starting $


The Objects

= 1 hour of Blue labor

= 1 hour of Red labor

= 1 dollar

Labor

$

Labor

= $5 dollars (each)


Labor Market

Red workers and Blue workers sell as much labor as they can to firms for $.

Labor

$

Labor

$


Production and Goods Market

Hired labor produces product. Product is automatically sold for $2 each.

Red labor hired

Blu

e labor

hir

ed

Units of output produced

0 1 2 3 4 5 6 7 8 9 100 0 35 43 49 53 57 60 63 65 68 70

1 0 39 48 54 59 63 66 70 72 75 77

2 0 41 51 57 63 67 71 74 77 80 82

3 0 43 53 60 65 70 74 77 80 83 86

4 0 45 55 62 68 72 76 80 83 86 89

5 0 46 56 64 69 74 78 82 85 89 91

6 0 47 58 65 71 76 80 84 87 91 94

7 0 48 59 66 72 77 82 86 89 92 95

8 0 49 60 68 74 79 83 87 91 94 97

9 0 49 61 69 75 80 85 89 92 96 99

10 0 50 62 70 76 81 86 90 94 97 100

Units of Red Labor


Example: Labor Market

Blue worker 1 Sells 6 to Firm 7 for $5 each.

Red worker 2 Sells 8 to Firm 7 for $5 each.

How much product does Firm 7 produce?


0 1 2 3 4 5 6 7 8 9 100 0 35 43 49 53 57 60 63 65 68 70

1 0 39 48 54 59 63 66 70 72 75 77

2 0 41 51 57 63 67 71 74 77 80 82

3 0 43 53 60 65 70 74 77 80 83 86

4 0 45 55 62 68 72 76 80 83 86 89

5 0 46 56 64 69 74 78 82 85 89 91

6 0 47 58 65 71 76 80 84 87 91 94

7 0 48 59 66 72 77 82 86 89 92 95

8 0 49 60 68 74 79 83 87 91 94 97

9 0 49 61 69 75 80 85 89 92 96 99

10 0 50 62 70 76 81 86 90 94 97 100

Units of Red Labor

Example: Labor Market

Firm 7 manufactures 92 units of product.The product will be automatically sold for $2 per unit.

87


Example: Labor Market and Goods Market

Blue Worker 1

Ends the experiment with (6)($5) = $30. Money = $30.

Red Worker 2

Ends the experiment with (8)($5) = $40. Money = $40.

Firm 7

• spent $70 on labor, and

• produced and sold 87 output at a price of $2 each.

Firm 7’s profit is $174 – $70 = $104.


1. How much am I producing right now?

1 Red and 3 Blue 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.


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?

+ $4 revenue & + $7 cost – $3 profit





Conclusion

Hiring 1 more red hour increases profit by $14.

Hiring 1 more blue hour decreases profit by $3

Hire 1 more red hour.





The Mechanics

Runner

Firms Workers

Manager

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

$5.00

$5.00


The Mechanics

Runner

Firms Workers

Manager


The Mechanics

Runner

Firms Workers

Manager

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

$5.50

$4.50


Ready to begin…


Labor Market

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.



= 1 dollar

Labor

$

Labor

= $5 dollars (each)


Report

1. Red workers report unsold labor and ending money.

2. Blue workers report unsold labor and ending money.

3. Firms report labor hired and ending money.


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 hour.

$6


Ready to begin…


Labor Market

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.

FIRMS MUST PAY NO LESS THAN PER HOUR.

$6



= 1 dollar

Labor

$

Labor

= $5 dollars (each)


Report

1. Red workers report unsold labor and ending money.

2. Blue workers report unsold labor and ending money.

3. Firms report labor hired and ending money.


Results…


Wage Rate

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

Free Market Minimum Wage

Blue Labor Red Labor


Unemployment Rate

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%


Blue Labor Red Labor


Units of Output Produced (all firms combined)

1,150

1,200

1,250

1,300

1,350

1,400

1,450



Total Profits (all firms combined)

$0

$500

$1,000

$1,500

$2,000

$2,500



Red Worker Wage Income

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

Red

1

Red

2

Red

3

Red

4

Red

5

Red

6

Red

7

Red

8

Red

9

Red

10

Red

11

Red

12

Red

13



Blue Worker Wage Income

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00B

lue

1

Blu

e 2

Blu

e 3

Blu

e 4

Blu

e 5

Blu

e 6

Blu

e 7

Blu

e 8

Blu

e 9

Blu

e 10

Blu

e 11

Blu

e 12

Blu

e 13



Firm Profits

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

$160.00

$180.00

Firm

1

Firm

2

Firm

3

Firm

4

Firm

5

Firm

6

Firm

7

Firm

8

Firm

9

Firm

10

Firm

11

Firm

12

Firm

13

Firm

14

Firm

15

Firm

16



Price Controls

The intent of price controls is to provide relief to buyers (e.g., college tuition caps, 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.


Prices Ration Goods

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 away from risky borrowers.

Capping tuition rations college away from less advantaged students.

A minimum wage rations jobs away from less productive workers.


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 deliverersWhat 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.


Source: 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



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


Un

emp

loym

ent

Rat

e



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


Un

emp

loym

ent

Rat

e


Source: 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


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)


How to Pay for a Minimum Wage

There are three ways in which a firm can find additional money to pay workers.

1. Layoff some workers and shift their wages to the remaining workers.

2. Keep all the workers and pay for the additional wages out of profits.

3. Keep all the workers and pay for the additional wages by raising prices.


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


But, we have to do something about the distribution of income.

The rich are getting richer while the poor get poorer!


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

< $

15,0

00

$15,0

00 -

$25,0

00

$25,0

00 -

$35,0

00

$35,0

00 -

$50,0

00

$50,0

00 -

$75,0

00

$75,0

00 -

$100,0

00

> $

100,0

00

% o

f H

ou

seh

old

s

1980

Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2006, Table 673.

Income Distribution for 1980 (in 2003$)


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

< $

15,0

00

$15,0

00 -

$25,0

00

$25,0

00 -

$35,0

00

$35,0

00 -

$50,0

00

$50,0

00 -

$75,0

00

$75,0

00 -

$100,0

00

> $

100,0

00

% o

f H

ou

seh

old

s

1980 2003


Income Distribution for 2003 (in 2003$)


wtf?


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

% of the Popuation

% o

f T

ota

l In

com

e

1980 2003


In 1980, the lower 80% of households earned 56% of all income.

By 2003, the lower 80% of households earned only 50% of all income.


In which world would each person rather live?

(prices are the same in the two worlds)

Household Income in World #1 Household Income in World #2Person 1 $32,000 $40,000Person 2 $33,500 $41,875Person 3 $35,000 $43,750Person 4 $36,500 $45,625Person 5 $38,000 $47,500Person 6 $39,500 $49,375Person 7 $41,000 $51,250Person 8 $42,500 $53,125Person 9 $44,000 $77,000

Person 10 $45,500 $79,625

In world #1, Person 10 earns 11% of all income.

In world #2, Person 10 earns 15% of all income.


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

% of the Popuation

% o

f T

ota

l In

com

e

World #1 World #2

In World #1, the lower 80% of households earned 80% of all income.In World #2, the lower 80% of households earned only 70% of all income.

Yet each person would rather live in World #2!


In which world would each person rather live?

(prices are the same in the two worlds)

World #3’s income distribution is the same as World #1’s.

Household Income in World #1 Household Income in World #2 Household Income in World #3Person 1 $32,000 $40,000 $6,400Person 2 $33,500 $41,875 $6,700Person 3 $35,000 $43,750 $7,000Person 4 $36,500 $45,625 $7,300Person 5 $38,000 $47,500 $7,600Person 6 $39,500 $49,375 $7,900Person 7 $41,000 $51,250 $8,200Person 8 $42,500 $53,125 $8,500Person 9 $44,000 $77,000 $8,800

Person 10 $45,500 $79,625 $9,100


Conclusions

1. Everything is scarce and will be rationed.

2. Prices signal information about value.

3. Price controls both prevent prices from conveying value information and cause rationing to be based on some other (usually unanticipated) factor.

4. Despite no (real) increase in the minimum wage from 1980 to 2003, the poor got richer (in real terms).** Because the rich got richer by more than the poor got richer,

the Gini-coefficient shows a growth in the disparity of income.


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


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


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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