the players and the goals in this experiment, there are workers and firms. workers sell labor to the...

1www.antolin-davies.com

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

Blue

labo

r hi

red

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?

$40 $30


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 87 units of product.The product will be automatically sold for $2 per unit.

87


Example: Labor Market and Goods Market

Blue Worker 1Ends the experiment with (6)($5) = $30. Money = $30.

Red Worker 2Ends 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





ConclusionHiring 1 more red hour increases profit by $14.Hiring 1 more blue hour decreases profit by $3

Hire 1 more red hour.





The Mechanics

Buyer

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

Buyer

Firms Workers

Manager


The Mechanics

Buyer

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 hour of Blue labor

= 1 hour of Red labor

= 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 hour of Blue labor

= 1 hour of Red labor

= 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…


$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

$1.00

Free Market Minimum Wage

Wage Rate

Blue Labor Red Labor


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Unemployment Rate

Blue Labor Red Labor


0

10

20

30

40

50

60

70


Units of Output Produced (all firms combined)


$0

$5

$10

$15

$20

$25

$30

$35


Total Profits (all firms combined)


$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

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

Red Worker Wage Income



$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20B

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

Blue Worker Wage Income



$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

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

Firm

17

Firm

18

Firm

19

Firm Profits



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:•legislating price does not legislate value,•legislating price prevents price from signaling value.


Prices Ration GoodsAll things are scarce. Scarce resources will be rationed. The question is, by what mechanism? Who will be excluded? Cap on interest rates?

Rationed by risk. Higher risk borrowers excluded.

Cap on tuition?Rationed by talent. Less talented students

excluded.

Minimum wage?Rationed by skill. Less skilled workers excluded.


Minimum WageWhen we force an employer to pay a worker more than the job is worth, the job disappears.

40 years ago: Telephone operators30 years ago: Gas station attendants10 years ago: Fast food serversLast year: Pizza deliverersWhat happens to workers whose jobs are eliminated? Those whose labor is worth more than minimum wage? Those whose labor is worth less than minimum wage?

34www.antolin-davies.comSource: Statistical Abstract of the United States, and Bureau of Labor Statistics

College Education (1984-2004)

y = 0.003x + 0.02R2 = 0.0002

p = 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

Unem

ploy

men

t Rat

e


HS Education (1984-2004)

y = 0.23x - 0.03R2 = 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


Unem

ploy

men

t Rat

e


Less than HS Education (1984-2004)

y = 0.46x - 0.07R2 = 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


Unem

ploy

men

t Rat

e


What percentage of workers earn minimum wage?


0%

1%

2%

3%

4%

5%

6%

7%

8%

16 - 19 20 - 24 25 +

Worker Age

% of Hourly Workers Earning Minimum Wage or Less

Source: Bureau of Labor Statistics, 2008

39www.antolin-davies.comSource: Bureau of Labor Statistics, 2008

0%

1%

2%

3%

4%

5%

6%

7%

8%

Part time Full time

Worker Status



0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Service Occupations

Sales and Office Occupations

Production, Transportation

Management, Professional Occupations

Construction, Maintenance,

Natural Resources Occupations

Industry


Source: Bureau of Labor Statistics, 2008

41www.antolin-davies.comSource: 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

Une

mpl

oym

ent P

opul

atio

n R

atio

for 1

6-19

Yea

r Old

s as

Per

cent

age

of 2

0-64

Yea

r O

lds

Minimum Wage as Percentage of Average Hourly Wage

Unem

ploy

men

t Pop

ulat

ion

Ratio

for 1

6-19

Ye

ar O

lds a

s a P

erce

ntag

e of

Rat

io fo

r 20-

64

Year

Old

s


Source: Bureau of Labor Statistics

Minority vs. Non-Minority Household Income (1970-2001)

y = -0.33x + 0.73R2 = 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

Ratio

of M

edia

n Ho

useh

old

Inco

mes

(B

lack

/Whi

te)


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 - 0.14R2 = 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

flatio

n


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

The rich are getting richer while the poor get poorer!


Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668.

% of Households in Each Income Bracket (2006$)




From 1980 to 1990, the number of households with purchasing power of at least $75,000 grew while the number with purchasing power less than $75,000 declined.




From 1990 to 2006, the number of households with purchasing power of at least $75,000 grew while the number with purchasing power less than $75,000 declined.


wtf?



1980 The top 20% of households earned 44% of all income.

2003 The top 20% of households earned 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 10% of all income.In world #2, Person 10 earns 15% of all income.


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 2006, 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.


To freely choose to purchase is to cast a vote. How is a free market vote different from a political vote?

Political vote: One size fits all.Free market vote: Multiple sizes for multiple recipients.

Political vote: Speed of change is driven by the election cycle.Free market vote: Speed of change is driven by the accounting cycle.

Political vote: Signal is distorted because the vote is for a “bundle” of issues embodied by one candidate.Free market vote: Signal is clear because the vote is for a specific issue.

How Should Society Choose?


Political freedom makes economic freedom possible.

Economic freedom makes political freedom meaningful.


number of firmsnumber of blue workersnumber of red workerslabor endowment per blue workerlabor endowment per red worker

output of a single firmunits of blue labor hired by a single fir

B

R

B

FBREEQL

ln ln ln

1

ln ln

munits of red labor hired by a single firmprice 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

LP

Q L L

L

L

ln

1 1B

PW


number of firmsnumber of blue workersnumber of red workerslabor endowment per blue workerlabor endowment per red worker

output of a single firmunits of blue labor hired by a single fir

B

R

B

FBREEQL

3 1711 11

munits of red labor hired by a single firmprice 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

LP

P E E R B N

L NW W

L NW

14 611 1121 1

Quantity supplied of Quantity supplied of

Equilibrium $8.25Equilibrium $3.51

R

R R

B B

R

B

W

L E RL E B

WW


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

PWW

PWW

PWW

the players and the goals in this experiment, there are workers and firms. workers sell labor to the...

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