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 $ = 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 $ $

7 Phases of Play 1. Labor market and production round Red labor hired Blue labor hired 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. 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.

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.

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…

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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.

32 Source: Statistical Abstract of the United States, and Bureau of Labor Statistics

33 Source: Statistical Abstract of the United States, and Bureau of Labor Statistics

34 Source: Statistical Abstract of the United States, and Bureau of Labor Statistics

35 Source: Bureau of Labor Statistics Minimum Wage as Percentage of Average Hourly Wage Unemployment Population Ratio for Year Olds as a Percentage of Ratio for Year Olds

36 Source: Bureau of Labor Statistics

37 Source: Bureau of Labor Statistics, California Department of Finance

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