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 = Ending $ – Starting $

4 The Objects = 1 hour of Blue labor = 1 hour of Red labor = 1 dollar Labor $ = $5 dollars (each)

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

6 Production and Goods Market Hired labor produces product. Product is automatically sold for $2 each. Red labor hired Blue labor hired Units of output produced

7 Example: Labor Market Blue worker Sells 6 to the Firm for $5 each. Red worker Sells 8 to the Firm for $5 each. How much product does the Firm produce? $40 $30

8 Example: Labor Market The Firm manufactures 87 units of product. The product will be automatically sold for $2 per unit. 87

9 Example: Labor Market and Goods Market Blue Worker Ends the experiment with (6)($5) = $30. Money = $30. Red Worker Ends the experiment with (8)($5) = $40. Money = $40. Firm Spent $70 on labor, and Produced and sold 87 output at a price of $2 each.  Firm’s profit is $174 – $70 = $104.

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 for $6 or 1 Blue for $7. So far, you have hired 1 Red and 3 Blue.

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 Example: Cost/Benefit of Hiring More Labor Suppose you can hire 1 Red for $6 or 1 Blue for $7. So far, you have hired 1 Red and 3 Blue.

12 Conclusion Hiring 1 more red hour increases profit by $14. Hiring 1 more blue hour decreases profit by $3  Hire 1 more red hour. Example: Cost/Benefit of Hiring More Labor Suppose you can hire 1 Red for $6 or 1 Blue for $7. So far, you have hired 1 Red and 3 Blue.

13 The Mechanics FirmsWorkers $5.50 $5.00

14 The Mechanics FirmsWorkers $5.50

15 The Mechanics FirmsWorkers $5.00

16 Ready to begin…

17 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.

18 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.

19 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.

20 Ready to begin…

21 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.

22 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.

23 Results…

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31 First Principles First Principles are truths that are not derived from other truths. They are either assumed to be true or are so self- evident as to be beyond dispute. When thinking about economic and policy issues, we should begin at first principles. If we don’t begin at first principles, we will likely end up inadvertently espousing views that are mutually contradictory.

32 First Principles Debate: We must help the poor by imposing a minimum wage. We must help employers by removing the minimum wage. F A I L Debate: The rights to life and property are natural rights. The rights to life and property are not natural rights.

33 First Principles The rights to life and property are natural rights. Others have the duty not to take your life. Others have the duty not to prevent you from using your property. Others may not prevent you from selling your labor. Others may not prevent you from paying for labor. We should not have a minimum wage.

34 Unintended Consequences If it is true that the rights to life and property are natural rights, then government policies that are inconsistent with this truth will yield unintended consequences.  Bad things will happen that we didn’t intend to happen.

35 Unintended Consequences Requiring car makers to install airbags and seatbelts has little effect on traffic fatalities. Requiring small children traveling in airplanes to be in car seats increases child travel fatalities. Requiring ethanol in gasoline makes us more dependent on foreign oil and is bad for the environment. Banning the trade in ivory reduces elephant populations. Raising the minimum wage reduces the income of the poor.

36 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.

37 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 Today:Pizza deliverers, Interns What 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?

38 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.

39 Prices Ration Goods All 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.

40 Is this true?

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

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

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

44 But, we have to do something! Most workers earn the minimum wage! Single parents earn the minimum wage!

45 Source: Bureau of Labor Statistics, 2008

46 Source: Bureau of Labor Statistics, 2008

47 Source: Bureau of Labor Statistics, 2008

48 But, we have to do something! The rich are getting richer while the poor get poorer!

49 Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668. % of Households in Each Income Bracket (2006$)

50 Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668. % of Households in Each Income Bracket (2006$)

51 Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668. % of Households in Each Income Bracket (2006$)

52 wtf?

53 Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2008, Table The top 20% of households earned 44% of all income. 2003The top 20% of households earned 50% of all income.

54 In which world would each person rather live? (prices are the same in the two worlds) In world #1, Person 10 earns 10% of all income. In world #2, Person 10 earns 15% of all income.

55 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).

56 Political freedom makes economic freedom possible. Economic freedom makes political freedom meaningful.

57 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?