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

2 The Players and the Goals In this experiment, there are WORKERS and FIRMS. WORKERS sell labor to the FIRMS. FIRMS make and sell stuff.

3 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

4 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 $

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

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

7 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

8 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?

9 Example: Labor Market Firm 7 manufactures 92 units of product. The product will be automatically sold for $2 per unit. 87

10 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.

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.

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

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

14 The Mechanics Runner FirmsWorkers Manager $5.00

15 The Mechanics Runner FirmsWorkers Manager

16 The Mechanics Runner FirmsWorkers Manager $5.50 $4.50

17 Ready to begin…

18 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.

19 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.

20 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.

21 Ready to begin…

22 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.

23 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.

24 Results…

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32 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.

33 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.

34 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.

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

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

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

38 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

39 Source: Bureau of Labor Statistics

40 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.

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

42 But, we have to do something about the distribution of income. The rich are getting richer while the poor get poorer!

43 Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2006, Table 673. Income Distribution for 1980 (in 2003$)

44 Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2006, Table 673. Income Distribution for 2003 (in 2003$)

45 wtf?

46 Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2008, Table 675. 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.

47 In which world would each person rather live? (prices are the same in the two worlds) In world #1, Person 10 earns 11% of all income. In world #2, Person 10 earns 15% of all income.

48 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!

49 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.

50 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.

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