Transcript Slide 1

Find your role and sit at the indicated seat.
Don’t disturb the materials.
Name
Haley Kemp
Ryan Hrobak
William Lewis
Marlin Payne
Joseph Dunford
Devin Bowen
Elizabeth Hogan
Alexander Bonya
John Pulito
Renold Sossong
Edward Moss
Jason Vigneault
Kristin Marrero
Gabriel Jakubisin
Peter Horne
Jason Rymer
Phillip Cutruzzula
Laura Vicinie
Kevin De Pinto
Tomás McLaughlin
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Role
Firm 1
Firm 1
Firm 2
Firm 2
Firm 3
Firm 3
Firm 4
Firm 4
Firm 5
Firm 5
Firm 6
Firm 6
Firm 7
Firm 7
Firm 8
Firm 8
Firm 9
Firm 9
Firm 10
Firm 10
Name
Kevin Baldini
Carrie DiRisio
Ben Lewis
Christina Orr
John Labuda
Chuck Stewart
Maria Sciandra
Joshua Kearns
John Mickey
Katie Milford
Brittany Billow
Cory Sukala
David Gilson
Zachary Stackhouse
Thurl Edwards
Anthony Zugec
Veronica Kelley
Kelly Miller
Pavel Yakovlev
Shane Seremet
Role
Red Worker 1
Red Worker 2
Red Worker 3
Red Worker 4
Red Worker 5
Red Worker 6
Red Worker 7
Red Worker 8
Red Worker 9
Red Worker 10
Blue Worker 1
Blue Worker 2
Blue Worker 3
Blue Worker 4
Blue Worker 5
Blue Worker 6
Blue Worker 7
Blue Worker 8
Blue Worker 9
Blue Worker 10
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.
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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
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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 $
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The Objects
Labor
= 1 hour of Blue labor
Labor
= 1 hour of Red labor
$
= 1 dollar
= $5 dollars (each)
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Labor Market
Red workers and Blue workers sell as much labor as they
can to firms for $.
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Labor
Labor
$
$
6
Production and Goods Market
Hired labor produces product. Product is automatically
sold for $2 each.
Blue labor hired
RedUnits
labor hired
of
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Red Labor
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Units of output
produced
7
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.
$40
$30
How much product does Firm 7 produce?
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Example: Labor Market
Firm 7 manufactures 87 units of product.
The product will be automatically sold for $2 per unit.
Units of Red Labor
0
1
2
3
4
5
6
7
8
9
10
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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.
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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.
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
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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
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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.
Conclusion
Hiring 1 more red hour increases profit by $14.
Hiring 1 more blue hour decreases profit by $3
 Hire 1 more red hour.
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The Mechanics
Firms
Workers
Units of H Purchased
0
1
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100 105 109
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101 106 111
Manager
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96
Buyer
14
The Mechanics
Firms
Workers
Manager
Buyer
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The Mechanics
Firms
Workers
Units of H Purchased
0
1
2
3
4
5
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40
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72
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82
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100 105
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102 106
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104 108
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100 105 109
0
44
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101 106 111
Manager
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Buyer
16
Ready to begin…
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Labor Market
Red workers sell your labor to firms for $.
Labor
= 1 hour of Blue labor
Labor
= 1 hour of Red labor
$
= 1 dollar
= $5 dollars (each)
Blue workers sell your labor to firms for $.
Firms: Every unit of output you produce is automatically
sold for $2.
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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.
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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 $6 per
hour.
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Ready to begin…
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Labor Market
Red workers sell your labor to firms for $.
Labor
= 1 hour of Blue labor
Labor
= 1 hour of Red labor
$
= 1 dollar
= $5 dollars (each)
Blue workers sell your labor to firms for $.
FIRMS MUST
PAY NO LESS
THAN $6 PER
HOUR.
Firms: Every unit of output you produce is automatically
sold for $2.
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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.
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Results…
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Wage Rate
$7.00
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
Free Market
Minimum Wage
Blue Labor
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Red Labor
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Unemployment Rate
80%
70%
60%
50%
40%
30%
20%
10%
0%
Free Market
Minimum Wage
Blue Labor
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Red Labor
26
Units of Output Produced (all firms combined)
1,400
1,200
1,000
800
600
400
200
0
Free Market
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Minimum Wage
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Total Profits (all firms combined)
$2,500
$2,000
$1,500
$1,000
$500
$0
Free Market
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Minimum Wage
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Red Worker Wage Income
$140.00
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
Free Market
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Red 10
Red 9
Red 8
Red 7
Red 6
Red 5
Red 4
Red 3
Red 2
Red 1
$0.00
Minimum Wage
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Blue Worker Wage Income
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
Free Market
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Blue 10
Blue 9
Blue 8
Blue 7
Blue 6
Blue 5
Blue 4
Blue 3
Blue 2
Blue 1
$0.00
Minimum Wage
30
Firm Profits
$300.00
$250.00
$200.00
$150.00
$100.00
$50.00
Free Market
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Firm 10
Firm 9
Firm 8
Firm 7
Firm 6
Firm 5
Firm 4
Firm 3
Firm 2
Firm 1
$0.00
Minimum Wage
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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.
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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 nonprice 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.
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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.
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College Education (1984-2004)
4.0%
3.5%
y = 0.003x + 0.02
R2 = 0.0002
p = 0.95
Unemployment Rate
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
0.3
0.32
0.34
0.36
0.38
0.4
0.42
0.44
Min Wage as Fraction of Avg Hourly Wage
Source: Statistical Abstract of the United States, and Bureau of Labor Statistics
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HS Education (1984-2004)
9.0%
8.0%
y = 0.23x - 0.03
R2 = 0.18
p = 0.05
Unemployment Rate
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
0.3
0.32
0.34
0.36
0.38
0.4
0.42
0.44
Min Wage as Fraction of Avg Hourly Wage
Source: Statistical Abstract of the United States, and Bureau of Labor Statistics
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Less than HS Education (1984-2004)
16.0%
14.0%
y = 0.46x - 0.07
R2 = 0.26
p = 0.02
Unemployment Rate
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
0.3
0.32
0.34
0.36
0.38
0.4
0.42
0.44
Min Wage as Fraction of Avg Hourly Wage
Source: Statistical Abstract of the United States, and Bureau of Labor Statistics
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Unemployment for Teenagers Relative to Adults (1964-2004)
Unemployment Population Ratio for 16-19 Year Olds as Percentage of 20-64 Year
Olds
Unemployment Population Ratio for 16-19 Year
Olds as a Percentage of Ratio for 20-64 Year Olds
3.3
3.1
2.9
2.7
2.5
2.3
2.1
1.9
1.7
1.5
0.3
0.32
0.34
0.36
0.38
0.4
0.42
0.44
Minim um Wage as Percentage of Average Hourly Earnings
Minimum Wage
as Percentage of Average Hourly Wage
Source: Bureau of Labor Statistics
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0.46
0.48
38
Minority vs. Non-Minority Household Income (1970-2001)
Ratio of Median Household Incomes
(Black/White)
69%
67%
65%
63%
y = -0.33x + 0.73
R2 = 0.15
61%
59%
57%
55%
32%
34%
36%
38%
40%
42%
44%
46%
48%
Minimum Wage as Fraction of Average Hourly Earnings
Source: Bureau of Labor Statistics
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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.
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Comparison of Minimum Wage to CA Inflation (1970-2004)
16%
14%
y = 0.44x - 0.14
R2 = 0.28
p = 0.001
CA Inflation
12%
10%
8%
6%
4%
2%
0%
35%
37%
39%
41%
43%
45%
47%
49%
51%
53%
Real CA Min Wage as % of Real US Avg Hourly Wage
Source: Bureau of Labor Statistics, California Department of Finance
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But, we have to do something about the
distribution of income.
The rich are getting richer while the poor get
poorer!
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% of Households in Each Income Bracket (2006$)
Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668.
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% 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 $75,000 declined.
Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668.
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% of Households in Each Income Bracket (2006$)
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.
Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668.
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wtf?
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100%
90%
In 1980, the lower 80% of households
earned 56% of all income.
% of Total Income
80%
70%
60%
By 2003, the lower 80% of households
earned only 50% of all income.
50%
40%
30%
20%
10%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% of the Popuation
1980
2003
Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2008, Table 675.
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In which world would each person rather live?
Person 1
Person 2
Person 3
Person 4
Person 5
Person 6
Person 7
Person 8
Person 9
Person 10
Household Income in World #1
$32,000
$33,500
$35,000
$36,500
$38,000
$39,500
$41,000
$42,500
$44,000
$45,500
Household Income in World #2
$40,000
$41,875
$43,750
$45,625
$47,500
$49,375
$51,250
$53,125
$77,000
$79,625
In world #1, Person 10 earns 10% of all income.
In world #2, Person 10 earns 15% of all income.
(prices are the same in the two worlds)
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100%
In World #1, the lower 80% of
households earned 80% of all income.
90%
% of Total Income
80%
In World #2, the lower 80% of households
earned only 70% of all income.
70%
60%
50%
40%
30%
Yet each person would
rather live in World #2!
20%
10%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% of the Popuation
World #1
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World #2
49
In which world would each person rather live?
Person 1
Person 2
Person 3
Person 4
Person 5
Person 6
Person 7
Person 8
Person 9
Person 10
Household Income in World #1
$32,000
$33,500
$35,000
$36,500
$38,000
$39,500
$41,000
$42,500
$44,000
$45,500
Household Income in World #2
$40,000
$41,875
$43,750
$45,625
$47,500
$49,375
$51,250
$53,125
$77,000
$79,625
Household Income in World #3
$6,400
$6,700
$7,000
$7,300
$7,600
$7,900
$8,200
$8,500
$8,800
$9,100
World #3’s income distribution is the same as World #1’s.
(prices are the same in the two worlds)
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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.
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How Should Society Choose?
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.
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Political freedom makes economic freedom possible.
Economic freedom makes political freedom meaningful.
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F  number of firms
B  number of blue workers
R  number of red workers
E B  labor endowment per blue worker
E R  labor endowment per red worker
Q  output of a single firm
LB  units of blue labor hired by a single firm
LR  units of red labor hired by a single firm
P  price of output
Q   LB  1 LR

Profit maximizing hiring levels
  P    P     P  
 ln
  ln

  WR   WB    WR 
   1
  ln
LR  e
  P    P     P  
 ln
  ln

  WB   WR    WB 
   1
  ln
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LB  e
1
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F  number of firms
B  number of blue workers
R  number of red workers
E B  labor endowment per blue worker
E R  labor endowment per red worker
Q  output of a single firm
LB  units of blue labor hired by a single firm
LR  units of red labor hired by a single firm
P  price of output
  35,   0.15,   0.30, P  2, E R  E B  10, R  B  12, N  21
3
11
17
11
14
11
6
11
 10.5   21 
Quantity demanded of LR  N 
 

 WB   WR 
 10.5   21 
Quantity demanded of LB  N 
 

 WB   WR 
1
Quantity supplied of LR  E R R
Quantity supplied of LB  E B B
Equilibrium WR  $8.25
Equilibrium WB  $3.51
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55
Experiment Scenario
P  $2.00
WR  $8.25
WB  $3.51
Competitive Scenario
P  $2.34
WR  $9.64
WB  $4.10
Minimum Wage Competitive Scenario
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P  $2.40
WR  $9.30
WB  $6.00
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