the players and the goals in this experiment, there are workers and firms. workers sell labor to the...
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The Players and the Goals In this experiment, there are WORKERS and FIRMS. WORKERS sell labor to the FIRMS. FIRMS make and sell stuff. Blue workers Each worker’s goal: Maximize happiness. The Players and the Goals Two types of worker Red workers. One thing makes you happy: Money. - PowerPoint PPT PresentationTRANSCRIPT
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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
= 1 hour of Blue labor= 1 hour of Red labor= 1 dollar
Labor
$
Labor
= $5 dollars (each)
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Labor Market
Red workers and Blue workers sell as much labor as they can to firms for $.
Labor
$
Labor
$
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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
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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
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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
The Firm manufactures 87 units of product.The product will be automatically sold for $2 per unit.
87
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Example: Labor Market and Goods Market
Blue WorkerEnds the experiment with (6)($5) = $30. Money = $30.
Red WorkerEnds 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.
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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 for $6 or 1 Blue for $7.So far, you have hired 1 Red and 3 Blue.
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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
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.
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ConclusionHiring 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.
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The Mechanics
Firms Workers
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
$5.00
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The Mechanics
Firms Workers
$5.50
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The Mechanics
Firms Workers
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
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Ready to begin…
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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)
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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 per hour.
$6
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Ready to begin…
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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)
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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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$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
Free Market Minimum Wage
Wage Rate
Blue Labor Red Labor
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0%
10%
20%
30%
40%
50%
60%
Free Market Minimum Wage
Unemployment Rate
Blue Labor Red Labor
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1,450
1,500
1,550
1,600
1,650
1,700
1,750
1,800
1,850
Free Market Minimum Wage
Units of Output Produced (all firms combined)
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$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
Free Market Minimum Wage
Total Profits (all firms combined)
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$0.00
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
Red
1
Red
2
Red
3
Red
4
Red
5
Red
6
Red
7
Red
8
Red
9
Red
10
Red
11
Blu
e 12
Blu
e 13
Red Worker Wage Income
Free Market Minimum Wage
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$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
$90.00
Blu
e 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
Free Market Minimum Wage
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$0.00
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
$140.00
$160.00
$180.00
$200.00
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
Free Market Minimum Wage
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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.
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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.
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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.
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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.
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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.
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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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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 serversToday: Pizza deliverers, InternsWhat 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?
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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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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.
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Is this true?
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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 0.46
Unem
ploy
men
t Rat
e
Minimum Wage as Fraction of Average Hourly Wage
College Education (1978-2008)
Source: Statistical Abstract of the United States, and Bureau of Labor Statistics
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0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44 0.46
Unem
ploy
men
t Rat
e
Minimum Wage as Fraction of Average Hourly Wage
HS Education (1978-2008)
Source: Statistical Abstract of the United States, and Bureau of Labor Statistics
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0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
0.3 0.32 0.34 0.36 0.38 0.4 0.42 0.44 0.46
Unem
ploy
men
t Rat
e
Minimum Wage as Fraction of Average Hourly Wage
Less than HS Education (1978-2008)
Source: Statistical Abstract of the United States, and Bureau of Labor Statistics
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But, we have to do something!
Most workers earn the minimum wage!Single parents earn the minimum wage!
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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
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0%
1%
2%
3%
4%
5%
6%
7%
8%
Part time Full time
Worker Status
% of Hourly Workers Earning Minimum Wage or Less
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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
% of Hourly Workers Earning Minimum Wage or Less
Source: Bureau of Labor Statistics, 2008
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But, we have to do something!
The rich are getting richer while the poor get poorer!
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Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668.
% of Households in Each Income Bracket (2006$)
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Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668.
% of Households in Each Income Bracket (2006$)
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Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668.
% of Households in Each Income Bracket (2006$)
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wtf?
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Source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2008, Table 675.
1980 The top 20% of households earned 44% of all income.
2003 The top 20% of households earned 50% of all income.
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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.
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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).
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Political freedom makes economic freedom possible.
Economic freedom makes political freedom meaningful.
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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?