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Simple Labor Market

Game Description

This game implements a competitive market for labor. Each firm, which may demand more than one unit of labor, submits one wage offer at a time. Each worker, who can supply 1 unit of labor, decides whether to accept the highest current offer.

Learning Objective 1: Labor Market Equilibrium

When a perfectly competitive market determines wages, the equilibrium wage, per unit of labor, is equal to the value of the marginal product of labor of the last worker hired.

Learning Objective 2: Policy Effects on Employment Rates

A minimum wage decreases the quantity of labor demanded, which will lead to a decrease in employment. By increasing the opportunity cost of supplying labor, unemployment insurance decreases employment. These policies may therefore affect structural unemployment, and thus, an economy's natural rate of unemployment.

Learning Objective 3: Monopsony

In a labor market where there is an employer with market power, we get lower wages—and fewer workers employed— than a similar labor market with multiple employers.

Brief Instructions

By default, we set Group Size equal to 16 and Jobs Per Firm equal to 3. This induces a market with 12 workers vying for 4 × 3=12 jobs. With the Value of Marginal Labor Product ranging from $8.00 to $13.00 and the opportunity cost of labor from $2.50 to $8.50, our default parameters induce an equilibrium wage of $8.20 with 11 units of labour employed.

It generally takes two iterations for the market wage to approximately converge to equilibrium. Your options:

  1. To play the exact market twice, set Minimum Periods to 2. Each student plays the same role, remains in the same group, and keeps the same value from round to round.
  2. Alternatively, after playing a one-round game, click Replay followed by Fixed Role. Each player maintains the same role in the same group, but receives new values.
  3. Or instead, after playing a one-round game, click Replay followed by Random. Roles, groups, and values are all randomly assigned.

Key Treatment Variations

Once labor markets have qualitatively converged to the equilibrium prediction, consider implementing labor-market policies which reduce employment levels:

  1. To implement unemployment insurance that appreciably reduces the number employed in equilibrium, set Unemployment Insurance to 500 (i.e., $5.00). With all other parameters set to their default values, this changes the equilibrium wage to $10.47 and reduces quantity employed from 11 to 6.
  2. To implement a minimum wage that appreciably reduces the number employed in equilibrium, set Minimum Wage to 1050 (i.e., $10.50). With all other parameters set to their default values, this changes the equilibrium wage to $10.50 and reduces quantity employed from 11 to 6.

Alternatively, you can explore the effects of labor-market monopsony. After a competitive labor market qualitatively converges to the equilibrium prediction, follow it with a market with the same number of workers, but only one firm. If you use the default parameters for the competitive labor market, setting Group Size to 13 and Jobs per Firm to 12 would implement the analogous monopsony market.

Results

Figure 1: Market Summary

The market summary table (Figure 1) summarizes each group's outcome. The first row gives the equilibrium benchmark for the market without labor market intervention. The second row reports statistics averaged across groups data. Each subsequent row reports the outcome for one group: average wage, quantity of workers employed, as well a realized surplus (firm, worker, and total.)

Figure 2: Supply, Demand, and Transaction Charts

In addition, we report two graphs for each group (Figure 2). On the left is the supply and demand graph, modified to incorporate the unemployment insurance payment or minimum wage if applicable. The graph on the right—with wage on the vertical axis and time on the horizontal—records each transaction. The graph at the bottom of the results page (Figure 3) records transactions across all groups.

Figure 3: All Transactions

If you used the Replay option—for example, to add a minimum wage to your original market—you can present results from two games in one results screen. From the results screen of the latter game, click Compare. The latter game's results appear on the left, and you choose the earlier comparison game with the Compare With drop down.

Robot Play

Our robot (i.e., an automated player) strategies for each role are the following:

Firms

Robots begin by offering 60 percent of their marginal revenue. Bids increase at regular time intervals (one quarter of round duration) such that profit declines by 50 percent with each updated bid.

Workers

If the best offer is less than opportunity cost, the robots rejects the offer. Above opportunity cost, the probability of acceptance is an increasing function of wage. When wage is double opportunity cost the worker accepts with certainty.

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