Activity 3: A Labour Market Game- Wage setting

In this activity, students learn how wages are negotiated in the labour market by both agents (employers and workers).

This is a classroom role-playing game in which students act as employers, workers, consultants and educators. Employers and workers each have separate goals and begin by bargaining over wages. Obviously, employers try to negotiate relatively low wages in order to increase profits, while workers seek relatively high wages to maximize total income.

Participants:

• Workers: Twenty or more students to act as workers in search of employment.

• Employers: Four to six students to act as employers in the competitive kite industry.

• Educator: 1 or 2 students who can enhance the labour market skills of workers.

Goals:

Workers: The goal of each worker is to earn the greatest total income. Workers earn income by finding an employer who will hire them at a mutually acceptable wage or by remaining unemployed and receiving public assistance. The winning Worker receives 2 euros.

Employers: The goal of each employer is to generate the greatest total profits. Profits are equal to the difference between revenues and costs of production. Employers must hire workers in order to produce kites, which generate revenues. The costs of production are determined by the wages negotiated between workers and employers. Employers try to negotiate relatively low wages in order to increase profits, while workers seek relatively high wages to maximize total income. The winning Employer receives 2 euros.

Skills & Endowments:

Low-skilled workers: (Yellow 3x5 index card) All workers begin the first round as LOW skilled. These workers carry a yellow card that identifies them to employers as LOW skilled. Yellow cards have a random wealth endowment of 4, 5, or 6 euros written on the back, so all workers start off with some resources.

High-skilled workers: (Pink 3x5 index card) At the end of any round, a worker may become HIGH skilled by acquiring an education from an educator. The worker pays 25 euros out of total income for this education. The educator gives the worker a pink card and collects the worker’s yellow card, subtracting the “tuition” from the worker’s total. (Note: No borrowing is allowed; workers must have total income of at least 25 euros  to become HIGH skilled.)

How to Play the Game:

1. Participants are explained that profit-maximizing employers will not offer more than the value of a worker’s marginal product. In the schedule above, one can check that the marginal product of each additional worker decreases with the total number of workers hired. This is because, with more people they might not be so productive as the first worker. Note also that high skill workers are more productive in any situation than low skill workers. Regarding the supply side, a worker faces an opportunity cost when considering whether to accept a wage offer. Other issues, such as working conditions, unemployment insurance, or economic fluctuations are not important at this point.

2. Distribute the game pieces. All workers receive low-skill cards to start the game. Each employer receives an Output and Marginal Product Schedule. Give the high-skill cards to each educator.

3. Market price and public assistance. Ask employers and their consultants to distribute themselves around the room:

• Announce to employers that the competitive market price of kites is 10 euros (this price can be changed from round to round)

• Announce to yellow card workers that if they do not find an acceptable job offer, they receive 15 euros per round in income from public assistance programs. In later rounds, announce to pink card workers that they receive 35 euros per round in income from public assistance programs if they do not accept a job offer.

4. Total income and total profits are cumulative. Workers add their initial endowment to the income received in all rounds, and then subtract any education costs, to compute total income. Employers add profits generated in all rounds to compute total profits.

5. Hiring process:

• A job lasts for only one round. (Make sure that workers and employers know that they are bargaining over wages in each round. Remind employers that the value of the marginal product changes with each new worker hired!)

• When an employer and worker agree on a wage, the employer writes the wage and his or her name or ID on the worker’s card.

• Once made, a deal cannot be broken – by either the employer or the worker.

• Employers also record wages paid on their Output and Marginal Product Schedule.

6. Acquiring skills:

• At the end of any round, workers may choose to become HIGH skilled by paying 25 euros to an educator. The educator deducts 25 euros from the total income shown on the worker’s yellow card and writes the new total on the worker’s pink card. Once they have invested in an education, they cannot undo this investment.

7. Play the first round.

• It is better to place a time limit on each round and announce the time remaining when the end approaches.

• Make sure that employers/consultants keep timely records on each round.

8. Ending the game. The game can be stopped after two or three rounds.

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Note: This game was inspired in my own experiences as an economics student. Another activity that I found interesting regarding wage setting can be seen in the following video: