Update from "Who Gets Paid What?" by Niharika Singh

Why do people in the U.S. make a higher average income than people in Mexico? Are robots better at doing certain jobs than humans? Why do lawyers make more money than judges?

For the last two weeks, students in my class have been using economic concepts and tools to understand the labor market and figure out how to answer their questions above. From learning about supply and demand in competitive markets, to making decisions about how much to work or play when their wage goes up, to hypothesizing about wage-setting in monopsonistic markets, students have been thinking critically about the various ways in which employers and workers interact in the labor market and the role the government plays in setting the boundaries of these interactions.*

This week, we played a game that mimicked real conditions students may face in the labor market—lack of bargaining power, wage theft, the profit motive, or competition from other workers. Students are randomly assigned to be workers and firms. Workers must complete a task under timed conditions in each round, and firms must monitor and pay these workers. Two firms employ three workers each, and ask workers to make bundles of 10 Q-tips for a daily wage under timed conditions. You win the game by making the higher profit if you are the firm, and the highest total compensation if you are the worker.

The key source of tension in the game is that firms know the true minimum wage ($11.25), but workers may or may not know the true minimum wage. Firms know that if they pay workers below minimum wage, there is a chance the worker knows what the wage is and files a complaint to the government. As the government, I change the conditions of the game in each round and workers and firms respond to these changes.

Game conditions change as follows each round**:

1.     Firms decide on a wage that can be below, at, or above the minimum wage. All workers in one firm are paid the same wage.

2.     One worker finds out what the minimum wage is, but cannot share this knowledge with other workers. All workers can register complaints to the government if they believe they are being paid below minimum wage starting this round. Firms may decide to pay any individual worker more.

3.     All workers find out what the minimum wage is, but cannot negotiate their wages. If they make lower than minimum wage, they file complaints to the government. Firms may decide to pay any individual worker more.

4.     Workers can renegotiate their wages individually and must be paid at least that wage at the end of the round, but can be paid more if employer wants.

5.     Workers must make at least the negotiated wage from the previous round, but as before, employers can pay more if they want.

If workers have filed complaints, the game concludes by the government following up on the complaints and randomly deciding whether the firm pays a penalty.

The graph below shows how worker wages changed across rounds in our game!

To start the game, we had 1 firm paying the minimum wage exactly, and another paying workers below minimum wage and treating workers a bit harshly. Workers filed complaints in 2 rounds, and the government penalized the wage-stealing firm at the end of the game!

Today and for the rest of the course, we will be using the different rounds of the game to discuss the following concepts: profit maximization, information failures, pay transparency, labor law enforcement, and collective bargaining. And, I couldn’t be more excited to have these conversations!

*S/O to the CORE team for their textbook, which has often guided my lesson planning: https://www.core-econ.org/the-economy/book/text/09.html.

**For a more detailed set of rules or for suggestions on how to improve game, please email niharikasingh@g.harvard.edu.