Labor Market Experiment

Haupert, Michael J. "Labor Market Experiment." Journal of Economic Education. 27 (Fall 1996) 300-308.

This experiment demonstrates to students the effects of search costs, unemployment insurance, and education on the labor market. The only materials needed for this exercise are plain index cards and paper for the students to record their earnings. Before class, the instructor should prepare 20 index cards with wages of $0 (10 cards), $100 (1 card), $200 (2 cards), $300 (3 cards), $400 (2 cards), $600 (1 card), and $1000 (1 card). After the students arrive, the professor mixes the cards and the game begins. The game will have 20 wage offers in each trial, and students may reject as many offers as they wish. However, after deciding on a wage, the student may not quit a job to accept another offer. Students are told that the range of wages that they could receive, between $0 and $1000, but not the frequency in which they occur. On the first trial, a card is removed from the shuffled stack and the professor announces the wage printed on it. Students must then decide whether to accept or reject the offer. If they accept they will make the wage printed on the card for each of the remaining 19 periods. For example, if a wage of $100 is drawn the student would make $1900 total. If the student rejects the offer, then he makes nothing and must wait and decide on the next offer. Students must weigh accepting a job now and receiving all of the earnings or holding out for a better offer. The next trial is conducted just like the first but search costs are added to the game. Before each card is drawn, the instructor asks the class to decide if they want to search for a job. If they decide to search for a job they are charge a fee of $100 (the cost of printing up resumes, filling out applications, and going to job interviews) and may accept or reject the wage drawn. If they decide not to search for a job they are charged nothing, but they may not accept the offer from this period (students can chose search or not search as much as they want for the remaining periods). The third trial is conducted just like the first except this time unemployment insurance is introduced. Each student receives $190 unemployment insurance for each period they do not have a job for the first 10 periods. Finally trial 4 is conducted just like trial 1 except this time education is introduced as a variable. For this trial 6 new cards are added to the deck, labeled $500E (1 card), $800E (2 cards), $1000E (2 cards), and $1500E (1 card). In this trial students may chose to go to college for the first two time periods (at a cost of $1500 per period) or remain uneducated. Students may not accept any offers while they are in school but after they will receive higher earnings from the E cards. Job offers that contain the letter E are only open to those with education. A class discussion dealing with all relevant issues is useful after the completion of all four trials.