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MinimumWages

by Klaus G. Troitzsch (Submitted: 04/26/2013)

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## WHAT IS IT?

This model is a simple agent-based model of negotiations between potential employers and potential employees in an artificial economy in which minimum wages are expected to be introduced. In the current version both groups can have different sizes, and every employer can employ more than one worker. The current version makes a distinction between three employer types (fast food providers, providers of cleaning services and providers of simple construction services).

## HOW IT WORKS

The market between potential employers and potential employees works as follows: in every round one potential employer seeks a potential employee or the other way round, either randomly or looking for the cheapest worker or the most generous potential
employee. Both have expectations about the wages. If the wages demanded are lower than the wages offered (and, in case one or both have a current contract with another partner, the new conditions are better than the old ones), the two partners contract, and the wages agreed upon are somewhere between the demanded and offered wages. There can be a minimum wages as a lower bound of mutual expectations and contracted wages, either for all three trades the same or different values for the three trades. Contracts terminate when one of the two partners finds a more profitable relationship or when an employer employs more than (1 + numberOfWorkers / numberOfEmployers) workers (in the latter case the worker with the highest wages is fired).

The model is in some features inspired by the zero-intelligence constrained (ZI-C) traders from Gode and Sunder. The ZI-C traders cannot make a trade that will yield a negative profit, i.e., buyers cannot buy at a price higher than their buyer value and sellers cannot sell for a price below their seller cost. In contrast to that model, both partners in this model can adjust their expectations according to the experiences made by themselves and/or their neighbours within a user-defined radius.

## HOW TO USE IT

To run the model, select the numbers of employers and workers, their respective maximum expectations, and the maximum number of rounds. Next press the setup button to initialize the model. Also select among four version of the matching algorithm ("who-seeks-whom"). Decide whether you want to introduce a general minimum wages, different minimum wages per trade or no minimum wages at all (all sliders set to 0). A graph is displayed which shows something like supply and demand curves (and later on the trajectory of the realised number of contracts and the respective wages), and the agents are placed on the toroidal cellular automaton. The worker agents (little persons) move to the shops (little houses) of their employers (and back again to their initial place when they are fired), but the landscape shows the distances between employers and workers. The setup phase is something like a warming-up phase where all workers have a chance to get hired. The go button starts the simulation. When a contract is entered into, the contractual wages is shown in a monitor, and the trajectory of the realised number of contracts and the average of currently valid contracts is added to the demand-supply diagram and the market statistics are updated. The model will automatically stop when the maxNumberOfTrades is reached. The model can be stopped and resumed earlier by clicking the go button again.

More plots show results of the simulation:

Min and max expected wages show the distribution of the expectations of both sides over time as well as the (theoretical) equilibrium wages and the average of the currently valid wages.

Wages distribution shows a histogram of the current contractual wages.

Workers' and employers' expectancies show the current distribution of the expectations of both sides.

## THINGS TO NOTICE

Averages of currently valid wages approximate the equilibrium wages soon, but the equilibrium employment volume is reached only very seldom.

It might be interesting to know how long a contract between employer and employee is in force before one of the two finds a more profitable partner. See the employment time distributions and also the distribution of the number of consecutive jobs per worker.

## THINGS TO TRY

Try several different "minimum wages", starting from 0!

Try what happens when the radius is smaller (~3) or higher (a radius of 72 covers all potential partners!).

## EXTENDING THE MODEL

## REFERENCES

Dhanaanjay K. Gode and Shyam Sunder. 1993. Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality. The Journal of Political Economy. 101 (Feb. 1993). 119-137.

NetLogo implementation of Gode and Sunder 1993 developed by: Mark E. McBride, Department of Economics, Miami University, Oxford, OH 45056, mark.mcbride@muohio.edu, http://mcbridme.sba.muohio.edu/, last updated: July 19, 2006, as ZITrading.nlogo in the NetLogo Model Library

Documentation of this version: Peyman Jazayeri and Mehmet Hadi Tohum. Auswirkung der Einführung eines Mindestlohns auf den Arbeitsmarkt, anhand eines Simulationsmodells.
http://kola.opus.hbz-nrw.de/volltexte/2012/759/, 2012.

## CREDITS

Current implementation by
Prof. Dr. Klaus G. Troitzsch
Institut f�r Wirtschafts- und Verwaltungsinformatik
Universit�t Koblenz-Landau
kgt@uni-koblenz.de
http://www.uni-koblenz.de/~kgt

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