A Classroom Unemployment Compensation Experiment

Abstract

This classroom experiment demonstrates how unemployment compensation can affect unemployment rates and wages. Students take the roles of workers and employers who use double oral auction labor markets to negotiate employment contracts. The instructor takes the role of a government that offers progressively higher levels of unemployment compensation. The experiment generates data that students can analyze to test the general predictive power of economic theory. Students also use their data to test the specific hypothesis that higher unemployment compensation increases the unemployment rate and causes wage compression. This experiment can be used in an introductory undergraduate macroeconomics course as a hands-on demonstration of the effects of unemployment compensation. During the course of the experiment, students observe how progressively higher levels of unemployment compensation affect unemployment rates, wages, and the distribution of income between skilled and unskilled workers. Because of its interactive nature, the experiment works best in classes of 16 to 50 students. However, the author and other professors have successfully run it in classes as small as 12 and as large as 90. It requires 45 minutes to run. The experiment uses two labor markets: one for skilled labor and one for unskilled labor. The markets operate simultaneously. Students take the roles of workers and employers who negotiate employment contracts in these markets using a double oral auction. See Hazlett (1999) for a general description of how to administer a double oral auction market. The experiment consists of several periods, each of which represents hiring workers for one hour of labor. An employer can hire at most one worker from each market each period. Every period, workers try to earn the highest possible net benefits from working. Likewise, employers try to earn the highest possible net benefits from hiring them.