Education as a signal of ability Final

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Default-person Will Kim (Author)

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Model group EECS 372-Spring 2011 | Visible to everyone | Changeable by everyone
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WHAT IS IT?

This model tests Michael Spence's model of job market signaling. In his model, he shows how firms may differentiate among two types of workers using education as a signal. Here, education has no direct benefit to either party: it does not make the worker's utility go up but rather decreases it, and it does not necessitate that firms can give the correct wages. However, both firms and workers soon find out that they can differentiate among workers and among themselves by getting different levels of education.

HOW IT WORKS

Initially, workers will be divided into TIERS based on their level of education. At each tick, firms will offer workers WAGES. Workers will then choose the highest wage that was offered and work for that company. After the workers accept, firms will calculate their revenues by looking at the revenue each tier raises. Depending on the FIRM-TYPE, the firm chooses to increase or decrease the wages given to that tier at this point. Next, the workers have a choice to increase or decrease their education. They do this by calculating the tier that gives the maximum expected utility, and then setting their EDUCATION to the minimum amount of education needed to get into that tier, which is given by REQ-EDUCATION. When workers have updated their education levels, they move to the corresponding position in the view.

HOW TO USE IT

NUMBER-OF-FIRMS, NUMBER-OF-WORKERS adjusts the number of workers and firms. TYPES is they number of different ABILITIES the worker has. INITIAL-WAGE-DIFFERENCE is the initial wage difference across tiers, which you can set to be anywhere from zero to twenty. TIER-LENGTH is the length of each tier in amounts of education, and EDUCATION-DIFFICULTY is how much more costly it is for workers to get a level of education. STEP-SIZE is the factor by which firms increase or decrease the wages of workers, and can be set to smaller values for more exact results. FIRM-TYPE denotes the type calculation the firm uses when adjusting wages.

THINGS TO NOTICE

Each worker is colored differently, with the brightest workers denoting the workes with the most ability, and darker workers denoting workers with less ability. The patches are colored as well. Each colored row represents a different firm, the topmost being the firm with the highest number. Each colored column represents a different education tier, with the rightmost being the one with the highest education. Each worker moves to a patch that denotes its tier and its employer. Over time, the workers should separate themselves so that the darker workers move to darker patches, and vice versa. Sometimes, workers go to the bottom left corner. This means that they do not get hired, or that they do not accept their offer since it is too low. These workers are considered unemployed.

THINGS TO TRY

Try varying the INITIAL-WAGE-DIFFERENCE, TIER-LENGTH, EDUCATION-DIFFICULTY to find conditions for which the workers can be correctly differentiated. Is this even possible? Under which conditions do the workers end up receiving the same wage? How is this different for each type of firm?

EXTENDING THE MODEL

Currently, the model has it that the interval for each tier of education is constant. Try altering the model so that the firms can adjust the length of each interval independently.

NETLOGO FEATURES

This model uses lists extensively. Since it was difficult to create and manipulate lists of agentsets, the who numbers of workers were used. Two functions were created to access the turtles of a given tier, and to access the tier of a given turtle.

RELATED MODELS

To the extent of my knowledge, there are no related agent based models that have modeled Michael Spence's Job Market Signaling. There is, however, a plethora of adaptations of his theory in economics and business.

CREDITS AND REFERENCES

This model is inspired by a paper by Michael Spence. "Job Market Signaling", Michael Spence, The Quarterly Journal of Economics (1973) 87 (3): 355-374

Comments and Questions

Please start the discussion about this model! (You'll first need to log in.)

Click to Run Model

breed [ workers worker ]
breed [ firms firm ]

globals [
  tiers ;; stores the who of workers with certain levels of education
  req-education ;; stores the required education of workers for each tier
]

patches-own [
  tier-nbr
  firm-nbr
]

workers-own [
  offer ;; the greatest amount of money the worker has been offered
  pemployer ;; the potential employer of the worker
  ability
  salary
  education
  utility
  employer
  ecost
  expected-utility ;; expected utility of each tier
]

firms-own [
  sales ;; yearly sales the firm raises per tier
  cost ;; cost of operating per tier
  marginal-cost
  marginal-benefit
  wage-schedule ;; wage schedule
  revenue ;; revenue
]

to setup
  ca ;; clear all
  set tiers n-values types [ (list 1) ]
  set req-education n-values types [ 0 ]
  set-default-shape workers "person"
  setup-patches
  setup-workers ;; worker setup procedure
  setup-firms ;; firm setup procedure
  update-tiers
  setup-expected-utility
end 

to setup-workers
  create-workers number-of-workers[
    setxy random-xcor random-ycor
    set ability ((random types) * 4 + 1)
    set education random-float types * 2
    set pemployer nobody
    set expected-utility n-values types [ 0 ]
    set color scale-color blue ability 0 (types * 4 + 1)
  ]
end 

to setup-firms
  create-firms number-of-firms [
    set revenue n-values types [0]
    set cost n-values types [0]
    set sales n-values types [0]
    set marginal-cost n-values types [0]
    set marginal-benefit n-values types [0]
    set size 2
    set hidden? true
    setup-wage-schedule
  ]
end 

to setup-expected-utility
  ask workers [
    foreach n-values types [?] [
      let expected-wage item ? [wage-schedule] of one-of firms
      let expected-educ item ? req-education
      set expected-utility replace-item ? expected-utility 
      ( expected-wage - expected-educ ^ education-difficulty / ability )
    ]
  ]
end 

to setup-patches
  let yinterval (max-pycor - min-pycor) / number-of-firms
  let xinterval (max-pxcor - min-pxcor) / types
  foreach n-values number-of-firms [?] [
    let i ? + 1
    ask patches with [pycor - min-pycor <= i * yinterval and pycor - min-pycor >= (i - 1) * yinterval ] [
      set pcolor 3 + ? * 10
      set firm-nbr item ? n-values number-of-firms [? + number-of-workers] 
    ]]
  foreach n-values types [?] [
    let i (? + 1)
    ask patches with [pxcor - min-pxcor <= i * xinterval and pxcor - min-pxcor >= (i - 1) * xinterval ] [
      set tier-nbr ?
    ]
    ask patches [
      set pcolor scale-color pcolor tier-nbr -2 (number-of-firms + 3)
  ]]
end 

;; we must assume that firms will give higher wages to people with more education

to setup-wage-schedule ;; firm procedure
  set wage-schedule n-values types [random-float types * initial-wage-difference]
  foreach n-values (types - 1) [?] 
  [ if ((item (? + 1) wage-schedule) - (item ? wage-schedule) < initial-wage-difference) [ setup-wage-schedule ] ]
end 

to-report tier-of-worker [ n ] ;; reports the tier of the worker given his who number
  foreach tiers 
  [ if (member? [who] of worker n ? = true) [ report position ? tiers ] ]
end 

to-report workers-in-tier [ n ] ;; reports an agentset of the nth tier
  report workers with [ member? [who] of self item n tiers ]
end 

;; From here the go procedure
;;  First, workers start with their initial values of education. Then, firms go and 
;;  make offers to workers. Next, workers accetp the highest offer. Now, workers and firms 
;;  calculate their utilities.

to go
  ask firms 
  [ update-tiers
    offer-wage ]
  ask workers 
  [ accept-offer
    update-utility
    update-expected-utility 
    ;move 
    ]
  ask firms 
  [ observe-performance 
    update-wage-schedule ]
  ask workers [ 
    update-education 
    move
  ]
  update-plots
  tick
end 

to move 
  foreach n-values types [?] [
    ask workers-in-tier ? [
      if ([tier-nbr] of patch-here != tier-of-worker who) 
      [ move-to one-of patches with [tier-nbr = tier-of-worker [who] of myself] ]
      ifelse (employer != nobody)
      [ if ([firm-nbr] of patch-here != [who] of employer )
        [ move-to one-of patches with [tier-nbr = tier-of-worker [who] of myself and firm-nbr = [who] of [employer] of myself]] ]
      [ setxy min-pxcor min-pycor ] ;do nothing
      ]
    ]
end 

to get-education
  set education education + 1
  set ecost education ^ education-difficulty / ability
end 

to update-tiers ;; need to check if this works!!
  foreach n-values (types - 1) [?] [
    let a item ? req-education
    let b item (? + 1) req-education
    let this-tier [who] of workers with [education < b and education >= a]
    set tiers replace-item ? tiers this-tier
  ]
  let last-req last req-education
  let last-tier [who] of workers with [education >= last-req]
  set tiers replace-item (types - 1) tiers last-tier
  ;; now set the minimum level of education for each tier
  foreach n-values types  [?] [
;    if (any? workers-in-tier ?)
    set req-education replace-item ? req-education (0 + tier-length * ?) 
;    [ set mean-education-of-tiers replace-item ? req-education (mean [education] of workers-in-tier ?) ]
  ]
end 

to offer-wage ;; firm procedure
  foreach n-values types [?] ;; for 1, 2, 3, ..., types. This is just a counting variable
  [
    let num ? ;; set num as a counting variable of the current number
    let w item num [wage-schedule] of self ;; wage-schedule = [w1 w2 w3]. num denotes current w.
    let T item num tiers ;; tiers = [T1 T2 T3]. num denotes current T
    foreach T [ ;; for T1, T2, ...
      ask worker ? [
        let temp w ;; offer wage of w
        if [offer] of self <= temp
        [ set offer temp 
          set pemployer myself ]]
  ]]
end 

to accept-offer 
    set salary offer
    set employer pemployer
;    set employed? true
    set pemployer nobody
    set offer 0
end 

to observe-performance ;; firm procedure
  foreach n-values types [?] [ ;; for each tier
    if (any? (workers-in-tier ?) with [employer = myself]) [
      let sum-salaries sum [salary] of (workers-in-tier ?) with [employer = myself]
      let sum-abilities sum [ability] of (workers-in-tier ?) with [employer = myself]
      let num-workers count (workers-in-tier ?) with [employer = myself]
      set cost replace-item ? cost sum-salaries
      set sales replace-item ? sales sum-abilities
      set marginal-cost replace-item ? marginal-cost (sum-salaries / num-workers)
      set marginal-benefit replace-item ? marginal-benefit (sum-abilities / num-workers)
    ]
  ]
  set revenue (map [?1 - ?2] sales cost)
end 

to update-wage-schedule ;; firm procedure
  foreach n-values types [?] [
    let sum-ability sum [ability] of workers-in-tier ? ;; workers with their who number included in subtier
    let sum-salary sum [salary] of workers-in-tier ?
    ;; this is for the profit maximizing firm that tries to balance the wages with costs
    if (firm-type = "equate sales and cost") 
    [ 
      if (sum-salary >= sum-ability) [ set wage-schedule replace-item ? wage-schedule (item ? wage-schedule - step-size) ]
      if (sum-salary < sum-ability) [ set wage-schedule replace-item ? wage-schedule (item ? wage-schedule + step-size) ] 
    ]
    ;; this is for the marginal firm
    if (firm-type = "marginal analysis") 
    [
      ifelse (item ? marginal-cost > item ? marginal-benefit) 
        [set wage-schedule replace-item ? wage-schedule (item ? wage-schedule - step-size) ]
        [if (item ? marginal-cost < item ? marginal-benefit)
          [ set wage-schedule replace-item ? wage-schedule (item ? wage-schedule + step-size) ] 
        ]
    ]
    ;; this is for the rewarding firm
    if (firm-type = "rewarding company") 
    [ 
      if (sum-salary >= sum-ability) [ set wage-schedule replace-item ? wage-schedule (item ? wage-schedule + step-size) ]
      if (any? workers-in-tier ? = false) [ set wage-schedule replace-item ? wage-schedule (item ? wage-schedule + step-size) ] 
    ]
    ;; this is for the penalizing firm
    if (firm-type = "punishing company")
    [
      if (sum-salary < sum-ability) [ set wage-schedule replace-item ? wage-schedule (item ? wage-schedule - step-size) ]
      if (any? workers-in-tier ? = false) [ set wage-schedule replace-item ? wage-schedule (item ? wage-schedule + step-size) ]
    ]
  ]
end 

to update-expected-utility
  foreach n-values types [?] [ ;; for n = [ 0 ... types ]
    ifelse (tier-of-worker who = ?) 
    ;; if the worker is in tier n
    [ set expected-utility replace-item ? expected-utility utility ];; set his expected utility 
    ;; if the worker is not in tier n
    [ if (any? workers-in-tier ?) [
      let mean-education item ? req-education 
      let observed-salary [salary] of one-of workers-in-tier ?
      let observed-utility (observed-salary - mean-education ^ education-difficulty / ability)
      set expected-utility replace-item ? expected-utility observed-utility ] ]
  ]
end 

to update-utility;; worker procedure
  set ecost education ^ education-difficulty / ability
  set utility salary - ecost
end 

;; workers optimize their education incrementally if they are in their highest earning bracket
;; but if not, they move to their highest earning bracket.

to update-education ;; worker procedure
  let my-tier tier-of-worker who
  let optimal-tier position (max expected-utility) expected-utility
  ifelse (optimal-tier = my-tier) 
  ;; if i am in the highest earning bracket
  [ ifelse (utility > 0) 
    [ if (education >= step-size and education > min [education] of workers-in-tier my-tier) [set education education - step-size ]]
    [ set education education + step-size ]  ]
  ;; if i am not in the highest earning bracket
  [ set education item optimal-tier req-education ]
end 

to update-plots
  set-current-plot "Wage vs. Tier"
  plot-pen-reset
  foreach n-values types [?] [
    if (any? workers-in-tier ?) 
    [ plotxy ? mean [salary] of workers-in-tier ? ]
  ]
  
  set-current-plot "Education vs Tiers"
  plot-pen-reset
  foreach n-values types [?] [
    if (any? workers-in-tier ?) 
    [ plotxy ? mean [education] of workers-in-tier ?]
  ]
  
  set-current-plot "Ability vs Tiers"
  plot-pen-reset
  foreach n-values types [?] [
    if (any? workers-in-tier ?) 
    [ plotxy ? mean [ability] of workers-in-tier ?]
  ]
  
  set-current-plot "Mean Educations"
  plot-pen-reset
  foreach n-values types [?] [
    if (any? workers-in-tier ?) 
    [ plotxy ? mean [education] of workers-in-tier ?]
  ]
  
  set-current-plot "Utilities by Firm"
  plot-pen-reset
  foreach n-values number-of-firms [?] [
    plotxy ? sum [revenue] of firm (? + number-of-workers)
  ]  
end 

There is only one version of this model, created over 13 years ago by Will Kim.

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