Lesson 4: Trade and Jobs

Activity:  The “Giant Sucking Sound” – Job Woes or Trade Flows?*

Download Giant Sucking Sound Activity: Teacher Guide, Handouts, Visuals (.doc file)

*Developed by Dr. Ken Leonard and Kathy Ratté, based on The Job Jungle, an activity written for FTE by Prof. R. Pat Fishe, University of Richmond. Copyright © 2001, Revised 2006 The Foundation for Teaching Economics.  Permission granted to copy for classroom use. 

 

Video Demonstration:

 

Content Standards:

Standard 6: Specialization – When individuals, regions, and nations specialize in what they can produce at the lowest cost and then trade with others, both production and consumption increase.

  • Two factors that prompt international trade are international differences in the availability of productive resources and differences in relative prices.
  • Individuals and nations have a comparative advantage in the production of goods or services if they can produce a product at a lower opportunity cost than other individuals or nations.
  • Comparative advantages change over time because of changes in factor endowments, resource prices, and events that occur in other nations.

Standard 13:  Income – Income for most people is determined by the market value of the productive resources they sell.  What workers earn depends, primarily, on the market value of what they produce and how productive they are.

  • Changes in the structure of the economy, the level of gross domestic product, technology, government policies, and discrimination can influence personal income.
  • Changes in the prices for productive resources affect the incomes of the owners of those productive resources and the combination of those resources used by firms.

Standard 14:  Entrepreneurship – Entrepreneurs are people who take the risks of organizing productive resources to make goods and services.  Profit is an important incentive that leads entrepreneurs to accept the risks of business failure.

  • Entrepreneurial decisions affect job opportunities for other workers.

Standard 15: Investment

  • Investment in factories, machinery, new technology, and the health, education, and training of people can raise future standards of living.
  • Economic growth creates new employment and profit opportunities in some industries, but growth reduces opportunities in others.
  • Investments in physical and human capital can increase productivity, but such investments entail opportunity costs and economic risks.

Lesson Overview

The “giant sucking sound” was United States Presidential candidate Ross Perot’s colorful phrase for what he believed would be the negative effects of the North American Free Trade Agreement (NAFTA), which he opposed. The phrase, coined during the 1992 U.S. presidential campaign, referred to the sound of U.S. jobs heading south for Mexico should the proposed free-trade agreement go into effect. Perot ultimately lost the election, and the winner, Bill Clinton, supported NAFTA, which went into effect on January 1, 1994. The phrase has since come into general use to describe any situation involving loss of jobs, or fear of a loss of jobs, particularly by one nation to a rival. For example:

  • A European Union representative spoke of worrying “about the giant sucking sound from Eastern Europe;”
  • An op-ed writer opined that “the Mexicans… are hearing ‘the giant sucking sound’ in stereo these days – from China in one ear and India in the other.”
  • A columnist used the phrase “That Giant Sucking Sound” to introduce a comment about a 34% slump in employment in the U. S. airline industry.” (Wikipedia –  Copyright (C) 2000,2001,2002  Free Software Foundation, Inc. 51 Franklin St, Fifth Floor, Boston, MA  02110-1301  USA.  Everyone is permitted to copy and distribute verbatim copies of this license document, but changing it is not allowed.

Students role-play employers and workers in the t-shirt industry to demonstrate the impact of changes in worker productivity on labor markets.  Then, using what they discovered in the simulation, student teams consider whether expanding into international labor markets can increase profits for a fictional employer, income for workers, and/or wealth for the society as a whole.

The purpose of this activity is twofold:

  • To allow students to experience how the productivity of workers determines the wage rates they can command in labor markets; and
  • To help students understand why, in open markets, jobs move to where the level of labor productivity is consistent with the characteristics of the job.

Students participate in a simulated labor market in the t-shirt industry, acting as either employers or prospective workers. The t-shirt industry was chosen because it involves both high-skill (design, marketing, accounting, etc.) and low-skill (cutting, sewing, printing etc.) jobs.  Additionally, the “real world” credentials of the example are impeccable: included in the activity is an Internet advertisement for workers to cut and sew t-shirts in a Mexican factory that wholesales to American t-shirt retailers.  The ad for the fictitious factory is a compilation of actual web site advertisements posted in the 1990s by companies located in northern Mexico.

Teacher Background

Ross Perot evoked the “giant sucking sound” to symbolize his opposition to trade policies that he feared would result in the loss of American jobs to Mexico and a consequent reduction of the standard of living of American workers.  With little reflection on the realities of trade, employment, and income, the phrase has become cultural shorthand for the “trade costs jobs” argument, an argument that economic analysis quickly reveals to be without merit.  Nonetheless, “trade costs jobs” seems to have intuitive appeal and persists in the thinking of many.  The challenge for teachers is to move students past the mental roadblock that prevents them from recognizing the huge benefits of international trade to Americans and to our trading partners.

Student Preparation

Some background preparation is necessary if students are to derive the full value of this exercise.  They should be familiar with the basic tools of economic analysis: understanding of the laws of supply and demand, market prices, and the determinants of demand and supply.   In addition, students should be comfortable with the reality that:

  • Firms in competitive markets, like that for t-shirts, don’t set prices; the market does.
  • Therefore, a firm’s only ability to exert control over profit lies in its control of production cost.

It is helpful if students have had some practice with marginal analysis, as the employers will be making decisions based on diminishing marginal returns to labor. However, this is not prerequisite and can be introduced effectively within the context of the activity.

Conceptual Background

  • The demand for labor is derived demand, meaning that the demand for workers is dependent upon the demand for the product the workers make.  If no one wants to purchase the product, then there will be no demand for the workers who produce it.
  • The market price of the product constrains employers’ hiring decisions.  If the cost of labor is so high that an employer cannot make a profit by selling the product at the market price, then the employer will not be willing to pay for the labor.  In simplest terms, market prices influence the wages that employers are willing to pay.
  • Wages are also influenced by productivity (output per man-hour of labor).  In hiring any particular worker, the employer must ask how much the worker will contribute to the business in terms of output.  Economists call this the value added or marginal value.
    • Worker productivity is determined by a number of factors, some under control of the worker himself and some the result of the conditions of employment.  Examples of productivity factors include:
      • The worker’s physical and/or mental abilities;
      • The worker’s level of education;
      • The type and amount of equipment (capital) available;
      • Other factors and conditions in and around the particular job location.
  • The important new learning for students in this activity is that the number of other workers already hired impacts a worker’s productivity.
    • In some cases, hiring additional workers increases productivity, as each worker is able to specialize.
    • At some point, however, hiring additional workers results in diminishing marginal returns, meaning that the productivity of the next worker hired will necessarily be less than that of the worker hired before him. 
      • A simple example of this is the “too many cooks spoil the broth” syndrome.  How many cooks could a busy restaurant profitably employ?  Common sense tells us that at some point, the kitchen gets too crowded for effective work.  The last cook hired – the one in everyone’s way through no fault of his own, may add very little to the total number of pizzas produced, or may even prove to be such an obstacle that total production of pizzas drops!

Time:

  • One-two class periods

Materials:

(See download link, above, for handouts, visuals, and teacher guide.)

  • Yellow index cards for low-skilled workers (1/student minus # of employers) Randomly mark a wealth endowment of $4, $5, or $6 at the top of each card.
  • Pink index cards (same number as yellow cards) for high skilled workers
  • Prizes for winning employer and winning worker
  • Overhead transparencies
  • Student handouts:
    • Output, Additional (Marginal) Product, and Additional (Marginal) Revenue – 1 per employer, Visual #3
    • Employer’s Profit Calculation Worksheet – 1 per employer, Visual #6
    • Problem Worksheet – 1 per student, Visual #8

Procedures

Part 1

1. Explain to students that they will be taking part in a simulated labor market in the t-shirt industry.  They will be assigned roles as either employers or workers, and the winning employer and the winning worker will each receive a prize.

2. Display the Background Visual #1, and explain that before they can effectively participate in the simulation, they need to know a little bit about labor markets.  Go through the background with the class as a whole.

One Kitchen – How Many Cooks?

# cooks # pizzas produced How many additional pizzas from hiring this cook? What happened?
0 0 0 No cook, no pizza
1 10 10 Good cook but does everything himself
2 25 15 1 baker, 1 prep and order taker
3 45 20 1 baker, 1 prep, 1 order taker – what a system!
4 55 10 An extra guy – helps out when someone’s behind
5 55 0 Things aren’t so hectic
6 40 -15 Get him out of the way!

Would you hire 6 cooks?     No
What would you need to know to decide how much to pay the cooks you did hire?  The price of pizzas.
If pizzas sell for $10, what’s the most you could afford to pay cook #4?   $100

3. Display the Scenario Visual #2, explain the nature of the t-shirt industry and discuss the goals of both the employers and the workers in the simulation.

4. Explain that in this simulation all workers will begin as low skilled (yellow card), but they will have an opportunity to purchase an education and up-grade themselves to high-skilled (pink card) workers as the activity progresses.

5. Display the 2nd page of Visual #2, “Output, Added (Marginal) Product, Added (Marginal) Revenue” overhead and distribute handouts to students.  Explain that in this particular market, the price of t-shirts is $10.  Fill in the yellow card chart with the class.  Ask students to fill in the pink card chart individually.  Check results and answer any questions.

6. Choose employers and assign the rest of the students to be workers. If your class is large enough, it is often a good idea to choose a pair of students to play each employer role, so that they can help each other.  If the class is small, you will have fewer employers and can probably help them yourself.  (See download file linked above for suggestions about how to determine the number of employers.)

7. Distribute the playing materials.  All workers receive yellow cards to start the game.  Each employer receives a Profit Calculation Worksheet and a colored pen.  Give a different colored pen to each employer.  

8. Display “If You Are a Worker . . .” (Visual #4) and”If You Are an Employer” (Visual #5)  review the roles of workers and employers.

9. Open the first round of the activity.  Allow it to run 6-10 minutes as workers search for better job offers.  (It is better to place a time limit on each round and announce the time remaining as the end approaches.  It’s not necessary that all rounds be the same length.)

10 .At the end of the round, allow time for workers to buy an education and employers to figure their profits and consider their strategies for the next round.

11. Run additional rounds.  Stop the game after 2-4 rounds.  (You may want to play additional rounds after the debriefing, using some of the variations listed below.)

  • Variations:
    • Yellow card workers who don’t find jobs qualify for $15 public assistance and pink card workers qualify for $35 public assistance per round.
    • Raise or lower the price of t-shirts.
    • Raise or lower the amount of public assistance.

12. Identify the winners, check their arithmetic, and award the prizes.  In the event of a tie, use a coin toss to determine the winner.

13. Debriefing Questions:  (See suggested answers in download file linked above.)

  • Which worker made the most money?   How?
  • Which employer made the most profit?  How?
  • Which worker(s) made very little money?  Why?
  • Which employer(s) made very little profit?  Why?
  • How many workers up-graded their skills by buying an education?  Why?
  • Were all employees equally productive?  What made the differences?
  • Workers, were you paid the same in each round?  Why or why not?
  • Employers, what determined how much you planned to pay for any particular worker?
  • Employers, what determined how much you actually were willing to pay for workers?
  • Employers, how might your hiring decisions have changed if the market price for t-shirts rose to $15?
  • Would you have paid higher wages?
  • Employers, did you pay all workers of one type (pink or yellow) the same wage?  Why or why not?
  • Are pink card (high-skilled) workers always worth more to employers than yellow card (low-skilled) workers?

Part 2

14. Usually by round three most workers have purchased an education to up-grade their skill level, resulting in an over-supply of pink card workers and a shortage of yellow card workers.  (If this was not the case, propose the situation to the students.  Possible explanations might include that all the remaining yellow card workers entered a government sponsored training program and were no longer part of the market. Or announce that the rules changed and pink card workers are no longer allowed to accept yellow-card jobs.)  Discuss:

  • Employers, if we play another round of the game, are there enough yellow card workers?  (No)
  • Why would you like to have more yellow card workers?  (Employers should answer that this would allow them to make more profit.  Encourage students to “translate” this.  Employers are finding out that, for example, it doesn’t do any good to hire another t-shirt designer or marketer if they can’t hire people to cut and sew the shirts.)

15. Have students return to the employers who last hired them.  Explain that you have a problem you want them to discuss and solve as a team.  If you have students who were not hired, assign them to teams.

16. Provide each team with a copy of the “Problem” handout. (pp. 161-162)  Display Visual #8 on the overhead and read through with the class.  Answer any questions and then allow teams time to work on the solution.

Problem:
You are members of your firm’s Make It Work Circle.  The firm has adopted a profit-sharing scheme and created the MIW Circle in which employees, management and ownership meet regularly to discuss the business.  The profit-sharing means that employees have a stake in the success of the business –  if the firm makes more profit, the employee gets more income – and therefore, employees participate enthusiastically in the MIW meetings.
The market for t-shirts has grown in response to fashion trends and the employer has found a backer willing to provide the investment funds necessary to triple the size of the company.   However, the human resources director has reported a virtual inability to hire yellow card workers.
The employer has called an MIW meeting to brainstorm solutions to this labor dilemma.  Make a list of things the company could do to take advantage of the opportunity to expand.

17. Ask teams to share their proposals.  Generate a master list of viable possibilities on the board or overhead. 

18. Display the overhead of the Peñasa internet advertisement.  Direct students to turn to the discussion questions on the handout.  Remind them that, in answering the questions, they should adopt the point of view of the person they played in the simulation: the employer(s), the unemployed worker, the skilled worker, the unskilled worker, the skilled worker in an unskilled job, etc.

19. Debrief