WEBVTT

00:00:00.191 --> 00:00:02.980
♪ [music] ♪

00:00:08.928 --> 00:00:10.359
- [Alex] In the next two videos,

00:00:10.359 --> 00:00:13.498
we'll turn our attention 
to price floors and their effects.

00:00:13.498 --> 00:00:15.900
In this video, we'll look at 
the first two effects

00:00:15.900 --> 00:00:18.577
and cover one of the most 
well-known price floors:

00:00:18.577 --> 00:00:19.919
the minimum wage.

00:00:19.919 --> 00:00:21.759
Let's get started.

00:00:25.300 --> 00:00:29.019
A price floor is a minimum price 
allowed by law.

00:00:29.019 --> 00:00:32.278
That is, it is a price 
below which it is illegal

00:00:32.278 --> 00:00:33.910
to buy or sell,

00:00:33.910 --> 00:00:35.006
called a price floor

00:00:35.006 --> 00:00:38.296
because you cannot go
below the floor.

00:00:39.006 --> 00:00:40.489
We're going to show 
that price floors

00:00:40.489 --> 00:00:42.437
create four significant effects:

00:00:42.437 --> 00:00:49.436
surpluses, lost gains from trade, 
wasteful increases in quality,

00:00:49.436 --> 00:00:51.357
and a misallocation of resources.

00:00:51.357 --> 00:00:53.068
We're going to go through 
these each in turn.

00:00:53.068 --> 00:00:54.568
Before we do so, however,

00:00:54.568 --> 00:00:57.293
it's worthwhile
asking this question:

00:00:57.293 --> 00:01:00.871
price floors are less common 
than price ceilings --

00:01:00.871 --> 00:01:02.230
why is this?

00:01:02.230 --> 00:01:06.100
That is, it's more common 
to see a price being held

00:01:06.100 --> 00:01:09.139
below the market price,

00:01:09.139 --> 00:01:14.319
than it is to see a price 
being held above the market price.

00:01:15.069 --> 00:01:16.189
Why?

00:01:17.108 --> 00:01:19.279
One reason may be political.

00:01:19.279 --> 00:01:23.740
That is, there are typically
more buyers of goods

00:01:23.740 --> 00:01:26.862
than there are sellers of goods.

00:01:26.862 --> 00:01:30.568
So when you hold a price 
below the market price,

00:01:30.568 --> 00:01:33.589
you may benefit, or at least 
appear to benefit,

00:01:33.589 --> 00:01:37.801
more buyers,
more people, more voters

00:01:37.801 --> 00:01:42.019
than when you hold a price 
above the market price,

00:01:42.019 --> 00:01:45.152
which would appear to harm buyers.

00:01:45.152 --> 00:01:47.799
Now interestingly,
the paradigmatic,

00:01:47.799 --> 00:01:50.238
the classic case of a price floor

00:01:50.238 --> 00:01:53.159
is the exception
which proves the rule.

00:01:53.159 --> 00:01:56.768
Because the classic case 
of a price floor is a good

00:01:56.768 --> 00:02:01.679
for which there are more sellers 
than there are buyers.

00:02:01.679 --> 00:02:06.420
So here's the case where the price 
is kept above the market price,

00:02:06.420 --> 00:02:10.259
and it make sense politically 
because there are lots of sellers

00:02:10.259 --> 00:02:12.018
compared to buyers.

00:02:12.018 --> 00:02:16.268
So, what is this good,
for which price floor is common

00:02:16.268 --> 00:02:19.179
and for which sellers exceed buyers?

00:02:19.179 --> 00:02:21.049
We'll get to that in just a moment.

00:02:21.049 --> 00:02:22.440
Think about it.

00:02:22.440 --> 00:02:24.488
So one of the things 
which a price floor does

00:02:24.488 --> 00:02:26.508
is it creates surpluses.

00:02:26.508 --> 00:02:30.369
Okay. Have you thought of the good
which a price floor is common,

00:02:30.369 --> 00:02:32.629
and it's a good for which 
the number of suppliers

00:02:32.629 --> 00:02:34.941
exceeds the number of buyers?

00:02:35.631 --> 00:02:38.929
Well, the minimum wage 
is a price floor.

00:02:38.929 --> 00:02:44.201
The minimum wage is a price 
below which you cannot sell labor,

00:02:44.201 --> 00:02:47.879
and the suppliers of labor 
exceed the buyers of labor.

00:02:47.879 --> 00:02:50.230
So it's not surprising
that a minimum wage

00:02:50.230 --> 00:02:52.798
is often politically successful.

00:02:52.798 --> 00:02:54.970
Now, who will
the minimum wage affect?

00:02:54.970 --> 00:02:56.760
Workers with very high productivity

00:02:56.760 --> 00:02:58.870
who are already earning
more than the minimum wage –

00:02:58.870 --> 00:03:01.983
they are not going to be affected 
by the minimum wage perhaps at all.

00:03:01.983 --> 00:03:04.373
Instead, it will affect 
the least experienced,

00:03:04.373 --> 00:03:07.290
least educated, least trained workers.

00:03:07.290 --> 00:03:11.091
Low-skilled teenagers, for example, 
are most likely to be affected

00:03:11.091 --> 00:03:12.889
by the minimum wage.

00:03:12.889 --> 00:03:16.482
Now, I said that a price floor
creates surpluses.

00:03:16.482 --> 00:03:20.152
The minimum wage is a price floor,
so it's going to create a surplus.

00:03:20.152 --> 00:03:23.264
A surplus of labor, we call what?

00:03:23.264 --> 00:03:24.854
We say a gaggle of geese?

00:03:24.854 --> 00:03:26.531
Say pride of lions?

00:03:26.531 --> 00:03:30.432
A surplus of labor
is called unemployment.

00:03:30.432 --> 00:03:32.225
So let's look with our model

00:03:32.225 --> 00:03:36.100
to understand how a minimum wage
can create unemployment,

00:03:36.100 --> 00:03:39.454
particularly among
the least skilled workers.

00:03:39.454 --> 00:03:41.125
Okay. Here's our standard diagram,

00:03:41.125 --> 00:03:43.071
except we're going to put 
the quantity of labor,

00:03:43.071 --> 00:03:46.001
especially unskilled labor,
on the horizontal axis.

00:03:46.001 --> 00:03:48.930
The wage or the price of labor 
on the vertical axis --

00:03:48.930 --> 00:03:50.271
there's our supply curve.

00:03:50.271 --> 00:03:53.238
There's our demand curve
with the market wage

00:03:53.238 --> 00:03:55.121
and the market employment level.

00:03:55.121 --> 00:03:56.757
Now we're going to add
the minimum wage.

00:03:56.757 --> 00:03:58.041
This is a price floor

00:03:58.041 --> 00:04:03.341
below which it is illegal to buy 
or sell this good: labor.

00:04:03.341 --> 00:04:07.150
Now we just read the consequences 
of the price floor of the diagram.

00:04:07.150 --> 00:04:08.458
So we read, for example,

00:04:08.458 --> 00:04:13.311
that at the minimum wage, 
the quantity of labor demanded

00:04:13.311 --> 00:04:15.059
is read off the demand curve.

00:04:15.059 --> 00:04:17.321
Remember, this is
the demand for labor.

00:04:17.321 --> 00:04:20.036
So this is the quantity
of labor demanded,

00:04:20.036 --> 00:04:23.341
and at the minimum wage, 
the quantity of labor supplied

00:04:23.341 --> 00:04:25.603
is read off the supply curve.

00:04:25.603 --> 00:04:28.550
Let's put that point on,
that's "Qs."

00:04:28.550 --> 00:04:31.820
So we have Qs units
of labor supplied,

00:04:31.820 --> 00:04:34.659
"Qd" units of labor demanded.

00:04:34.659 --> 00:04:36.941
Qs is bigger than Qd,

00:04:36.941 --> 00:04:41.740
so the difference between them 
is a surplus of labor,

00:04:41.740 --> 00:04:44.749
also known as unemployment.

00:04:46.889 --> 00:04:48.882
Now the minimum wage
is a controversial

00:04:48.882 --> 00:04:51.272
and hotly debated issue.

00:04:51.272 --> 00:04:53.381
Some academic results indicate

00:04:53.381 --> 00:04:56.120
that the unemployment effect 
of a modest increase

00:04:56.120 --> 00:04:57.294
in the minimum wage

00:04:57.294 --> 00:04:59.632
would not be substantial.

00:04:59.632 --> 00:05:02.452
At the same time, however, 
we also have to recognize

00:05:02.452 --> 00:05:04.882
that a modest increase
in the minimum wage

00:05:04.882 --> 00:05:07.344
would not have big benefits either.

00:05:07.344 --> 00:05:09.300
First, only a small percentage
of workers

00:05:09.300 --> 00:05:11.424
are going to be affected
by the minimum wage.

00:05:11.424 --> 00:05:17.003
97% or so of workers already earn 
more than the minimum wage.

00:05:17.003 --> 00:05:19.141
In fact, even among young workers,

00:05:19.141 --> 00:05:22.522
94% or so less than 25 years of age,

00:05:22.522 --> 00:05:25.072
they already earn
more than the minimum wage.

00:05:25.072 --> 00:05:28.062
At best, the minimum wage 
will raise the wages

00:05:28.062 --> 00:05:30.352
of some low-skilled
and young workers,

00:05:30.352 --> 00:05:33.382
most of whose wages 
would have increased anyway

00:05:33.382 --> 00:05:35.942
as they became more skilled.

00:05:35.942 --> 00:05:37.331
At worst, the minimum wage

00:05:37.331 --> 00:05:39.240
will increase the price
of a hamburger,

00:05:39.240 --> 00:05:41.522
create some unemployment,

00:05:41.522 --> 00:05:45.412
and/or keep some teenagers 
in school for a bit longer --

00:05:45.412 --> 00:05:48.112
not all necessarily bad things.

00:05:48.622 --> 00:05:49.652
What, however,

00:05:49.652 --> 00:05:52.222
about a larger increase 
in the minimum wage?

00:05:53.053 --> 00:05:54.403
Few economists doubt

00:05:54.403 --> 00:05:56.352
that a large increase
in the minimum wage

00:05:56.352 --> 00:05:59.294
would cause serious unemployment.

00:05:59.294 --> 00:06:03.142
After all, we could
not create prosperity

00:06:03.142 --> 00:06:05.692
by raising the minimum wage 
higher and higher.

00:06:05.692 --> 00:06:08.364
If a minimum wage of $10
an hour is a good idea,

00:06:08.364 --> 00:06:09.582
what about 15?

00:06:09.582 --> 00:06:11.892
What about 20, 25, $100?

00:06:11.892 --> 00:06:13.753
$500 an hour?

00:06:13.753 --> 00:06:15.663
Would we all be rich at that point?

00:06:15.663 --> 00:06:18.861
Would we all be receiving wages 
of $500 an hour?

00:06:18.861 --> 00:06:19.924
Of course not.

00:06:19.924 --> 00:06:22.561
Most of us would be unemployed.

00:06:22.561 --> 00:06:24.501
So a large increase
in the minimum wage

00:06:24.501 --> 00:06:26.215
is going to cause
serious unemployment,

00:06:26.215 --> 00:06:29.683
and the good example of this 
is Puerto Rico in 1938.

00:06:29.683 --> 00:06:32.833
Congress actually set 
the first minimum wage at this time

00:06:32.833 --> 00:06:35.184
at 25 cents an hour.

00:06:35.184 --> 00:06:36.985
Now that may seem low,
but that's at a time

00:06:36.985 --> 00:06:39.374
when the average wage
in the United States

00:06:39.374 --> 00:06:41.393
was still less than
a dollar an hour,

00:06:41.393 --> 00:06:44.203
was 62 and a half cents an hour.

00:06:44.203 --> 00:06:47.483
Congress, however,
forgot to exempt Puerto Rico,

00:06:47.483 --> 00:06:50.283
when the average wages 
in Puerto Rico at that time

00:06:50.283 --> 00:06:53.626
were much lower than in the rest 
of the United States,

00:06:53.626 --> 00:06:56.124
only three cents
to four cents an hour.

00:06:56.124 --> 00:06:59.434
So this modest increase 
in the minimum wage

00:06:59.434 --> 00:07:01.933
for the continental United States

00:07:01.933 --> 00:07:05.486
was a huge increase
in the minimum wage for Puerto Rico.

00:07:05.486 --> 00:07:08.466
And lots of Puerto Rican firms
went bankrupt,

00:07:08.466 --> 00:07:10.651
it created devastating unemployment.

00:07:10.651 --> 00:07:14.225
In fact, Puerto Rican politicians 
came to Washington

00:07:14.225 --> 00:07:18.844
to beg for an exemption 
to get them out of the minimum wage.

00:07:18.844 --> 00:07:21.063
So, a large increase
in the minimum wage

00:07:21.063 --> 00:07:25.843
would certainly cause substantial 
and serious unemployment.

00:07:25.843 --> 00:07:28.293
We do see higher minimum wages 
in other countries.

00:07:28.293 --> 00:07:31.213
The minimum wage in France 
is higher than the U.S.,

00:07:31.213 --> 00:07:34.204
relative to average wages 
in those two countries.

00:07:34.204 --> 00:07:36.144
In addition, labor laws in France

00:07:36.144 --> 00:07:38.534
make it very difficult
to fire workers

00:07:38.534 --> 00:07:40.555
once they have been hired.

00:07:40.555 --> 00:07:42.136
As a result, firms in France

00:07:42.136 --> 00:07:45.755
are very reluctant
to hire new workers.

00:07:45.755 --> 00:07:48.106
Younger workers
are especially affected

00:07:48.106 --> 00:07:49.965
because they are less productive,

00:07:49.965 --> 00:07:52.724
and also they are
less known commodities.

00:07:52.724 --> 00:07:55.515
So, the risk
of hiring them is greater.

00:07:55.515 --> 00:07:58.807
As a result, unemployment
among young workers

00:07:58.807 --> 00:08:00.366
is very high in France.

00:08:00.366 --> 00:08:03.526
It was 23% in 2005,

00:08:03.526 --> 00:08:06.555
and that was long before 
the economic crisis,

00:08:06.555 --> 00:08:09.583
the financial crisis 
affecting the entire world.

00:08:09.583 --> 00:08:11.366
So even during good times,

00:08:11.366 --> 00:08:15.617
unemployment in France 
among young workers is very high,

00:08:15.617 --> 00:08:17.233
because the minimum wage is high,

00:08:17.233 --> 00:08:19.718
and because firms
don't want to hire,

00:08:19.718 --> 00:08:23.218
given how difficult it is 
to fire workers.

00:08:23.218 --> 00:08:25.217
Okay. Let's also show
that the minimum wage

00:08:25.217 --> 00:08:26.997
creates lost gains from trade --

00:08:26.997 --> 00:08:29.309
this ought to be
fairly familiar by now.

00:08:29.309 --> 00:08:32.027
At the minimum wage, 
the quantity of labor demanded

00:08:32.027 --> 00:08:34.147
is given by Qd.

00:08:34.147 --> 00:08:38.056
That is less than the quantity 
of labor which would be traded,

00:08:38.056 --> 00:08:41.918
given the market wage,
this market employment.

00:08:41.918 --> 00:08:46.728
Key point is that 
there are buyers of labor

00:08:46.728 --> 00:08:51.267
who are willing to buy labor 
at a price below the minimum wage,

00:08:51.267 --> 00:08:53.610
and there are suppliers of labor,

00:08:53.610 --> 00:08:57.634
workers who are willing 
to work below the minimum wage.

00:08:57.634 --> 00:09:00.718
These deals would be
mutually profitable,

00:09:00.718 --> 00:09:02.900
but they are illegal.

00:09:02.900 --> 00:09:05.640
So there are buyers of labor

00:09:05.640 --> 00:09:07.678
who are willing to buy below 
the minimum wage,

00:09:07.678 --> 00:09:09.448
there are sellers willing to sell.

00:09:09.448 --> 00:09:11.840
These deals would be
mutually profitable,

00:09:11.840 --> 00:09:13.770
but they are illegal,
they are not made.

00:09:13.770 --> 00:09:16.459
Because of that,
there are lost gains from trade,

00:09:16.459 --> 00:09:18.651
or a deadweight loss.

00:09:18.651 --> 00:09:21.680
Okay. So, we have covered 
the first two effects of price floors,

00:09:21.680 --> 00:09:24.969
namely surpluses 
and lost gains from trade.

00:09:24.969 --> 00:09:27.999
In the next lecture, we will use 
a slightly different example

00:09:27.999 --> 00:09:30.170
to look at wasteful
increases in quality

00:09:30.170 --> 00:09:32.600
and a misallocation of resources.

00:09:33.610 --> 00:09:35.050
- [Narrator] If you want
to test yourself,

00:09:35.050 --> 00:09:36.686
click "Practice Questions."

00:09:37.296 --> 00:09:40.760
Or, if you're ready to move on, 
just click "Next Video."

00:09:40.760 --> 00:09:43.254
♪ [music] ♪