9:59:59.000,9:59:59.000 - [Tyler] In the next two videos,[br]we'll turn our attention to price floors 9:59:59.000,9:59:59.000 and their effects. In this video, we'll[br]look at the first two effects and cover 9:59:59.000,9:59:59.000 one of the most well-known price floors,[br]the minimum wage. Let's get started. 9:59:59.000,9:59:59.000 A price floor is a minimum price [br]allowed by law. That is, it is a 9:59:59.000,9:59:59.000 price below which it is illegal to buy or[br]sell, called a price floor because you 9:59:59.000,9:59:59.000 cannot go below the floor. We're going [br]to show that price floors create four 9:59:59.000,9:59:59.000 significant effects: surpluses, lost gains[br]from trade, wasteful increases in quality, 9:59:59.000,9:59:59.000 and a misallocation of resources. We're[br]going to go through these each in turn. 9:59:59.000,9:59:59.000 Before we do so, however, it is worthwhile[br]asking this question: price floors are 9:59:59.000,9:59:59.000 less common than price ceilings - why is[br]this? That is it's more common to see a 9:59:59.000,9:59:59.000 price being held below the market price,[br]than it is to see a price being held above 9:59:59.000,9:59:59.000 the market price. Why? One reason may be[br]political. That is, there are typically 9:59:59.000,9:59:59.000 more buyers of goods than there are[br]sellers of goods. So when you hold a price 9:59:59.000,9:59:59.000 below the market price, you may benefit, or[br]at least appear to benefit, more buyers, 9:59:59.000,9:59:59.000 more people, more voters than when you[br]hold a price above the market price, which 9:59:59.000,9:59:59.000 would appear to harm buyers. Now[br]interestingly, the paradigmatic, the 9:59:59.000,9:59:59.000 classic case of a price floor is the[br]exception which proves the rule. Because 9:59:59.000,9:59:59.000 the classic case of a price floor is a[br]good for which there are more sellers than 9:59:59.000,9:59:59.000 there are buyers. So here's the case where[br]the price is kept above the market price, 9:59:59.000,9:59:59.000 and it make sense politically because[br]there are lots of sellers compared to 9:59:59.000,9:59:59.000 buyers. So, what is this good, for which[br]price floor is common, and for which 9:59:59.000,9:59:59.000 sellers exceed buyers? We'll get to that[br]in just a moment. Think about it. So one 9:59:59.000,9:59:59.000 of the things which a price floor does is[br]it creates surpluses. Okay. Now, have 9:59:59.000,9:59:59.000 you thought of the good which a price[br]floor is common, and it's a good for which 9:59:59.000,9:59:59.000 the number of suppliers exceeds the number[br]of buyers? Well, the minimum wage is a 9:59:59.000,9:59:59.000 price floor. The minimum wage is a price[br]below which you cannot sell labor, and the 9:59:59.000,9:59:59.000 suppliers of labor exceed the buyers of[br]labor. So, it's not surprisingly that a 9:59:59.000,9:59:59.000 minimum wage is often politically[br]successful. Now, who will the minimum wage 9:59:59.000,9:59:59.000 affect? Workers with very high[br]productivity who already earning more than 9:59:59.000,9:59:59.000 the minimum wage - they are not going to be[br]affected by the minimum wage perhaps at 9:59:59.000,9:59:59.000 all. Instead, it will affect the least[br]experienced, least educated, least trained 9:59:59.000,9:59:59.000 workers. Low-skilled teenagers, for[br]example, are most likely to be affected by 9:59:59.000,9:59:59.000 the minimum wage. Now, I said that a price[br]floor creates surpluses. The minimum wage 9:59:59.000,9:59:59.000 is a price floor, so it's going to create a[br]surplus. A surplus of labor we call what? 9:59:59.000,9:59:59.000 We say a gaggle of geese? Say pride of[br]lions? A surplus of labor is called 9:59:59.000,9:59:59.000 unemployment. So let's look with our model[br]to understand how a minimum wage can 9:59:59.000,9:59:59.000 create unemployment, particularly among[br]the least skilled workers. Okay. Here's 9:59:59.000,9:59:59.000 our standard diagram, except we're going[br]to put the quantity of labor, especially 9:59:59.000,9:59:59.000 unskilled labor, on the horizontal axis.[br]The wage or the price of labor on the 9:59:59.000,9:59:59.000 vertical axis. That's our supply curve.[br]That's our demand curve with the market 9:59:59.000,9:59:59.000 wage and the market employment level. Now[br]we're going to add the minimum wage. This 9:59:59.000,9:59:59.000 is a price floor below which it is illegal[br]to buy or sell this good, labor. Now, we 9:59:59.000,9:59:59.000 just read the consequences of the price[br]floor of the diagram. So we read, for 9:59:59.000,9:59:59.000 example, that at the minimum wage, the[br]quantity of labor demanded is read off 9:59:59.000,9:59:59.000 the demand curve. Remember, this is the[br]demand for labor. So, this is the quantity 9:59:59.000,9:59:59.000 of labor demanded, and at the minimum[br]wage, the quantity of labor supplied is 9:59:59.000,9:59:59.000 read off the supply curve. Let's put that[br]point on, that's Qs. So we have Qs units 9:59:59.000,9:59:59.000 of labor supplied, Qd units of labor[br]demanded. Qs is bigger than Qd, so, the 9:59:59.000,9:59:59.000 difference between them is a surplus of[br]labor, also known as unemployment. Now 9:59:59.000,9:59:59.000 the minimum wage is a controversy and[br]hotly debated issue. Some academic results 9:59:59.000,9:59:59.000 indicate that the unemployment effect of a[br]modest increase in the minimum wage would 9:59:59.000,9:59:59.000 not be substantial. At the same time,[br]however, we also have to recognize that a 9:59:59.000,9:59:59.000 modest increase in the minimum wage would[br]not have big benefits either. First, only 9:59:59.000,9:59:59.000 a small percentage of workers are going to[br]be affected by the minimum wage. 97% 9:59:59.000,9:59:59.000 or so of workers already earn more than[br]the minimum wage. In fact, even among 9:59:59.000,9:59:59.000 young workers, 94% or so less than 25[br]years of age, they already earn more than 9:59:59.000,9:59:59.000 the minimum wage. At best, the minimum[br]wage will raise the wages of some 9:59:59.000,9:59:59.000 low-skilled and young workers, most of[br]whose wages would have increased anyway as 9:59:59.000,9:59:59.000 they became more skilled. At worst, the[br]minimum wage will increase the price of a 9:59:59.000,9:59:59.000 hamburger, create some unemployment and/or[br]keep some teenagers in school for a bit 9:59:59.000,9:59:59.000 longer. Not all necessarily bad things.[br]What, however, about a larger increase in 9:59:59.000,9:59:59.000 the minimum wage? Few economists doubt[br]that a large increase in the minimum wage 9:59:59.000,9:59:59.000 would cause serious unemployment. After[br]all, we could not create prosperity by 9:59:59.000,9:59:59.000 raising the minimum wage higher and[br]higher. If a minimum wage of 10 dollars an 9:59:59.000,9:59:59.000 hour is a good idea, what about 15? What[br]about 20? 25? A hundred dollars? 9:59:59.000,9:59:59.000 500 dollars an hour? Would we all be[br]rich at that point? Would we all be 9:59:59.000,9:59:59.000 receiving wages of 500 dollars an[br]hour? Of course not. Most of us would be 9:59:59.000,9:59:59.000 unemployed. So a large increase in the[br]minimum wage is going to cause serious 9:59:59.000,9:59:59.000 Unemployment, and the good example of this[br]is Puerto Rico in 1938. Congress actually 9:59:59.000,9:59:59.000 set the first minimum wage at this time[br]at 25 cents an hour. Now, that may seem 9:59:59.000,9:59:59.000 Low, but that's at the time when the[br]average wage in the United States was 9:59:59.000,9:59:59.000 still less than a dollar an hour, was[br]62 and a half cents an hour. Congress, 9:59:59.000,9:59:59.000 however, forgot to exempt Puerto Rico.[br]When the average wages in Puerto Rico at 9:59:59.000,9:59:59.000 that time were much lower than in the rest[br]of the United States, only three cents to 9:59:59.000,9:59:59.000 four cents an hour. So this modest[br]increase in the minimum wage for the 9:59:59.000,9:59:59.000 continental United States was a huge[br]increase in the minimum wage for Puerto 9:59:59.000,9:59:59.000 Rico. And lots of Puerto Rican firms went[br]Bankrupt, it created devastating 9:59:59.000,9:59:59.000 unemployment. In fact, Puerto Rican[br]politicians came to Washington to beg for 9:59:59.000,9:59:59.000 an exemption to get them out of the[br]minimum wage. So, a large increase in the 9:59:59.000,9:59:59.000 minimum wage would certainly cause[br]substantial and serious unemployment. We 9:59:59.000,9:59:59.000 do see higher minimum wages in other[br]countries. The minimum wage in France is 9:59:59.000,9:59:59.000 higher than the U.S. relative to average[br]wages in those two countries. In addition, 9:59:59.000,9:59:59.000 labor laws in France make it very[br]difficult to fire workers once they have 9:59:59.000,9:59:59.000 been hired. As a result, firms in France[br]are very reluctant to hire new workers. 9:59:59.000,9:59:59.000 Younger workers are especially affected[br]because they are less productive and also 9:59:59.000,9:59:59.000 they are less known commodities. So, the[br]risk of hiring them is greater. As a 9:59:59.000,9:59:59.000 result, unemployment among young workers[br]is very high in France. It was 23% in 2005, 9:59:59.000,9:59:59.000 and that was long before at the economic[br]crisis, the financial crisis affecting the 9:59:59.000,9:59:59.000 entire world. So even during good times,[br]unemployment in France among young workers 9:59:59.000,9:59:59.000 is very high because the minimum wage is[br]high, and because firms don't want to 9:59:59.000,9:59:59.000 hire, given how difficult it is to fire[br]workers. Okay. Let's also show that the 9:59:59.000,9:59:59.000 minimum wage creates lost gains from[br]trade - this ought to be fairly 9:59:59.000,9:59:59.000 familiar by now. At the minimum wage, the[br]quantity of labor demanded is given by 9:59:59.000,9:59:59.000 Qd. That is less than the quantity of[br]labor which would be traded given the 9:59:59.000,9:59:59.000 market wage, this market employment.[br]Key point is that there are buyers of 9:59:59.000,9:59:59.000 labor who are willing to buy labor at a[br]price below the minimum wage, and there are 9:59:59.000,9:59:59.000 suppliers of labor, workers who are[br]willing to work below the minimum wage. 9:59:59.000,9:59:59.000 These deals would be mutually profitable,[br]but they are illegal. So, there are buyers 9:59:59.000,9:59:59.000 of labor who are willing to buy below the[br]minimum wage, there are sellers willing to 9:59:59.000,9:59:59.000 sell. These deals would be mutually[br]profitable, but they are illegal, they are 9:59:59.000,9:59:59.000 not made. Because of that, there are lost[br]gains from trade or a deadweight loss. 9:59:59.000,9:59:59.000 Okay. So, we have covered the first two[br]effects of price floors, namely surpluses 9:59:59.000,9:59:59.000 and lost grains from trade. In the next[br]lecture, we will use a slightly different 9:59:59.000,9:59:59.000 example to look at wasteful increases in[br]quality and a misallocation of resources. 9:59:59.000,9:59:59.000 - [Announcer] If you want to test yourself,[br]click Practice Questions. Or, if you're 9:59:59.000,9:59:59.000 ready to move on, just click Next Video.