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