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[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:09.14,0:00:12.22,Default,,0000,0000,0000,,- [Tyler] In the next two videos,\Nwe'll turn our attention to price floors
Dialogue: 0,0:00:12.40,0:00:16.19,Default,,0000,0000,0000,,and their effects. In this video, we'll\Nlook at the first two effects and cover
Dialogue: 0,0:00:16.37,0:00:20.82,Default,,0000,0000,0000,,one of the most well-known price floors,\Nthe minimum wage. Let's get started.
Dialogue: 0,0:00:25.05,0:00:29.93,Default,,0000,0000,0000,,A price floor is a minimum price \Nallowed by law. That is, it is a
Dialogue: 0,0:00:30.11,0:00:35.28,Default,,0000,0000,0000,,price below which it is illegal to buy or\Nsell, called a price floor because you
Dialogue: 0,0:00:35.46,0:00:41.20,Default,,0000,0000,0000,,cannot go below the floor. We're going \Nto show that price floors create four
Dialogue: 0,0:00:41.38,0:00:49.50,Default,,0000,0000,0000,,significant effects: surpluses, lost gains\Nfrom trade, wasteful increases in quality,
Dialogue: 0,0:00:49.68,0:00:52.89,Default,,0000,0000,0000,,and a misallocation of resources. We're\Ngoing to go through these each in turn.
Dialogue: 0,0:00:53.07,0:00:58.38,Default,,0000,0000,0000,,Before we do so, however, it is worthwhile\Nasking this question: price floors are
Dialogue: 0,0:00:58.56,0:01:04.40,Default,,0000,0000,0000,,less common than price ceilings - why is\Nthis? That is it's more common to see a
Dialogue: 0,0:01:04.58,0:01:13.01,Default,,0000,0000,0000,,price being held below the market price,\Nthan it is to see a price being held above
Dialogue: 0,0:01:13.19,0:01:21.15,Default,,0000,0000,0000,,the market price. Why? One reason may be\Npolitical. That is, there are typically
Dialogue: 0,0:01:21.33,0:01:28.65,Default,,0000,0000,0000,,more buyers of goods than there are\Nsellers of goods. So when you hold a price
Dialogue: 0,0:01:28.83,0:01:34.85,Default,,0000,0000,0000,,below the market price, you may benefit, or\Nat least appear to benefit, more buyers,
Dialogue: 0,0:01:35.03,0:01:42.25,Default,,0000,0000,0000,,more people, more voters than when you\Nhold a price above the market price, which
Dialogue: 0,0:01:42.43,0:01:47.78,Default,,0000,0000,0000,,would appear to harm buyers. Now\Ninterestingly, the paradigmatic, the
Dialogue: 0,0:01:47.96,0:01:53.57,Default,,0000,0000,0000,,classic case of a price floor is the\Nexception which proves the rule. Because
Dialogue: 0,0:01:53.75,0:01:59.69,Default,,0000,0000,0000,,the classic case of a price floor is a\Ngood for which there are more sellers than
Dialogue: 0,0:01:59.87,0:02:06.40,Default,,0000,0000,0000,,there are buyers. So here's the case where\Nthe price is kept above the market price,
Dialogue: 0,0:02:06.58,0:02:10.81,Default,,0000,0000,0000,,and it make sense politically because\Nthere are lots of sellers compared to
Dialogue: 0,0:02:10.99,0:02:16.64,Default,,0000,0000,0000,,buyers. So, what is this good, for which\Nprice floor is common, and for which
Dialogue: 0,0:02:16.82,0:02:22.79,Default,,0000,0000,0000,,sellers exceed buyers? We'll get to that\Nin just a moment. Think about it. So one
Dialogue: 0,0:02:22.97,0:02:27.19,Default,,0000,0000,0000,,of the things which a price floor does is\Nit creates surpluses. Okay. Now, have
Dialogue: 0,0:02:27.37,0:02:31.38,Default,,0000,0000,0000,,you thought of the good which a price\Nfloor is common, and it's a good for which
Dialogue: 0,0:02:31.56,0:02:37.38,Default,,0000,0000,0000,,the number of suppliers exceeds the number\Nof buyers? Well, the minimum wage is a
Dialogue: 0,0:02:37.56,0:02:44.38,Default,,0000,0000,0000,,price floor. The minimum wage is a price\Nbelow which you cannot sell labor, and the
Dialogue: 0,0:02:44.56,0:02:49.21,Default,,0000,0000,0000,,suppliers of labor exceed the buyers of\Nlabor. So, it's not surprisingly that a
Dialogue: 0,0:02:49.39,0:02:53.97,Default,,0000,0000,0000,,minimum wage is often politically\Nsuccessful. Now, who will the minimum wage
Dialogue: 0,0:02:54.15,0:02:58.03,Default,,0000,0000,0000,,affect? Workers with very high\Nproductivity who already earning more than
Dialogue: 0,0:02:58.21,0:03:01.30,Default,,0000,0000,0000,,the minimum wage - they are not going to be\Naffected by the minimum wage perhaps at
Dialogue: 0,0:03:01.48,0:03:06.44,Default,,0000,0000,0000,,all. Instead, it will affect the least\Nexperienced, least educated, least trained
Dialogue: 0,0:03:06.62,0:03:11.26,Default,,0000,0000,0000,,workers. Low-skilled teenagers, for\Nexample, are most likely to be affected by
Dialogue: 0,0:03:11.44,0:03:17.35,Default,,0000,0000,0000,,the minimum wage. Now, I said that a price\Nfloor creates surpluses. The minimum wage
Dialogue: 0,0:03:17.53,0:03:23.15,Default,,0000,0000,0000,,is a price floor, so it's going to create a\Nsurplus. A surplus of labor we call what?
Dialogue: 0,0:03:23.33,0:03:29.07,Default,,0000,0000,0000,,We say a gaggle of geese? Say pride of\Nlions? A surplus of labor is called
Dialogue: 0,0:03:29.25,0:03:34.56,Default,,0000,0000,0000,,unemployment. So let's look with our model\Nto understand how a minimum wage can
Dialogue: 0,0:03:34.74,0:03:39.90,Default,,0000,0000,0000,,create unemployment, particularly among\Nthe least skilled workers. Okay. Here's
Dialogue: 0,0:03:40.08,0:03:43.34,Default,,0000,0000,0000,,our standard diagram, except we're going\Nto put the quantity of labor, especially
Dialogue: 0,0:03:43.52,0:03:47.93,Default,,0000,0000,0000,,unskilled labor, on the horizontal axis.\NThe wage or the price of labor on the
Dialogue: 0,0:03:48.11,0:03:52.77,Default,,0000,0000,0000,,vertical axis. That's our supply curve.\NThat's our demand curve with the market
Dialogue: 0,0:03:52.95,0:03:56.91,Default,,0000,0000,0000,,wage and the market employment level. Now\Nwe're going to add the minimum wage. This
Dialogue: 0,0:03:57.09,0:04:03.65,Default,,0000,0000,0000,,is a price floor below which it is illegal\Nto buy or sell this good, labor. Now, we
Dialogue: 0,0:04:03.83,0:04:07.95,Default,,0000,0000,0000,,just read the consequences of the price\Nfloor of the diagram. So we read, for
Dialogue: 0,0:04:08.13,0:04:14.03,Default,,0000,0000,0000,,example, that at the minimum wage, the\Nquantity of labor demanded is read off
Dialogue: 0,0:04:14.21,0:04:18.60,Default,,0000,0000,0000,,the demand curve. Remember, this is the\Ndemand for labor. So, this is the quantity
Dialogue: 0,0:04:18.78,0:04:23.59,Default,,0000,0000,0000,,of labor demanded, and at the minimum\Nwage, the quantity of labor supplied is
Dialogue: 0,0:04:23.77,0:04:30.23,Default,,0000,0000,0000,,read off the supply curve. Let's put that\Npoint on, that's Qs. So we have Qs units
Dialogue: 0,0:04:30.41,0:04:37.84,Default,,0000,0000,0000,,of labor supplied, Qd units of labor\Ndemanded. Qs is bigger than Qd, so, the
Dialogue: 0,0:04:38.02,0:04:46.93,Default,,0000,0000,0000,,difference between them is a surplus of\Nlabor, also known as unemployment. Now
Dialogue: 0,0:04:47.11,0:04:52.60,Default,,0000,0000,0000,,the minimum wage is a controversy and\Nhotly debated issue. Some academic results
Dialogue: 0,0:04:52.78,0:04:57.60,Default,,0000,0000,0000,,indicate that the unemployment effect of a\Nmodest increase in the minimum wage would
Dialogue: 0,0:04:57.78,0:05:02.81,Default,,0000,0000,0000,,not be substantial. At the same time,\Nhowever, we also have to recognize that a
Dialogue: 0,0:05:02.99,0:05:08.07,Default,,0000,0000,0000,,modest increase in the minimum wage would\Nnot have big benefits either. First, only
Dialogue: 0,0:05:08.25,0:05:12.78,Default,,0000,0000,0000,,a small percentage of workers are going to\Nbe affected by the minimum wage. 97%
Dialogue: 0,0:05:12.96,0:05:17.88,Default,,0000,0000,0000,,or so of workers already earn more than\Nthe minimum wage. In fact, even among
Dialogue: 0,0:05:18.06,0:05:23.60,Default,,0000,0000,0000,,young workers, 94% or so less than 25\Nyears of age, they already earn more than
Dialogue: 0,0:05:23.78,0:05:28.50,Default,,0000,0000,0000,,the minimum wage. At best, the minimum\Nwage will raise the wages of some
Dialogue: 0,0:05:28.68,0:05:33.76,Default,,0000,0000,0000,,low-skilled and young workers, most of\Nwhose wages would have increased anyway as
Dialogue: 0,0:05:33.94,0:05:38.39,Default,,0000,0000,0000,,they became more skilled. At worst, the\Nminimum wage will increase the price of a
Dialogue: 0,0:05:38.57,0:05:44.67,Default,,0000,0000,0000,,hamburger, create some unemployment and/or\Nkeep some teenagers in school for a bit
Dialogue: 0,0:05:44.85,0:05:51.00,Default,,0000,0000,0000,,longer. Not all necessarily bad things.\NWhat, however, about a larger increase in
Dialogue: 0,0:05:51.18,0:05:56.27,Default,,0000,0000,0000,,the minimum wage? Few economists doubt\Nthat a large increase in the minimum wage
Dialogue: 0,0:05:56.45,0:06:03.36,Default,,0000,0000,0000,,would cause serious unemployment. After\Nall, we could not create prosperity by
Dialogue: 0,0:06:03.54,0:06:07.36,Default,,0000,0000,0000,,raising the minimum wage higher and\Nhigher. If a minimum wage of 10 dollars an
Dialogue: 0,0:06:07.54,0:06:11.64,Default,,0000,0000,0000,,hour is a good idea, what about 15? What\Nabout 20? 25? A hundred dollars?
Dialogue: 0,0:06:11.82,0:06:16.35,Default,,0000,0000,0000,,500 dollars an hour? Would we all be\Nrich at that point? Would we all be
Dialogue: 0,0:06:16.53,0:06:20.92,Default,,0000,0000,0000,,receiving wages of 500 dollars an\Nhour? Of course not. Most of us would be
Dialogue: 0,0:06:21.10,0:06:25.39,Default,,0000,0000,0000,,unemployed. So a large increase in the\Nminimum wage is going to cause serious
Dialogue: 0,0:06:25.57,0:06:30.62,Default,,0000,0000,0000,,Unemployment, and the good example of this\Nis Puerto Rico in 1938. Congress actually
Dialogue: 0,0:06:30.80,0:06:35.92,Default,,0000,0000,0000,,set the first minimum wage at this time\Nat 25 cents an hour. Now, that may seem
Dialogue: 0,0:06:36.10,0:06:39.69,Default,,0000,0000,0000,,Low, but that's at the time when the\Naverage wage in the United States was
Dialogue: 0,0:06:39.87,0:06:44.60,Default,,0000,0000,0000,,still less than a dollar an hour, was\N62 and a half cents an hour. Congress,
Dialogue: 0,0:06:44.78,0:06:49.91,Default,,0000,0000,0000,,however, forgot to exempt Puerto Rico.\NWhen the average wages in Puerto Rico at
Dialogue: 0,0:06:50.09,0:06:54.72,Default,,0000,0000,0000,,that time were much lower than in the rest\Nof the United States, only three cents to
Dialogue: 0,0:06:54.90,0:06:59.88,Default,,0000,0000,0000,,four cents an hour. So this modest\Nincrease in the minimum wage for the
Dialogue: 0,0:07:00.06,0:07:04.72,Default,,0000,0000,0000,,continental United States was a huge\Nincrease in the minimum wage for Puerto
Dialogue: 0,0:07:04.90,0:07:09.61,Default,,0000,0000,0000,,Rico. And lots of Puerto Rican firms went\NBankrupt, it created devastating
Dialogue: 0,0:07:09.79,0:07:15.01,Default,,0000,0000,0000,,unemployment. In fact, Puerto Rican\Npoliticians came to Washington to beg for
Dialogue: 0,0:07:15.19,0:07:20.51,Default,,0000,0000,0000,,an exemption to get them out of the\Nminimum wage. So, a large increase in the
Dialogue: 0,0:07:20.69,0:07:25.82,Default,,0000,0000,0000,,minimum wage would certainly cause\Nsubstantial and serious unemployment. We
Dialogue: 0,0:07:26.00,0:07:30.19,Default,,0000,0000,0000,,do see higher minimum wages in other\Ncountries. The minimum wage in France is
Dialogue: 0,0:07:30.37,0:07:34.73,Default,,0000,0000,0000,,higher than the U.S. relative to average\Nwages in those two countries. In addition,
Dialogue: 0,0:07:34.91,0:07:39.24,Default,,0000,0000,0000,,labor laws in France make it very\Ndifficult to fire workers once they have
Dialogue: 0,0:07:39.42,0:07:46.05,Default,,0000,0000,0000,,been hired. As a result, firms in France\Nare very reluctant to hire new workers.
Dialogue: 0,0:07:46.23,0:07:50.82,Default,,0000,0000,0000,,Younger workers are especially affected\Nbecause they are less productive and also
Dialogue: 0,0:07:51.00,0:07:56.16,Default,,0000,0000,0000,,they are less known commodities. So, the\Nrisk of hiring them is greater. As a
Dialogue: 0,0:07:56.34,0:08:01.87,Default,,0000,0000,0000,,result, unemployment among young workers\Nis very high in France. It was 23% in 2005,
Dialogue: 0,0:08:02.05,0:08:08.46,Default,,0000,0000,0000,,and that was long before at the economic\Ncrisis, the financial crisis affecting the
Dialogue: 0,0:08:08.64,0:08:14.42,Default,,0000,0000,0000,,entire world. So even during good times,\Nunemployment in France among young workers
Dialogue: 0,0:08:14.60,0:08:19.31,Default,,0000,0000,0000,,is very high because the minimum wage is\Nhigh, and because firms don't want to
Dialogue: 0,0:08:19.49,0:08:24.50,Default,,0000,0000,0000,,hire, given how difficult it is to fire\Nworkers. Okay. Let's also show that the
Dialogue: 0,0:08:24.68,0:08:28.04,Default,,0000,0000,0000,,minimum wage creates lost gains from\Ntrade - this ought to be fairly
Dialogue: 0,0:08:28.22,0:08:32.85,Default,,0000,0000,0000,,familiar by now. At the minimum wage, the\Nquantity of labor demanded is given by
Dialogue: 0,0:08:33.03,0:08:38.92,Default,,0000,0000,0000,,Qd. That is less than the quantity of\Nlabor which would be traded given the
Dialogue: 0,0:08:39.10,0:08:45.80,Default,,0000,0000,0000,,market wage, this market employment.\NKey point is that there are buyers of
Dialogue: 0,0:08:45.98,0:08:51.77,Default,,0000,0000,0000,,labor who are willing to buy labor at a\Nprice below the minimum wage, and there are
Dialogue: 0,0:08:51.95,0:08:57.79,Default,,0000,0000,0000,,suppliers of labor, workers who are\Nwilling to work below the minimum wage.
Dialogue: 0,0:08:57.97,0:09:05.07,Default,,0000,0000,0000,,These deals would be mutually profitable,\Nbut they are illegal. So, there are buyers
Dialogue: 0,0:09:05.25,0:09:08.71,Default,,0000,0000,0000,,of labor who are willing to buy below the\Nminimum wage, there are sellers willing to
Dialogue: 0,0:09:08.89,0:09:12.79,Default,,0000,0000,0000,,sell. These deals would be mutually\Nprofitable, but they are illegal, they are
Dialogue: 0,0:09:12.97,0:09:18.59,Default,,0000,0000,0000,,not made. Because of that, there are lost\Ngains from trade or a deadweight loss.
Dialogue: 0,0:09:18.77,0:09:23.16,Default,,0000,0000,0000,,Okay. So, we have covered the first two\Neffects of price floors, namely surpluses
Dialogue: 0,0:09:23.34,0:09:27.38,Default,,0000,0000,0000,,and lost grains from trade. In the next\Nlecture, we will use a slightly different
Dialogue: 0,0:09:27.56,0:09:32.28,Default,,0000,0000,0000,,example to look at wasteful increases in\Nquality and a misallocation of resources.
Dialogue: 0,0:09:33.94,0:09:38.11,Default,,0000,0000,0000,,- [Announcer] If you want to test yourself,\Nclick Practice Questions. Or, if you're
Dialogue: 0,0:09:38.29,0:09:40.65,Default,,0000,0000,0000,,ready to move on, just click Next Video.