Video transcript
Voiceover: Let's think a littlebit about the labor market. In all of these videos,whether we're talking about renting units or hiring people, these are huge oversimplifications,but we're doing it in this way so we can applysome of these basic ideas that we're being exposed to in this survey of microeconomics, so that we can apply those basic ideas to real world things. It's important to realize we're making huge oversimplifications andoften times the real context can be more complicatedor a little bit nuanced, but it gives us a way ofthinking about things. This is the unskilled labormarket, so people who don't have any specific training orexperience for a given job. The vertical axis istheir wage rate per hour. It's essentially the price of labor. This little gap hereshows I started at zero, but then I jumped up to five, six, seven. This right here is a quantity of labor. We're measuring that interms of millions of hours per month. Once again, we have thislittle gap here, so we can jump to 20 million hours, 21 million hours. It's important to realize,when we think about demand in the labor market, we're not talking about individual consumers, we're talking about employers. In most cases, demand comes from individual consumers,but now the demand is coming from employers. These are the people who areessentially buying labor. The supply is not comingfrom corporations. The supply is coming fromthe people who provide labor, so now it's coming fromindividual workers. Now it is coming from workers. Let's just say that this market starts off completely unregulated,so it has a natural equilibrium price orequilibrium wage at $6 an hour and an equilibriumquantity of labor supplied, which is 22 millions of hours per month. Let's say the governmentin this hypothetical city or country says, "You know what? "$6 is a really low wage. "We have trouble imagininghow people live well "off of a $6 an hour wage." They say this right over here is too low. The government does notlike it and maybe many of their voters arepeople making that wage, so they say, "Hey, you know what? "We are going pass somewell-intentioned legislation. "We are going to pass a minimum wage. "We are going to pass a law, minimum wage, "that says any employer hasto pay at least $7 an hour." $7 an hour. It has to be at least $7 anhour, so this right over here is a price floor. This is a minimum price in the market. When we talked about rent control, that was a price ceiling. That was a maximum price for rent, now this is a minimum price for labor. Since the price floor, thisminimum price, is higher than the actual clearingprice, it's going to distort the market. Our price floor is right over here, $7. This right over here is our minimum wage. What's going to happen here? If you look at the demand side of things, the employers are going to say, "Wow! "If I have to pay $7 anhour now, I can only afford "21 million hours of labor." They're going to say,"I can only afford now "21 million hours of labor,"but if you look at the workers they're going to say, "Gee,if I can make $7 an hour, "more people are goingto be willing to work." Either an individual might say, "If I was working 40 hoursa week making $6 an hour. "If I'm making $7 anhour, I'm willing to work "45 hours a week." Or there might be astudent who's on the fence, who says, "Wow! "Now wages have gone upenough that it makes sense "for me to work." There might be someonewho's retired and now, at $6 wasn't enough for themto come out of retirement, but $7 is. Maybe a stay at home parentnow says $7 is enough for them to come out of retirement or not stay at home anymore. The labor, the quantitysupplied of labor, in terms of hours, will increase. At $7 an hour, peoplewill be willing to supply that much labor, butwhat's going to happen in this situation right over here? In this situation youhave all of these people who want to work, but there's only demand for this much work. Right here, this is going tobe an oversupply of labor. Another way to think aboutit, there's only jobs for 21 million people nowand now 23 million people want to work. You're going to have 2million people who are, by the classical definition of unemployed, people who are looking for work who can't find work now. Once again, this iscompletely oversimplified, because at this point right over here, based on the way I just viewed that, you would have nounemployment and we all know even when the economy is humming maximumly and there's no regulation,there is some unemployment, just due to frictions in the market, people just randomlyquitting jobs or looking for a new job, so youcould almost view this as excess unemployment. Or you could view this as just a very oversimplified model and inthe ideal world you'd get close to zero unemployment. Now you have more people looking for jobs, because the wages havegone, but fewer jobs, because the employersare forced to pay more. If we make all of theseassumptions in the model and you just want to say howmany fewer jobs are there, because this, obviously, we'retalking about more people even looking for jobsbecause the perceived wages have gone up. In the absolute level,based on these linear supply and demand curves, before there was demand for 22 million jobs and that was what the quantity demandedwas and that's also where the quantity supplied was, but now its only 21 million. Based on this model, you're going to have 1 million fewer jobs. When you think aboutit in terms of surplus. Before the minimumwage, the entire surplus was this entire area over here. This entire area that'sbelow the demand curve and above the supply curve. This entire area was the total surplus and it was being dividedbetween the consumer surplus and the producer surplus. This right over here, between the price and the supply curve wasthe producer surplus. The producer surplus, rememberthe producers of labor are the individual workers. This was the benefit above and beyond the opportunity cost thatthe workers were getting was this area right over herethat I'm doing in dark white or filled in white andthe consumer surplus or the employer surplus here was the value that the employers weregetting above and beyond the price that they had to pay. Now, in this situation of a minimum wage, now this is the set price,this is the quantity of labor that is demanded. What you lose now, thesurplus that we lose is this quantity right over here. We could figure outthat area quite easily. Let's see, this height rightover here is 1 million hours per month, so it's going to be 1 million. I'll just write 1, we'll justremember it's on millions. Times this height right overhere, which is $2 per hour. Times one half. If we just multiply these,we get this whole rectangle for the area of the triangle,we multiply it times one half. That gives us exactly 1 and the units are dollars per hour timesmillions of hours per month, gives us millions of dollars per month. It becomes $1 millionper month of surplus, of benefit above andbeyond, of total benefit that is lost to this marketbecause of this regulation, if you assume all of thethings in this model. Just like we talkedabout in the last video, we have a $1 million permonth dead weight loss. Now, not everyone loses here. Because the price is set upover here, for the people who are working those first21 million hours per month, their producer surplus has now increased, because the space betweenwhat they're getting and their opportunitycost has now increased. For those lucky enoughto actually have a job, those workers now dohave a higher surplus, but for those employers,which is on the demand side right now, who are employingthose first 21 million hours of labor, they now have asmaller consumer surplus or demand surplus oremployer surplus right there. For the first 21 million unitsof labor, it's redistributing the pie between theemployers and the workers, but then because you aremaking the wage higher, it's reducing the overalldemand, so there is, if you believe this model,some job destruction taking place.
