 The minimum wage, as I mentioned on Sunday night, is a classic example of economic analysis, both for the Austrian school, even mainstream economics. And so it's pretty important. And it's an example of government intervention in the economy. So you have society as a free society with no government, and then government intervenes in the economy. It does things like regulations, price controls, which we're going to be talking about here today, taxes, subsidies, monetary policy. The list of government interventions, unfortunately, in our society is practically endless. But this is an example of where the Austrian school really is credited with developing the concept of government intervention. When Mises first started on this journey, you look at his early works, and it was about price controls, basically, and that's been expanded over time by Mises. And then in 1962, in man economy and state or power and market, Rothbard put together a complete picture of the extent and the effects of government intervention. So obviously, this is a topic of great interest to most people here. Some of your classes so far help develop the analysis of, in this case, price controls or minimum wage, subjective value and market price. We're talking about market prices here, very fundamental. Professor Rittenauer's lecture on the division of labor and social order. Obviously, that's going to play a role here as well as entrepreneurship by Professor Klein. So all of that's going to be part of the package that we'll be going to talk about today. Now, in the market economy with the absence of government intervention, you get to choose your own comparative advantage. And you choose it based on market prices. So it's not like rocket science. Market prices are your guide to things like what products you're going to buy, what type of career you're going to follow. And so that's why Austrians put a great deal of emphasis on market prices, stable market prices, not fixed market prices, nothing like that, but stable market prices where relative prices, the price of one thing versus another, gives you information about, for example, what product to buy, what automobile to buy, the difference between an expensive luxury car and a Honda Accord, for example. And it does the same thing for you in terms of jobs. You pick your majors, you pick your career area based on anticipated revenues, wages, salaries and benefits. So market prices are crucial to developing, understanding, discovering your comparative advantage. Minimum wages disrupt or intervene in that process at the low end of the labor market. Now, we want to have some understanding about what determines prices, and in this case, wages. And wages are a little bit more complicated, but basically, many people in the economy, in the country, in our society, believe that somehow businesses decide on wage rates and on prices of goods. They just get to unilaterally decide these things. Well, I teach at Auburn University and if I got to decide my wage rate, it would reflect my true ability and talents and would be millions of dollars a year. Now, the president and the dean and the department head over there, if they got to decide it, they would probably want to offer me as little as possible, maybe minimum wage. That's the minimum right now. And if not for the minimum wage, they could pay me a dollar a semester. But of course, that's not how things work in the real world. It's the forces of supply and demand that ultimately determine prices and that determined wage rates. And in terms of wage rates for labor, what we're talking about is a factor of production. Labor, capital, land are the major forms of the factors of production. Of course, there's all sorts of labor, all sorts of land, and all sorts of capital. The wage rate is, we're going to just cover the basic factors here, is imputed back from the product that it produces. So the wage rate is highly influenced by what that specific type of labor produces, the product it produces. So an easy example is that of a petroleum engineer. A petroleum engineer is responsible for finding, drilling, discovering, and ultimately developing oil into petroleum products. So the salary of petroleum engineers is in part imputed back from the consumer good market. So the price of gasoline that you pay is going to be an important factor in determining the salary of that petroleum engineer. The example that Professor Salerno gave derived from Carl Manger's Principles of Economics is that of a cigarette rolling machine. If everyone decided to quit smoking cigarettes, and instead were vaping or chewing tobacco or whatever, or not doing it at all, then the value of a cigarette rolling machine, which might cost millions of dollars if you bought one, but if everybody stopped smoking cigarettes, the value of that machine, which is very highly specific, would be zero, unless you could find something else to roll up in paper that might be valuable on the market. Another way of looking at this is that the wage rate is going to be determined by the marginal revenue product. That's the technical term for the influence of the market on wage rates. So the marginal revenue product is what kind of quantity have you contributed to the firm's production and what can they sell that product for? So it's both price and quantity that you add to the company that makes you valuable and creates a wage that can be paid. Now to illuminate that concept, that technical concept, think of a call center that has 40 people answering calls from customers, either ordering products or checking on their orders or complaining about the product or whatever. Okay, taking those orders is a vital for the firm in terms of production, right? But what if our 40 people answering the call center, answering the calls at the center, had to dump their own garbage pail at work and clean their own area at work? Well, in that case, they would lose like 10 minutes every day from doing that particular chore. Okay, and they might lose an entire sale as a result of that of not being able to make that last call. Well, what if the firm hires a janitor to come by and to pick up the trash and sweep the floor every night so that those 40 people didn't have to do that job themselves? Well, the marginal revenue product of the janitor, he doesn't answer the phone at all. Not one call does he answer. And yet he creates 10 minutes of extra labor for all those call takers times 40, so he creates 40 new calls just by doing that job for them. So he doesn't take any calls, but the firm answers 40 more calls as a result of his work. So the marginal revenue product would be 40 times whatever the price that they were selling their product for. So it's a little bit of a technical question, but I think that example sort of illustrates what's going on. So that's the demand for labor. The supply of labor is based on the labor-leisure trade-off. How hard working are you or how lazy are you? Or do you have other aspirations other than work that may be productive, but you're not actually working at a job and earning a salary? So the labor-leisure trade-off is key. It's very important. If you don't work, if you're adverse to work, we're all adverse to work in some respects. We all like leisure, and so we have to decide, do we want to work overtime, do we want to work full-time, do we want to work part-time, do we want to be a substitute teacher rather than a full-time teacher, and on and on. Other factors that affect the decision and wages are training. The more training you have, the higher your wage, the more risk in a job. So if you're going down in the mines, coal mines, your life is at risk, and so miners get higher pay as a result of that risk. More skill is also important. So a lot of people can be trained to be a jeweler, to make fine jewelry, but on top of that, some people are going to be more skilled than others. And so skill also raises your wage. The trustworthiness, okay, some jobs are very sensitive. You might be handling money. You may be that jeweler who took in a Rolex watch and fixed it and kept it for himself and gave the customer back a fake Rolex watch. So certain jobs, we want people to be very trustworthy, so we pay them a lot of money. So if they break that trust, we take their high-paying job away. And then some jobs are just nasty. We wouldn't want to be an embalmer, for example, who drew all the liquids out of dead people. That would not be my first choice. So the minimum wage is a government intervention into this whole complex process, and it has big effects on the market, the low-end, the low-skilled labor market. And so what I'm going to cover today is the Austrian perspective on the minimum wage as well as the mainstream economic perspective on the minimum wage. Mainstream economics thinks that the minimum wage causes unemployment, and sometimes they don't. As a matter of fact, if you look at the Wikipedia article on the minimum wage, it goes through all of these things, wages, income, poverty, equality, and so on. And they put up a story that says it increases it, and then below that it decreases it. So they have no firm conclusions. I will say that most economists oppose the minimum wage, but they don't really have a clear, consistent story. Whereas Austrian economics says, yes, it is going to cause unemployment, and it's going to cause a lot of other things, a lot of negative things. So there's a great confusion on the part of mainstream economists, and I think the Austrian approach provides a great deal of clarity. And this issue is in the news again. I just read that the House of Representatives is going to consider a piece of legislation to increase the minimum wage to $15 an hour across the country by 2024. So it's going to be, if passed completely, it would be implemented over a number of years. So the minimum wage is a floor on the payment of labor. So that's the minimum employers can pay workers except for a couple of special cases. So you can pay higher, obviously, but not lower. The current rate is $7.25. So this piece of legislation would more than double the minimum wage in the United States. 31 states have higher minimum wage laws than the federal. So that's a high number. It's the highest it's ever been. I understand. And the many cities, particularly on the left coast, have even higher wages. And so cities like San Francisco, San Jose, Seattle, Portland, and so forth have higher minimum wage than state levels. And they're experiencing a lot of the negative effects of that, of course. In the Bay Area, for example, a number of mom and pop famous restaurants have closed up shop because of the minimum wage and other regulations, as well as the age of the owners themselves. This is the conventional analysis. Supply and demand. You have upward sloping supply curve as in all markets and downward sloping demand curves. And you would have an equal, uh-oh, it's running out of juice here. So the intersection creates an equilibrium wage. The minimum wage is set above that. It means that more people are going to enter the low-skill job market, and employers are going to want fewer workers. So the quantity demanded goes down. And price theory is great. It's what is very often taught by both Austrians and mainstream economists. But price theory is not everything. I learned that studying prohibition is that price really is the least significant factor of the analysis of prohibition. So there's a lot of other things that can change other than price and quantity as a result of a price floor, like here in the case of minimum wage. Okay, so on the one hand, this is the way conventional mainstream economists look at things. This one economist says there's no evidence that raising the minimum wage costs jobs, at least when the starting point is as low as it is in modern America. This apparent defiance of the laws of supply and demand occurs because the market for labor isn't like the market for, say, wheat, because workers are people. Okay, so on the other side, on the right side, you have an economist who could say, quote, any econ 101 student can tell you the answer. The higher wage reduces the quantity of labor demanded and hence leads to unemployment. Clearly these advocates of the minimum wage law very much want to believe that the price of labor, unlike the price of gasoline or Manhattan apartments, can be set on considerations of justice, not supply and demand without unpleasant side effects. So the quote on the left comes from Paul Krugman. The quote on the right comes from Paul Krugman. It took me a while to find those two quotes, but I knew he would contradict himself. Okay, and then there's a couple famous studies on the situation in Seattle. It's kind of complex, but you'll get the punchline at the end. The University of California, Berkeley, which is very left leaning, did a study of Seattle food service industry where there was an 11 to $13 increase or almost 20%. They found little or no change in wage pay and employment in full service. That is high skilled positions in restaurants of only a 1% difference. There was limited in limited services or fast food. The increase was less than expected by 4%. Hours work declined by 13%. The University of Washington study, which is more typically mainstream or more conservative, they looked at not just food service, but all industries with low wage workers. They found reduced hours by 9%, increased wages by 3%, but the monthly pay of these individuals reduced by $125 a month. There was, however, an increase in high skilled jobs of $19 an hour or more. And of course, part of that is you bring in high skilled workers in order to substitute for these low skilled workers and you save money as a result because the high skilled workers can work with more capital goods, more complex capital goods, they're better workers, they're more experienced workers and so forth. The recollection here is that both studies say about the same thing. Increase the wage or the price and you decrease the hours demanded by businesses and you get a reduction in monthly pay. So while there's a benefit in your wage rate going up, you find yourself having fewer hours and as a result your paychecks are smaller, not larger. On average, both studies find a relative substitution of high skilled workers for low skilled workers as we would expect and so businesses bring in high skilled workers and equipment in order to substitute for the higher wage rate required for the low skilled workers. And so we're starting to see this, like in McDonald's, they're substituting kiosks for actual people working in them and of course they've always been doing this, making french fry machines that cooked perfect french fries, hamburgers that cooked themselves and so forth. So the Austrian perspective on the minimum wage law is that it causes some combination of the following things. First, it's unemployment. Generally there's some agreement there with mainstream economists. Two economists, well I'll get back to that. So you get fewer hours, fewer jobs, fewer employers. This can actually drive people out of business. A decrease in job benefits. This is where the mainstream economists fall apart because benefits are subjective. They're very often not detailed. Companies don't have that data and what a mainstream economist can't measure, they ignore. But job benefits are very important. Health insurance, vacation and sick leave, clean uniforms and many other things. And also it decreases job desirability. So these are the other things other than price that are affected by the minimum wage but because they can't be counted and measured very effectively, they're ignored. But you see a higher minimum wage and the job becomes less desirable other than wage. So the employer might make you work harder instead of a four hour shift. They may give you a three hour shift so that you're working the lunch hour or the dinner hour only. And there's no downtime, there's more customers than you can handle. Less sanitary conditions, like for example, well we'll just have to fire the janitor. Less lighting and air conditioning and the list of these things can go on and on. There's an increased demand for high skilled labor and jobs are automated as I mentioned before. Now one of the reasons why Austrians have clarity here, we can tell you exactly what the picture in general is going to be and why the mainstream economists find conflicting statistical results is that we stick with the Ceteribus paribus condition. So when we make a statement about what the minimum wage would do, we're making it under conditions of Ceteribus paribus in that all other things remain the same. We know that all other things are not going to remain the same and that would explain some of the anomalies found by the mainstream. David Newmark, for example, looked at 100 studies on the minimum wage and even though he found 67 of them to show that the minimum wage caused unemployment, that's over 30 that did not show that. Well what the problem is is that if you increase the minimum wage and then it goes into effect nine months later, conditions can change. The economy can go into a recession so that the unemployment as a result of minimum wage would be much greater or the economy could go into a bubble. And so everybody's looking for workers, the minimum wage might not cause any unemployment. As a matter of fact, if you looked at the unemployment rate, it may actually go down if the change is significant enough. So two economists, pretty famous economists, Card and Kruger, came out with a study based on a 1994 increase in the minimum wage in New Jersey and they looked at New Jersey and next door in Pennsylvania and what they found was that the increase in the minimum wage did not result in any unemployment in New Jersey as a result. But again, things can change. In this case they didn't change but a better economist named David Newmark looked at the actual tax payments by fast food restaurants in New Jersey rather than just calling up the businesses and asking them, have you fired anybody as a result of the increase in the minimum wage? Well, if you're just an owner or manager on the phone you're going to say no or some of them might say we hired more. But if you're looking at income tax receipts from these places you've got better data as a result. So Card and Kruger basically fudged the result by using surveys which generally speaking shouldn't be done because survey information is just your opinion at the time. It's not a hard cold economic fact like unfortunately income taxes are. Another thing that we find with higher minimum wage is discrimination. The minimum wage opens up opportunities that wouldn't exist in an open and free market for discrimination. Specifically discrimination against minorities and the inexperienced or young people without any job experience. Those areas low-skilled labor is where you're going to see that discrimination likely to emanate from. Okay, so looking at the unemployment rate in the second quarter of 2017 you could look at any quarter and you'd see the same pattern that results. The total unemployment rate was 4.2% which is about where it is right now. Unemployment for 16 and 17 year olds was the total was 16.4%. So four times the overall unemployment rate. White teenagers ages 16, 17 the unemployment rate was 14.7%. Black teenagers 16 and 17 years old the unemployment rate was 27.8%. And for Hispanics it was 19%. So you see clearly that young people are discriminated against as a result of the minimum wage and minorities are even greater discrimination against them as a result. Now these numbers are going to be affected by other factors but the fact that they look like this and they always look like this going back to the time before the minimum wage when basically there was a free market and in a free market there is no unemployment. If you can hire yourself out for a very low wage you're going to get a job, okay? So this has been the pattern since the 1930s. In this study it looks at European countries from 2004 to 2012. The blue line are countries that have no minimum wage at all and the red line are the countries that have a minimum wage and those countries have different minimum wages but they have one that's effective and it causes a higher amount of unemployment. So the blue line is countries without minimum wage and here's countries the red line with the minimum wage. So it's pretty clear statistically that that unemployment issue is definitely a problem. I mean in a place, any place you would think they would want to maximize unemployment, minimize unemployment but this is an issue that's been around for a very long time and it's obviously hurting people. The fact that teenagers in particular are negatively affected is very problematic because getting a job when you're 16, 17 is very important for just learning the basics about showing up and following the rules and paying attention to your superiors, treating your other coworkers in a reasonable way in a reasonable fashion, treating customers in a reasonable if not deferential fashion. All of those things are very important to learn and future employers are going to want to see that as well. So again, very important, very disruptive to the whole employment process. So minority teenagers for example are very adversely affected by this and then they end up having trouble later in life in terms of developing a career and keeping jobs very, very important. Okay so this graph looks at teen employment, not unemployment but employment and the last hike which was in 2009. Okay so this is an index number of teen employment so normal would be 100, abnormally high would be 110, abnormally low would be say 90. This law was passed in October of 2007 I believe so it was passed but it was not implemented until way over here in August of 2009. So employers knew about this coming increase in their cost of production and so what happened was you have a normality here and you also have the negative influence of the financial crisis but basically things are normal way into 2008. They're cutting back but it's still normal conditions in the teen low skilled labor market and then this is the last month that you could, an employer could pay $6.55 after that the minimum wage increased to $7.20 and so employers were reworking their structure of production buying more capital and high skilled labor and getting rid of low skilled weight and then when you get over here to the final month there's an 8% drop so 8% of all teenagers basically lost their job in two months time. So again it's pretty clear evidence of the unemployment effect. So conclusions, wage rates are determined by market factors. We discussed the leisure labor trade off, we discussed the compensating differentials, we discussed marginal revenue product, all of those go into the complex mix of what a wage is going to be for a particular type of labor in a particular area. So wages in general are much lower in Alabama than say for example in New York City. So the same franchise would be paying much higher price for workers in New York City than they would in Alabama. So if that $15 an hour minimum wage is passed it's going to really hurt not just teenagers, it's going to hurt the entire Alabama economy as a result. So market factors, there is no unemployment in a pure market economy. If there's no impediments to you getting a job then there's no reason why you can't bid yourself lower in order to secure a job in the marketplace. And remember everybody's earning their marginal revenue product so it would be fairly easy to find work out there. In other words there's plenty of work out there at the right wage. Plenty of work, it's just that there are restrictions on workers. So things like plumbers and electricians, you have to have a license in order to work in that area. And so that prevents you from doing small plumbing jobs or small easy electrical jobs that you are competent to do. So it's not just the minimum wage that restricts our ability to sell our labor but there are all sorts of government interventions that protect certain jobs for certain people and keep other people from getting into those professions which would come after your experience as a teenager in a low skilled job. We didn't cover this but wage rates, increases in wage rates are driven by increases in capital. Okay so capitalism, even though it has a bad name, it's all about capital and capital is about technology. So if you have more capital and people can invest in better technologies that's going to end up increasing wage rates and skill rates in the economy because high skilled workers using technological tools can produce more product. And if you can produce more product, it's going to result in higher wages. Of course we also want to see the extension and expansion of the structure of production. So the complexity that we've talked about there with the structure of production is a main driving force. The savings, the capital, the technology is just a component of the evolution of that structure of production. Early job experience improves lifetime employment and earnings. Believe me, I worked as a teenager as a dishwasher in a hospital food facility. So you would not believe the mountains of garbage and filth that I had to deal with every day and it was one of the reasons why I decided I'm going to get an education and be a professor. And once I got into college I said, you know, that's the kind of job I want. Four classes is that it? How much money? And that's again, I mean, that's what teenagers need to experience. And it's something unfortunately, it's not just the minimum wage but other factors in modern American society that are preventing many more teenagers from not even being in the job market at all. And also one of the most important points to take away and this is something that's not unique to the Austrian school but the Chicago school, the UCLA school is that minimum wage laws hurt precisely those people that are supposedly intended to benefit from increases in the minimum wage. It doesn't benefit the people who need those jobs the most and would be willing to work for a low wage. Like for in the 1970s for example, going through the stagflation and high unemployment rate of the 1970s and early 1980s, a lot of homemakers, mothers entered the workforce in minimum wage jobs to keep their family standard of living up, going through that inflationary period and high unemployment and what that did though is it kicked minority teenagers out of the market as a result. So it didn't help the people who needed it the most. Teenagers, minorities, the disabled, the handicapped, it helped middle class housewives supplement their household budget so it hurt precisely those that it supposedly intended to help. Thank you very much.