 The next lecture this afternoon is on the minimum wage and a lot of people think that they know About the minimum wage They've worked for the minimum wage. They've seen the supply and demand graph They know minimum wage causes unemployment, but that's not the whole story and there's a lot of confusion there's a lot of debate about the minimum wage and Economists seem to be Not of one mind on this topic. So there's a lot of people who didn't show up today Because they thought that they knew All the stuff that you're gonna know and they're gonna pay Yeah, the other lecture is theory and history by David Gordon. They are gonna pay Okay, and this was a topic in the original Mises universities That were organized By Murray Rothbard himself We go through two days of all the methodology lectures that you've seen Already and at the end of the second day the example That leads from The methodology and theory Was a sub subject to a lecture on the minimum wage itself So this is something that we don't cast off. This is a this is a great example It's a classic example of economic analysis And we're gonna see in here why there's confusion and why there's debate It's and it's because people don't understand in depth What the minimum wage does? In addition to minimum wage, there's a lot of topics legislation out there about having a living wage in certain countries and Certain cities and so forth Equal pay for equal work is always in the news and a lot of that stuff is on the ballot. We've seen many minimum wage Ballot measures in the last several years on the city and county level But it's sort of been taken off the table since 2009 at the national level So we're gonna deal with the confusion and we're gonna provide the Austrian approach to the minimum wage Which will really clarify things in our thinking. Okay, so what is the minimum wage? Well, it's simply a Floor a legal floor on how much labor can be paid on an hourly basis So currently the federal minimum wage says that employers cannot pay less In their paychecks then lower than $7.25 an hour so it prevents people from making contracts below that specified level Even though both parties to the contract may think they're gonna benefit from it You can of course pay much higher wages, but you can't pay lower 31 states have minimum wage laws that are higher than the federal law The state of Alabama doesn't even have a minimum wage law So we're stuck with the federal law and I think there's four or five states that simply do not have it and then again recently Cities mostly on the West Coast Have adopted much higher minimum wage laws in Seattle. It's eventually gonna go up to $15 an hour Okay, so this is the conventional analysis So you've got a demand for labor What employers are willing to pay for workers the demand for labor is basically How much productivity? Labor or additional labor can provide a company So they're looking at it purely in a market situation employers are looking at how much to hire Based on the productivity of labor. So other considerations are very Very little or none at all in the minds of employers They don't really care The supply of labor is what you and I are willing to provide at different wages So at a wage of $1 there's not gonna be very very little Labor forthcoming, but if you go to the equilibrium level here, you're gonna get a greater quantity of labor into the market and if you Set a minimum wage law above equilibrium so that it's an effective legal Decree the quantity of labor supplied is going to increase To a very high level and we're talking about here Low skilled labor we used to call it unskilled labor But in the era of political correctness people have been taking exception to that that you know if you're working at a minimum wage job and somebody calls you unskilled Little it is a little insulting So but at this high wage this high minimum wage Employers only find it profitable to hire a very small quantity of labor So this is the straightforward price theory approach that you see in mainstream textbooks. This actually leaves out quite a bit Professor Jeffrey Herbiner said in the opening day or the Monday that He was talking about price theory and and how economists agree that price theory is important even Milton Friedman wrote a price theory textbook and it's sort of the bread and butter of Economic analysis prices are the most motivating factor within a market economy, but That's assuming a great deal about all other factors other than price And we see this come alive in the war on drugs and we're going to see this come alive with a minimum wage But you can bet that all sorts of government interventions are going to have price effects But they're going to have other effects as well And in this case they can be very important and this will help clarify our Analysis of what the minimum wage law does Okay, so in this dispute in this confusion within professional academic economists, we have some people Such as this person who says there's just 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 quote the market for labor Isn't like the market for say wheat Because workers are people now on the other hand We have important Mainstream economists who believe pretty much the exact opposite 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 very much want to believe that the price of labor unlike the price of gasoline or Manhattan apartments Can be set based on considerations of justice Not supply and demand without Unpleasant side effects Okay, so the first person that I quote is This person that's Paul Krugman former professor of economics at Princeton University in the Leight institution Editorial writer for the New York Times and Nobel Prize winning economist okay, so it may seem silly but Some people must believe in him Now the other quote which seemed to be the exact opposite you can probably imagine who said this oh It was Paul Krugman, too So even within the same person there's a great deal of confusion here as There always is with Paul Okay So recently the Seattle thing has been in the news because they're taking the minimum wage up eventually to $15 an hour and there were two important studies done one by the University of California Berkeley Which is tends to be left-leaning I think the city council asked for this study and then the mayor Asked for this study from the University of Washington Which is a little more centrist and the city council paid for one and the mayor paid for the other So in the Berkeley study They very much wanted to downplay the adverse Effects of the minimum wage as a matter of fact the economists on this team have done a lot of work a lot of sophisticated work To try to measure the effect of the minimum wage By overcoming the problem of Keteris paribus or Ceteris paribus They looked at only the food service industry the increases in wages were from anywhere from 11 to 13 dollars They saw little or no change in pay wage pay and employment in full service Restaurants okay, so this is where you're getting full service You don't go to the counter you get led to your table and there's tablecloths and a waiter comes out Takes your orders delivers your food fills your water glass and so forth Limited service increases less than expected by 4% Okay, so they they were thinking it was going to increase it by 18% But in fast food restaurants the increase was only 4% and what they did find Was that hours work declined by 13% they didn't really find Much unemployment in terms of people losing their job But when you looked at the food industry as a whole the number of hours worked Decrease so our graph in a sense wouldn't capture that because the number of people Didn't change that much, but the number of hours that they worked Fell by less than their increase in wage rate University of Washington wanted to show That the minimum wage did have an effect negative effect on labor So they looked at not just food service, but all industries with low wage workers So they expanded their reach in other words and what they found was that it reduced the number of hours work by 9% and only increased wages by 3% So you're taking a global look at firms here so that the increase in a minimum wage for the entire firm Only ended up increasing wage rates within the firm by 3% But the number of hours work fell by 9% so the monthly pay Was actually reduced and they found that high-skill workers earning $19 a more An hour actually those jobs increased so what was going on in these firms was that they would be Reducing the number of hours to the low skilled workers and hiring high skilled workers To take up the slack so you can get a high high skilled chef or cook for example and Get more of them involved in the process and reducing the number of Water boys and you know people clearing dishes and that sort of thing So you have one group trying to minimize the effect and one group trying to Maximize the effect But both of these studies basically say the same thing Okay, that the effect of the increase in the minimum wage did not really Necessarily reduce the number of jobs Within firms at least initially. This is a short-run effect Not a long run effect. This is a short run effect So the increases in wages or the price of labor decreased the number of hours Rather than the number of jobs and reduced monthly pay So the workers here probably wouldn't Think this is a good thing. They might have to work an extra job to make up for the difference Both studies found a relative substitution of high skilled for low skilled jobs So the people just entering the workforce There were fewer jobs available for them, but people with higher skills went up in number and Eventually when we go from the short run to the long run will not only see more high skilled workers and fewer low skilled workers But we'll also see more capital Replacement like McDonald's right now is responding to these higher minimum wages by installing kiosks in their restaurants Once you buy the kiosk it is basically going to be there at the counter taking orders forever and ever and There's very little ongoing expense To having the kiosk there. So once you buy it, it's going to last for maybe a decade And eventually those kiosks will be replaced by even better kiosks And it's worthy to note that even though the effects were Relatively mild in the short run remember mild in the short run Seattle is a bubble city That's where Boeing is located Microsoft is located Amazon is located in Nordstroms So they have four very high-end large corporations That have high skilled workers They're all headquartered right there in Seattle and The last time I checked Seattle had more construction cranes You know the construction cranes you see around town. That's a very new phenomenon I've been in Auburn now for 36 years and the first one of those type of large cranes didn't show up until About 2015 There were more construction cranes in Seattle than in New York City in Los Angeles combined So that's in Seattle is a relatively small city so You wouldn't expect In other words you would most expect people in Seattle to be willing to not notice small increases in prices Okay, so the Austrian perspective I'm sort of introducing it a little bit of at a time here The minimum wage law causes some combination of the following effects One is unemployment This comes in the form of fewer hours fewer jobs and fewer employers Especially small business one of the things that if you follow the news out of Seattle and San Francisco and some of other areas where they've increased the minimum wage some of the classic mom-and-pop restaurants That have been around and people consider them You know institutions in their community have had to close their doors because of hot requirements for higher pay health insurance Those sorts of things the employer tries to adjust But ultimately it's very difficult for small traditional mom-and-pop businesses to adjust It's much easier for something like McDonald's that has research and development departments and strategy departments To make those adjustments and they have the capital To do things like go out and buy a million kiosks The second thing is decreased job benefits. So there's many margins on which business owners and To a lesser extent their employees can adjust to a higher minimum wage In none of it's very good. For example at the high-end health insurance Which is not really an option at many mom-and-pops or even fast food restaurants but for example Waffle House provides or offers health insurance to its employees, but When the minimum wage goes up the You know the cost of health insurance is just too great. Nobody opts for it Vacation the six days and then little things like who pays for uniforms who pays to have uniforms cleaned There are many many multiple things that employers can adjust You know if there was an increase in the minimum wage here in Alabama and Jeff had to raise my salary in in response to that He might end up turning down the air conditioning or you know Having a lower quality toilet paper purchased There's all sorts of things that might be done and You've got to be you have to be an Entrepreneur a business owner to know all those margins because every business owner is Always looking at those margins or having other people look at those margins for them Jeff doesn't actually Make the purchasing decisions on toilet paper Decrease job desirability. Okay, this is where some of these other things come into play. For example, make you work harder For example, instead of an eight-hour shift at a restaurant Where you have plenty of time in between lunch and dinner Doing odds and ends Maybe the employer will only have you work from Say 11 to 2 and then other people come in from 5 to 8 So you've got to go back and forth. You got to transport yourself twice in order to Accumulate the same number of hours less desirable Less sanitary conditions I worked in a hospital cafeteria When I was in high school and There was a big increase in the minimum wage which everybody was rejoicing over but the janitor what his His job went from a full-time job to a part-time job and and so It was a high school student that came in the afternoon to do the janitorial work and then the night crew actually finished the janitorial work and The full-time with benefits person ended up being replaced and Then you know little things like lighting air conditioning heating Etc. All those margins can be adjusted and none of it is in really in the favor of the workers Then there's an increase in the demand for high-skill labor as we saw in the restaurant studies and Some jobs are automated with capital either partially or completely. This is something that employers are always doing they're always automating things or adding capital to make workers More productive It's just that when you see or you anticipate increases in the minimum wage You see a flurry of these developments one of the Really nasty things about the minimum wage is that it causes discrimination Remember earlier. I said that the demand for labor was based on how much labor could produce how productive it was How much could be produced and what could we sell it for so it's hard-nosed Counting exercise by employers as to how much to hire but with a higher minimum wage You have an uncompetitive situation basically you have More people willing to work at the minimum wage Then there are jobs. So now employers Get to pick labor from a large pool of workers It's not like cutting-edge supply and demand competitive situation so employers can now Service their tastes for discrimination I tell my students Something with respect to rent control, which is also a classic example of Economic analysis in rent control The prices are held down rather than being held up and in holding down the prices There's not enough housing For everybody and so I tell my students I select one student. I say you've got an apartment But instead of six hundred and fifty dollars renting it you have to rent it For two hundred dollars or less because of rent control and then I asked the class I said Who do you think is in this room? Everybody in this room. Who do you think and we all want apartments? Who do you think is going to get that apartment? We know in advance. Who's going to get the apartment? Does anybody know no me? I'm going to get the apartment Or else Okay, so this is from 2017 second quarter Unemployment statistics Total unemployment was four point two percent. So we looked at the entire labor force The unemployment rate was four point two percent. It's about four percent right now for teenagers The unemployment rate was sixteen point four percent So teenagers are the lowest skilled workers within the labor force And so they get shut out of the decision process They get shut out of jobs And if we break down teenage unemployment White teens have an unemployment rate of fourteen point seven Black teens same age Twenty-seven point eight that's actually come down significantly this year, but there's still a difference here there's a difference between teens and everybody and there's a difference between black and white teens and Economists have long speculated that the reason for higher rates for teens than on average Is because of the minimum wage law you'd rather have an employer would rather have a more skilled More experienced somebody who's interested in a job long term Than somebody who's going to come and go Doesn't have the skills is going to need to be trained and then Next year somebody else is going to have to be trained. So they exercise Discrimination here between adults and teens and then there's also discrimination shows up between white and black and Hispanic teens as well So a lot of just a lot of discrimination in the economy is a result of these kind of Interventions such as the minimum wage law Okay, now this slide looks at employment in the European Union from 2004 to 2012 and What it looks at is the blue line is the unemployment rate in countries without a minimum wage and The red line is the unemployment rate in countries with a minimum wage So this is kind of a natural experiment so to speak Where we divide Europe into the countries with a minimum wage and without a minimum wage And it's worth noting that in countries and states without minimum wages Things do are not catastrophic And actually in the long run it works out better so as We're in the the bubble the unemployment rates are falling and the states with minimum wages is actually getting a little closer to the countries without the minimum wage But then when the crisis hits The unemployment rate in countries with the minimum wage actually expands enormously From about six and a quarter percent up to twelve percent and in some of the countries with a more binding minimum wage We see unemployment rates much higher than that and teenage unemployment 25 30% in contrast to that with countries where you can set your own wage the unemployment is lower and has less of a negative Reaction to the crisis in the in the European economy after 2008 Here's another little piece of evidence Teen employment and last hike in the minimum wage law which was in 2009 So we haven't had an increase in the minimum wage law in the United States in nine years But this is the economic crisis January 08. That's basically begins in late 07 but was relatively insignificant until 2008 and so Employment at the beginning of the study was about an index of 111 And employment decreases throughout You get to July of 09 The final month of the previous minimum wage so it was 655 and then it was bumped up to 725 an hour So basically you have a decline here of about 10% Over 18 months so a 10% decline in the crisis over 18 months And then when the new minimum wage kicks in here in July of 09 You get a decrease of almost well. It was about 8% within a matter of three months So that had a significant deterrent to employment when the minimum wage increased Okay, so the conclusions here Wage rates determined under market conditions the relative scarcity of human and non-human resources Determined wage rates There is no unemployment in a pure market economy. We didn't cover that But that's basically a conclusion that Austrians have been drawing that if we don't have intervention in the market economy Then everyone would always be able to get a job somewhere at some wage rate And that's important because if teenagers can get jobs Which right now it's it's very difficult to do that in Europe and in the United States They get job experience and you you're thinking well Is Thornton really using those janitorial skills? Or the dish washing skills that he learned in the hospital cafeteria. Well, no, I'm not but It teaches you things like how to behave at work showing up for work on time Being responsive to your boss Doing good deeds for the consumers And being on your best behavior those things are things that will serve you well Throughout your professional career no matter what it is Wage rate increases are driven by increases in capital and savings and the extension and expansion of the structure of production in other words the people who advocate The minimum wage the living wage equal pay-for-equal work Have no idea of What wage rates are based on and how to increase them? The Austrians have done a lot of good work on showing that in economies that are progressing its savings Which gets turned into capital goods by entrepreneurs as well as new technologies which makes workers More productive and ends up increasing wage rates So the very first thing we need to know is not what the wage rate should be But how do we get into a situation where wage rates are increasing? Where the number of jobs are increasing rather than the opposite? And as I mentioned just previous early job experience improves lifetime employment So the fact that you have jobs as you're a young person and in high school and You're familiarizing yourself with the basic demands of work and pay Those are skills that are gonna Do you well throughout your professional career? The people who don't get those jobs as teenagers and as young people Those people very often fall into the welfare trap and they never really fully get into integrated into the market economy and as a result tend to be problematic For society in the sense of having to support them On welfare or in prisons things of that nature and The most basic thing that we can conclude from the minimum wage when you look at The some of the facts that I've listed is that the minimum wage actually hurts Those it was intended to help so those fast food workers Who lost hours? Were displaced by the high skilled workers in those same restaurants So the high-skill worker who's already making a decent salary They're benefited At the expense of the people who lost hours or didn't have jobs available To them At all So how do we help the poor? We have to know what causes wage rates and we have to know what raises Wage rates but in a more general sense in order to help the poor There's a lot of things that we can do number one is eliminate the minimum wage and compulsory education There's a lot of ways you can downplay compulsory education But especially if you're in a lousy public school It would probably be much better for you to start getting jobs and work experience Because job experience leads to higher wages down the road Three eliminate monopoly grants by the government monopoly grants Unions tend to restrict employment opportunities in all sorts of fields and ultimately some people get left In a very negative situation We want to lower the cost of living and increase opportunity and monopoly grants Raise the cost of living and reduce opportunity. So eliminating monopoly grants by governments Improves the situation of poor people immediately So there's all sorts of profession. There's all sorts of industries where the government gives monopoly privileges by requiring licenses giving away patents Creating government jobs all sorts of things that the government does which grants monopolies Which increase the cost of living and decrease opportunity? Number five eliminate taxes on labor Every time we raise taxes on labor. We reduce the net Pay basically of workers. So the income tax Social security taxes Unemployment taxes, there's all sorts of things to get taken out of our paychecks Which makes the poor worse off it makes everybody worse off, but especially the poor Encourage higher wages and income and creating more jobs by eliminating Taxes on labor and then finally eliminate the welfare trap the welfare trap The for the people who don't get the minimum wage because they can't find a job They end up on welfare. So the government is giving them food stamps income support public housing all sorts of things And if they were to go out and get a job and earn some money The government would just simply take away the money on the other side So I was talking to somebody Just yesterday and One of his relatives was in the Marines and When he got out he was in a car accident and he ended up being a paraplegic and He was on welfare as a result of that But somehow or another and I don't know how he could do this, but he found ways of making money He had three different jobs one of which was selling real estate But if he reported his real estate commissions They would have taken away his housing support so in some sense it's hard to feel too negative about people on welfare because they're caught in a trap and Many people find it rational not to do anything and collect the welfare benefits or work in the underground economy Work in the black market and that sort of thing because welfare is an awful pernicious trap for people Since at least 1965 Okay, I'm just going to finish up here with a couple of things that need to be said About misconception regarding labor a lot of these advocates for changes in wage policy They believe that employers determine wage rates and working conditions. It's a one-sided affair The the employer sets the wage and that's it Well now I know for certain that when I was working at Auburn University If the president of the university or the dean of business Had to say so as to how much I got paid He might pay me minimum wage and when you're only working nine hours a week That means my pay would be dramatically cut If I was making the decision as to how much I was getting paid Well You can imagine It's not employers. It's not employees No single person determines wage rates in professions in the market economy People still have the idea of the Malthusian trap after Thomas Robert Malthus He said that if there were Any increases in wages that workers would simply eat more and have more children Driving wages right back down to subsistence But of course subsistence in Malthus's days Was so much lower than it is today Even people on welfare are so much better off today Than the king of England during Malthus's day They've got automobiles. They've got TVs. They've got cell phones So even the lowest sort here in the United States is broken far out of the Malthusian trap Then there's also this misconception that unions help labor That labor laws help labor that if what wasn't for unions American workers would still be working 80 hours under horrendous conditions But unions don't help labor unions only help Union members and when they help union members They actually hurt the rest of the labor force and so under capitalism The conditions for workers have improved Remarkably in the United States and we've we've seen that as other countries have opened up into market like economies That workers in those economies are also much better off. Basically you go from a subsistence Bear subsistence in a non-market economy Such as we see in North Korea such as we used to see in India and in China now for a large portion of their workforces has Almost Western standards of living and the number of people in extreme poverty Has declined by 200. I think it's 200 million people in the last 10 years. So capitalism Not surprisingly is the way to go. Thank you very much