 This lecture is on the minimum wage. I know it sounds like a simple straightforward type of issue, maybe not as consequential in terms of the overall economy. But it is a good way to illustrate the Austrian approach to economic analysis versus our mainstream friends and how they approach economic analysis. And also the minimum wage is indicative of the amount of government intervention in labor markets more generally. So if you see a political unit with a high minimum wage, chances are it's also going to have a lot of other similar types of government interventions. This is also related to a certain extent to other hot topics in the media these days. In addition to the minimum wage, of course, there's equal work for equal pay, the living wage, all these things are in the news on a fairly regular basis these days and increasingly on government ballots. So the main thing, some of the main topics that we're going to look at here is the fact that the minimum wage law is a classic example of economic analysis of government intervention. As I said, it's related to other issues, issues for which there's a great amount of confusion between various political ideologies on the left and on the right. This is a very ideologically driven issue. As I said, it's not all that consequential, but there's a lot of people that have strong views on both sides of the issue, and just as a disclaimer to this whole lecture, I just wanted you all to know that I actually do hate the poor. And as a result of mainstream analysis of this issue, there's a lot of confusion. It seems like one study will come out and exonerate the minimum wage, say that it doesn't have a negative effect, and then other studies which actually do come out and say it does cause unemployment, it does hurt various groups. And so there's a lot of confusion about this issue, and Austrian economic analysis brings a lot of clarity to this issue. And so the Austrian approach to this is a little unique. We don't necessarily expect an immediate increase in unemployment across the economy, for example. As a result of a new minimum wage or a higher minimum wage, there's a lot of other factors in the Ceteris-Perovis condition where we hold all things equal in order to be able to make that statement. So for example, if I said that the city of Atlanta has just voted, or voted at one time, to increase the minimum wage from the federal level of $7.25 to $10 an hour, starting at the end of June 1996. Well, you would think that's a pretty big increase. Atlanta is a relatively low wage city, so we might expect a great deal of unemployment as the figures start to come out. But at the end of June of 1996, of course, the summer Olympics began in Atlanta, so that would completely obliterate the fact that we could hold supply and demand for low-skilled labor constant. There would be a big increase in the demand for low-skilled workers in July of 1996 in the city of Atlanta, so we can't make any perfect predictions about these things because of other factors that we want to consider. And in addition to that, changes in the real world, Austrians take a very holistic examination of labor markets in all of the factors that might impact employment and the well-being of the employees that are being affected. So before we get to that, basically, minimum wage law is a floor on payments to labor. In other words, people are not allowed to contract between employee and employer below a certain level. So you can pay higher than the minimum, obviously, but not lower. Currently, the federal minimum wage law in the United States is $7.25 an hour. That goes across the country, you can't pay less than that. 31 states have higher minimum wage laws. In some cases, it's only like $7.30 an hour. In other cases, state law can bring it up close to $10 for the minimum. And then, of course, most notably, cities around the country have enacted higher minimum wages in their cities than their state or federal law would permit. And of course, we'll concentrate a little bit here on the city of Seattle because it's in the news on a regular basis. An article was just posted on Mises.org about the situation in Seattle. But other places have done it as well. So 31 states have higher minimum wage laws. 14 states are equal to the federal minimum wage law. And five states have no minimum wage law. And so you find those states without any minimum wage. You still have to pay $7.25 an hour. But they never had reason to pass a minimum wage law because they know that it would hurt their businesses and their workers. And so states in the poor south, which includes Alabama, don't have a minimum wage. So it's the realization of the negative impact that the minimum wage could bring about. Now, conventional economic analysis, the types of studies that you read about in the media are based on a simple supply and demand framework. And so you have the wage law here setting the minimum so that wages can't go below that level, where the market wage would be down here. And so as a result of this higher wage, the demand for labor, employer's demand for labor is reduced and the supply of people wanting jobs increases. That's very important to determine who exactly is being unemployed in this market. Now, this looks, first of all, it makes it look like it's a drastic effect on the labor market. But this is only the market for low-skilled labor. It's a very small segment of the labor force, about 2% of the overall labor market is this low-skilled labor market. And so your expectations of the amount of unemployment that you would get, this graph kind of exaggerates. And it's also important to note that over time, even though you might not get any increase in unemployment immediately, that over time employers are going to adjust and so the unemployment effect of the minimum wage law can actually get worse over time. But notice this really gives the mainstream economists very little information to work with. They have two data points. Basically the price of labor or wage rate and the quantity of labor that's employed or unemployed. Austrian economic analysis is going to take a much more holistic view so that we actually try to understand what's going on in labor markets beyond the two data points of wage rate and amount of employment and unemployment. As a result of their bare-bones approach, there's a lot of confusion within mainstream economics about what's going to result from a minimum wage. Okay, so on the one hand, you have economists who say, and I'll read this for those in the back, quote, 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. Okay, so on the one hand, the minimum wage does not cause a loss in jobs. On the other, we have economists who believe, 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 that of gasoline or Manhattan apartments, can be set based on considerations of justice, not supply and demand without unpleasant side effects. So, one group say there's no evidence that it costs jobs, and the other side says it's obvious that it's going to cause jobs. And Sue, who are these people who said these quotes? Well, on the first hand, it's Paul Krugman. But on the other hand, it's Paul Krugman. If you write long enough and unorganized enough as Paul Krugman does, eventually you will end up taking both sides of every issue. More recently, of course, the debate that's in the media today is the Seattle minimum wage debate because studies have been coming out examining the effect of Seattle's move from $11 to $13 to $15 an hour. It's staggered and it's confused because if you pay health benefits, you can be exempt. If you're small business, you can be exempt for a little while. And so it's a lot more complicated than that and difficult to study empirically. Okay, so the University of Washington study came out and it looked not just at food service, but for all industries with much in the way of low wage workers. And they found that it reduced the number of hours worked in those industries by 9%. They found that the increase in wages in those industries was about 3% because it's looking at the entire workforce in these low wage industries so you don't get a big 18% increase. And this reduced monthly pay by $125. So if you were a low skilled worker working in a job, you got an increase in your wage rate, but you also lost hours. And so you ended up with actually a smaller paycheck. And also they found that in these same industries that there was a big increase in the hiring of people earning $19 or more. So in other words, skilled labor, their output actually expanded. So we're not talking about the dishwasher, we're talking about the cook or the chef. Now, in the University of California at Berkeley study, and by the way, the University of California at Berkeley study came out mysteriously very recently. It seems that the University of Washington study, a draft of that was shown to the city council and the mayor. And the mayor made a special call to Berkeley because if you want a positive spin on the minimum wage, where better to go than Berkeley? The People's Republic of Berkeley. And so their study finds that the increase of 18% from $11 to $13, that there was no change for labor in the high-end restaurants, restaurants where you get waited on, there's people dispensing water and drinks, so on. So this is the relatively high-skilled people within the food industry in Seattle. So these people could be exempt if they collected tips or if they gave healthcare benefits, but they actually saw an increase in employment within this group of in the food service where you're getting full service. In the limited service or fast food industry where you're not waited on, you do, you bust your own table, you bring your own food to the table, you get your own drinks, you get your own napkins. Limited service, they saw increases of about 4%. And they saw a decrease in the number of hours worked by 13%. And so if you increase wages across the food service industry by 4%, but hours worked declined by 13%, which is not surprising, giving that the minimum wage increases by 18%, then your paycheck is going to decline, although the study itself didn't, I didn't see any actual numbers about that decline. So the University of California at Berkeley had a very positive spin, no harm here, not much harm here. The Washington study found that there was basically, for low-wage people were hurt, their paychecks were lower, and high-skilled workers were helped. Now in the press, this is discussed as if it's one side versus the other, but actually both studies say similar things. You would never know it just by reading the New York Times or the Seattle, whatever the newspaper is there. It's always one versus the other. But if you want to look at both studies carefully, they both basically say the same thing, that higher wages led to a decrease in the number of hours worked and that reduced monthly pay. So in the immediate run, the response in terms of the employers was not to fire people, but just to take away their hours. It takes some time to reduce your workforce. You know, you don't want to work in a place where the employer comes in and you say, okay, you three out of here. That's very bad for morale. But if you reduce people's hours, some people will quit and you'll end up creating unemployment over the intermediate term. And both studies find a substitution of high-skilled workers for low-skilled workers. Okay, whether it's low-wage industries or the food service industry, basically you saw relatively more of the high-skilled workers getting their jobs, keeping their hours, or finding more employment when the real harm comes to the low-skilled people. Okay, and also they kind of left out, although there's a lot of debate between the two teams, but Seattle, Washington is the biggest bubble in the world right now. Okay, it is one of the coolest cities and they have great employers that pay high wages, Boeing, Microsoft, Amazon, Nordstroms. These are all kind of very trendy, big and important industries, companies. And the Seattle area is in a complete and utter bubble. You've probably seen the construction cranes in Auburn. Actually, for a couple of days we had three of them in the city. We've never had one in the past. In Seattle, the super-high construction cranes, the ones that go up 40, 50, 60 stories, there are now more super-high construction cranes in the city of Seattle than in the city of New York and Los Angeles combined. So there's a bubble throughout the American economy, but the bubble is most intense in these trendy cities like Seattle, which is the best example of what's going on. Okay, the Austrian perspective, the minimum wage law is going to cause some combination of the following effects. So again, we're looking at multiple effects, not just unemployment, but certainly unemployment is one of them. We expect first fewer hours than fewer jobs, ultimately fewer employees, excuse me, employers. And for the employers, hardest hit will be small businesses, small businesses that don't have corporate headquarters that can steer them through the troubles that the minimum wage brings about. So mom and pop restaurant can't adjust the same way that McDonald's can. So McDonald's has responded to this wave of minimum wage law increases by developing and now installing kiosks. And I've seen them not in Auburn, but around, where you place your order into a computer kiosk, and so that eliminates the person who takes orders and makes change. It's all automated, you pay with a card. So that's going to happen. There's going to be a decrease in job benefits as a result of increases in the minimum wage, so you can expect things like, these are things you've heard of, health insurance, vacation and sick days, or even clean uniforms. So some businesses provide you with a clean uniform to wear every day you come to the job. Other places might give you a couple, but you've got to clean them and so forth. So those kind of benefits can be diminished as a result. So the employers, the contract seems to be just wages and hours, but it also implies everything else about the business, everything else about the job. So that employees should experience less job satisfaction. As the minimum wage is raised, you get more dollars, but you get less employee satisfaction from these other aspects of the job. Then decreased job desirability. Okay, these are things that are also under the control of the employer. So for example, the employer can make you work harder. So instead of coming in at lunch from 10 to 2 to work at a restaurant, you may come in at 10.30 and leave at 1.30. The easiest hour is at the beginning and end of lunch when there's very few customers, right? The hardest part of the job is when there's always a line waiting to get in to a restaurant. They can make you work harder. They can hire janitors for a smaller number of hours so that the place is dirtier, greasier, whatever. They can reduce the amount of lighting. They can reduce air conditioning just by changing the thermostat or heat. All of those things can be changed by the employer. And then on the capital side, you see that an increase in the minimum wage for low-skilled workers can increase the demand for high-skilled workers. And we saw that in both the Berkeley and the University of Washington study that the group with high skills actually saw an increased demand for their labor and possibly even an increase in their wages. And then of course I already mentioned that jobs can be automated with capital. McDonald's is nothing but a study in the replacement of labor with capital. The more increases you get in the minimum wage law, the more likely you are to see automation as part of the workforce. Again, small businesses can't do something like this. They don't have corporate headquarters working on a kiosk for their business. The minimum wage law can also lead to discrimination. Remember at the very beginning I said that raising the minimum wage decreases the demand for labor and increases the supply of labor. So that now employers have a choice over a wider variety of possible employees without any differentiation in wages. Potential employees cannot compete on the basis of wages. And so this opens up the potential for discrimination in labor markets. So when the minimum wage is increased, we see an influx of middle and upper income teenagers entering the workforce. We see housewives get into the workforce with those higher minimum wages. So there's a much bigger supply and much less demand. And so this opens up the opportunity for employers to discriminate. In other words, if they do have bias in their heart, this allows them to exploit that bias in the workforce by choosing either more productive people or just people they would prefer to work around. When discussing this at Auburn University with my freshman students, I say, well, let's look at rent control, which is a similar type of price control. Let's say Auburn passed a rent control where apartments could be priced at no more than $200 a month. And I've got an apartment that I used to be able to rent for $550 a month. And you own the apartment. And I want you to tell me what person in this room, if I want the apartment, he wants the apartment, he wants the apartment. Everybody in here wants the apartment. Who are you going to rent the apartment to? Or you'd rent it to me. Yeah. You're going to rent it to your teacher. Well, that's the same thing goes on in labor markets. People can exploit their biases in the form of discrimination of the employees that they hire. So there tends to be a lot of discrimination against minorities. There tends to be a lot of discrimination towards people without any experience. Or there's more discrimination against people who have, for physical, mental, whatever reason, have lower productivity than the average person in the low-skill labor market. So we would expect to see minorities and teenagers and others with much higher unemployment rates and actually some mainstream economists actually get this point about discrimination. I don't want to insinuate that they don't. So let's look at unemployment rates in the U.S. economy. The latest reporting quarter, second quarter of 2017, total unemployment rate is 4.2%. That's 100% of the labor market according to the Bureau of Labor Statistics. So unemployment is relatively low right now. If we looked at all teenagers, people with low levels of experience, the unemployment rate is 16.4%. Now if teenagers could offer their services at less than $7.25 an hour, we would expect that the difference between total unemployment and total teenage unemployment to be almost zero. It might be a little above or a little bit below, but we wouldn't expect this huge difference here between the total market and the market for teenage unskilled, unexperienced workers. White teenagers actually have a lower unemployment rate than total teenage unemployment. So employers are marginally discriminating in favor of white teenagers. Black teenagers, however, have an unemployment rate of almost 28%. So there's evidence that employers are able to discriminate against black teenagers, although there are other circumstances that we'd like to take into consideration, like the location of people, the location of jobs and so forth, that might reduce that differential. Hispanic teenagers fall somewhere in between about 19% unemployment. And the thing about this is that learning to be an employee, to work in the workforce, to integrate yourself into a job is very, very vital, especially if you're from low income or even lower middle income, getting job experience. And it's not like learning how to wash dishes type of experience. It's like experience of showing up for work, ready to work on time every day that you're scheduled. You need to learn that kind of thing early on because if you don't and you fail to learn that quickly and early, your outcome in the labor market over the course of your life is going to be much diminished. Okay, so basically, Austrians have a different, more holistic approach to this and it's not just a matter of wage rate. It's not just a matter of the number of people employed. It's how many hours are they getting? What kind of job satisfaction are they getting? What kind of non-wage benefits are they receiving? What are the conditions within the workplace? All of those things really matter. They're not accounted for in any of these studies. This study looked at the average unemployment rate in the European Union with countries with a minimum wage and without a minimum wage. They're asking, oh my God, there's countries without a minimum wage? When they just explode and fall apart and the world would come to an end? No, I think it's like 20% of the European Union countries don't have any minimum wage and typically they have very low unemployment and they have relatively low teenage unemployment. Actually there was another study about Denmark. In Denmark, they have a minimum wage for teenagers and their teenage unemployment statistics look pretty good. But once you turn 18, the minimum wage for 18 plus goes up by 40%. Not surprisingly, a lot of people on their 18th birthday lose their job. It's an enormous difference that occurs on the 18th birthday. So we know that that unemployment is the result of the jacking up of the minimum wage at that point. But basically the orange line here on top is the countries with a minimum wage and the blue line below is countries without a minimum wage. And this is overall unemployment, not teenage unemployment. So that during the bubble here from 2004 down to 2008, you see the bubble having its effect on reducing unemployment rates and there's not much of a differential here. And then when the bust comes in Europe, the unemployment rate in countries with a minimum wage goes up to 12% and it increases in the bust in countries without a minimum wage to 8%. So the unemployment rate, if we could rely just on this one factor, which we actually can't, but if we just looked at that one factor, the unemployment rate of countries with a minimum wage has an unemployment rate 50% greater than those countries without a minimum wage. So it's fairly clear, it's fairly open the impact there. This is another study in the U.S. that looked at teenage unemployment from January of 2008 at the beginning of the bust to October 2009. And this is all on an index level so that before the increase took place in mid 2009, this is the last time we raised our minimum wage, throughout this bust in the economy through 2008 in the first half of 2009, teenage unemployment decreased by about 10%. So it took 18 months for the unemployment rate of teenagers in the United States to fall about 10%. Either in anticipation of the increase or because of the bust in the housing market. But then after the increase took place, the three months after the increase took place, teenage unemployment fell by 8%. So 10% over 18 months versus 8% over three months. So there was a drastic decline after the minimum wage was increased. And so it's pretty clear what's going on here. The increases in the minimum wage, which took place in July of 2009, really did matter a significant amount when you basically reduce employment by 8% after you've already seen a 10% increase in unemployment. So in conclusion, wage rates determine market conditions, are determined by market conditions, the relative scarcity of human and non-human resources are capital. I don't know why I used non-human resources. That's more of a mainstream approach. And that's very clear from the Austrian analysis. There's no ambiguity in the Austrian analysis. There is no unemployment in a pure free market economy. So anytime we look at situations of high unemployment, what we're really seeing is government interventions or business cycle associated unemployment. Real wage rate increases in the free market are not driven by the political process, but they're dominated by economic processes of savings turning into investment, creating better tools for workers to work with, increasing their productivity, and therefore increasing their wages and their standards of living. So the way you make people wealthy is through savings and investment. Workers are going to get part of the benefit of successful investments in the economy. If you make workers more productive, employers are going to have to pay them more. You're going to develop more skilled workers and less unskilled workers in that type of an economy. So it's also related to the expansion of the structure of production. You expand the structure of production, you produce more product, you have more productivity, wages go higher. That's why wages are relatively high in the United States and Canada and relatively low in Mexico and Central America. It's capital investment that drives that whole process and savings drives investment. And very noteworthy to make is the point that early experience in the job market is vital to the full lifetime development of a worker. And ultimately the minimum wage hurts their intended beneficiary. The minimum wage is supposed to target poor people, people with low income. People have a harder time getting into the labor market. But that's precisely the people who are being hurt. As more people come into the workforce to take advantage of the minimum wage, you're really forcing out those who have low skill levels like teenagers, who have disadvantages in the job market such as minorities, disabled people and so forth. Those are people who are basically driven from the labor market left to their own devices. There are lots of things you can do to help the poor. I've listed just a few of them to give you some idea of the types of things that ultimately help the poor and make it easier for them to transition from being poor into being not poor. That's the key. I would eliminate the minimum wage law and compulsory education. Given the state of public education in certain areas where people are most negatively affected by the minimum wage, I would let people out of school and into the workforce if they wanted to because job experience leads to higher wages over their lifetime. I would eliminate monopoly grants by governments over certain professions so that more people could get into those professions and hire more people to work in their businesses. This lowers the cost of living for everybody and increases opportunity for everybody. I would eliminate taxes on labor. That's no brainer. You get more labor if you don't tax it. You get higher incomes after tax incomes, obviously, if you reduce or eliminate taxes on labor. Certainly we could eliminate a lot of the deductions that people see in their paychecks in terms of taxes and unemployment insurance and all that. If you have a free market in labor, you don't need unemployment insurance. People would have higher wages and incomes and there would be more jobs available. I would also like to eliminate the welfare trap, which people who are eliminated as a result of the minimum wage ultimately find themselves trapped in the welfare system, which again is very destructive to lifetime earning capacity. In final summary, the minimum wage is bad. It hurts their intended beneficiary, and there's a lot better ways that we know would work to make these people better off. Okay, thank you very much. We've got about four minutes. So what are the sides that you used to look at how minimum wage hurts or do you look at the unemployment rates? Maybe in a better way, because I feel that it hurts them even more if we just looked at workforce participation rates. Well, that certainly isn't... You know, you want to look at a lot of statistics. I can't present them all here, but I think it's important that Austrians already look at more of these vital signs than mainstream economists. Yes? I don't have anything on the tip of my tongue, but certainly there have been studies of that that people who entered the workforce at 16 in this type of job do better than someone who enters when they're 20. Now, of course, if you looked at people who stayed out of the workforce and went to college, they're going to do better than the person who doesn't have that opportunity. So it's a little tricky to say that that applies globally to everyone because it certainly doesn't apply in the past at least to students who stayed out of the workforce, went to college and learned both more generally about the world and more specifically about doing an occupation. So basically just kind of taking back off of that. At least this is an assumption I'm going to make. Correct me if I'm wrong. You say that compulsory education isn't the way to help with the poor. So would you say that it doesn't necessarily lead to going to college or would it be connected to it? Yeah, I mean, if you're stuck in a poorly performing school district, I think it's generally, it helps people to get work skills, whether that's part-time and staying in school or whether that's full-time and hopefully transitioning to a higher-skilled job. I mean, I've seen this growing up is that, you know, high school students take particular jobs. I'm thinking one I had myself was dishwasher, janitor type stuff in a hospital cafeteria and some of those high school students would graduate from high school and go to college. Others would graduate from high school and stay in the hospital cafeteria. They wouldn't be dishwashers. They'd probably be cooks and things like that. So it depends on the individual. What I'm hoping to do, what I'm hoping to explain is that you need to increase the opportunities for people and the minimum wage is something that squashes that to a certain extent. Yes? If we were to abolish the minimum wage, I mean, I don't kind of get a point about it on the sticky wages. What would the time frame look like on that? Like in the United States, how long would it take for us to be able to see that? Well, it would take some time. Just as it takes time for employers to make adjustments throughout their business to how many people are working, how many hours, how much capital versus labor, how much high-skilled versus low-skilled, they've got to make all those adjustments. So it's going to take a matter of a few years for things to fully adjust and for people to get used to a different set of knowledge so that the starting salaries for low-skilled workers in hope like Alabama might fall to $6 an hour. In New York City, they wouldn't fall at all. So it depends on the local economy as well. There would be no need for adjustment in certain places and there would be need for substantial adjustment in other places, and so that might take a year, 18 months, two years or longer for a full adjustment to take place. Thank you.