 Like to welcome everybody to my lecture on the minimum wage This past year has been a big Year for topics such as the minimum wage Talk about the living wage President Obama's campaign to raise the federal minimum wage He pushed through and got the ten dollar and ten cent minimum wage for Federal workers or anybody working on federal projects And of course there's the Biketti book on Inequality economic inequality and of course there is a great deal of Widening the gap in terms of inequality in the United States and so a lot of people think that in order to Reform the system to address equality to reduce poverty That it seems like it's a no-brainer Just to simply raise the minimum wage And that's what we're going to be looking at here. Is that really the solution to all of these complex Problems that exist In the US economy So what is the minimum wage? Well in addition to the standard analysis of the minimum wage which you could get in just about any college Classroom in the United States Another thing that we're going to be doing in here is showing the difference and the superiority of the Austrian approach to economic theory In comparison to mainstream economics price theory so You're probably pretty well familiar this in the United States The minimum wage is simply a law that mandates that all payments to labor Reach at least a certain level per hour and currently it is seven dollars and twenty five cents an hour and has been so for Approximately the last six years when it was installed in at the seven dollar and twenty five cent an hour level in July of 2009 in real terms it was one of the highest minimum wages In the United States now of course as inflation erodes away at the purchasing power of that The the real minimum wage has declined somewhat In response to that 31 states Have their own minimum wage laws Mandating that workers get paid more than the federal level of seven dollars and twenty five cents And a lot of cities have actually Mandated minimum wage laws for their cities So particularly in the western part of the United States Seattle Portland San Francisco San Jose Los Angeles have all Established higher minimum wages and they're ratcheting them in so that a lot of those minimum wages are going to go to like $15 an hour over the next couple of years, but it also exists in Kansas City the DC area Maryland and other places have Minimum wage laws that are higher than the state level 14 states have a federal have a minimum wage law, but it's exactly the same as the federal level Five states have no minimum wage law So the federal law applies they don't have any state law and the states without minimum wages are typically here in the south So Mississippi, Alabama, South Carolina places like that So that's just basically what it is and there are a lot of opinions as to what minimum wage laws do And so I've drawn a couple of opinions representing the diverse opposites views of the minimum wage and what it does On the one hand We have the view that there's just no evidence that raising the minimum wage Costs jobs or causes unemployment At least in this if 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 commodities like wheat because workers are people This is obviously someone thinking at a very high level Very high now on the other hand We have people who will say any econ 101 student can tell you the answer and in other words the The stupid of people I have to hang around with will say that the higher wage Of the minimum wage law reduces the quantity of labor demanded and hence leads to unemployment Clearly the advocates of minimum wage laws Very much want to believe that the price of labor unlike that of commodities such as gasoline or Manhattan apartments Can be set based on considerations of justice Not supply and demand without unpleasant side effects. And of course the unpleasant side effects is unemployment So who do you think? Can anybody offer me a guess as to who what prominent person? Is responsible for this quote? Got it Paul Krugman he's a Nobel Prize winning economist Krugman was working at Princeton and For a long time that's where he won the Nobel Prize He's been writing for the New York Times for several years and he just moved his appointment to a university in New York City Closer to his Manhattan Apartment condominium now who do you think said the the other quote? You any one-to-one student can tell you that's going to lead to unemployment Those are good guesses they would have said something like that I Yeah, hi all these great thinkers Bingo I Process of logical deduction over there Well, that's that's a big point that we're trying to drive home is On the one hand and on the other hand, you know that these guys will say just about anything Okay, so what does the minimum wage law do? well from the Austrian perspective the minimum wage It's not just a problem of unemployment Okay, that's not the be all and end all we don't like to work for one thing Only 2.6% of the American workforce is even subject to the minimum wage They're working mostly part-time and they're not supporting families But we're interested in the full economic content and we don't want to get lost by trying to stick with one measure of effect so The minimum wage causes some combination of the following Unemployment okay, it it forces people to be unable to compete for a job based on price or wage It leads to discrimination in the workforce So it puts in particular minority teens at a disadvantage in the workforce because There's more people who want jobs that are going to be able to get jobs and some so some employers Will make their decisions on their personal discriminating tastes They just don't like like tall people or minorities And so the minimum wage gives them an opportunity to discriminate There's a decrease in job benefits All jobs come with some kind of benefits Here at the Mises Institute. We're proud to offer our employees free coffee and tea Without payment we don't have to pay candy Barts and different story But we we have this package of benefits most jobs have packages of benefits Then there's a decrease in job desirability Every job has a multitude of different aspects to it and All of those aspects can be adjusted or dialed up and down by the employer and So when you're thinking about a job Employees do consider the wage or the salary important, but they also consider all the other aspects of Jobs to be important Do I have an office or am I in a cubicle? Is there air conditioning and what level do they set it at? Is it 80 degrees? 75 degrees or here at the Mises Institute 63 Except in my office, which is the only place that isn't cold in the entire building So you can imagine employers can change these things and if they're forced to pay higher money Wages they'll tend to decrease job amenities And then there's also a hidden but just as important increased demand for capital intensive labor So that we are what is that an increase in the demand for capital intensive labor? Well, I see it going back and forth every day from work There's various construction projects and on some construction projects. There's a bunch of guys out there With shovels digging dirt planting trees by hand with shovels Other construction projects I've seen around town. They all have mechanized tools to Do the planting of trees so this one site that had this little tractor and it had this little screw thing That was about that wide and it would go through and dig out the holes To plant the trees Okay, so the guys with the shovels are competing as a guy with a tractor in this drill The guy with the tractor in the drill is probably costing the project Something like 35 or $40 an hour Whereas the guys out there in the heat with the shovels ten dollars an hour each So if there's say four or five of them It's forty fifty dollars an hour to do the same task So low skilled and high skilled are competing against one another and if we raised the low skill wage From seven dollars and twenty five cents an hour to twelve dollars and seventy five cents an hour those low skilled guys Would be at a disadvantage to the guy with the little tractor and the drill and Finally, of course jobs get automated partially or completely So McDonald's for example is rolling out Series of new restaurants Where instead of people taking your order You're going to go up to a kiosk and place the order yourself And that's going to tell a bunch of machines in the back to produce a Big Mac French fries and a Diet Coke And so most of the jobs are automated and lost Okay, so that's the basic effects of the minimum wage I'll be talking about them in more detail as we go through the lecture But I wanted to get a little perspective about labor and the misconceptions about it first of all question First of all employers don't determine wage rates and working conditions It seems as if they do It seems that they get to set the wage and the working conditions And that they have wide latitude in terms of what they do But actually it's the market that sets wage rates and working conditions Okay, when I'm working at Auburn University The president of Auburn University does not set my wage The department chairman the dean they don't set my wage On the other hand, I don't get to set my wage if they get to set it They'd probably want to pay me ten thousand dollars a year If I got to determine it it would probably be something more realistic and in line with my Efficiency and performance Maybe eight hundred thousand dollars But neither one of us Neither one of us get to make that choice. It's the market that makes that choice. It says we've got to offer this guy What's in line with market wages for this type of job and his productivity And then there's other things like the Malthusian trap that employers only pay employees The subsistence amount of living And that that's been a bugaboo Throughout the history of economics But of course we were born or economics was born in a period where a lot of people did get just a subsistence wage And people compare that today with the minimum wage Obviously things have Improved a great deal, but it hasn't been through the with the help of labor or labor laws the whole idea That employers determine everything they only give subsistence wages and if it wasn't for unions and labor laws we'd all be beggars with Barely clothes on our back. This is utter nonsense under capitalism If you look at the real history of capitalism what you see is that real wages have consistently been rising In countries that were capitalistic The work week has fallen In capitalism in other words, we work Fewer hours today than we did 50 100 150 years ago And our real income is substantially higher even though we're working fewer hours child labor in advanced capitalistics economies has been virtually eliminated unfortunately And Workplace safety has consistently improved without government Yes, I'm in I'm very much in favor of child labor Yes, right and as a matter of fact, that's one of the biggest problems with the minimum wage As a matter of fact Alfred Marcho writing in the late 19th century 1888 was the first edition of his principles of economics book which was the dominant treatise at the time dealt with the concept of unemployment on less than one page of the text today, of course We have pretty much a chapter of unemployment in the micro Section and a chapter on unemployment or more in the macro section of most principles texts Ludwig van Mises said that this is a distortion to say that factories Carried off the housewives from the nurseries and the kitchens and the children from their play These women had nothing to cook with and to feed their children These children were destitute and starving Okay, so before the industrial revolution came around Pretty much the vast majority of people were At a subsistence level And starvation and plague were common occurrences so that If you look at the industrial revolution 250 300 years ago The mass production from the factories during the industrial revolution and since We're producing to sell precisely to the masses. You don't have mass production if it's you're only producing for kings and queens and noble nobles maybe the the iphone is not produced just for billionaires and hollywood celebrities Okay, so we're going to cover a little bit of labor economics some of the basics of what's involved here Because once you have a realistic view of what's going on in the labor market, you're better able to understand what's specifically going on in With the minimum wage law Labor versus leisure we have a labor leisure trade-off. We have a preference for work relative to labor excuse me labor relative to leisure So labor is an important factor of production along with capital and land And the more we labor the more we can produce But this is of course limited we only have 24 hours in a day We only have so many skills And we like leisure. Okay, because leisure is a desirable consumer good That must be foregone so we'd rather Get more wages not through working more but From what's called labor productivity and labor productivity Improves or increases when we're given better tools In other words when the capitalists have the money to give us better tools We end up making more money We end up having fewer people with shovels and more people with these funny little tractors And the drill bit to to plant trees with And therefore our wages go up as a result But it's the capitalist having savings to invest that drives that labor productivity And things like the minimum wage are the things That scare off the capitalist from investing Okay, so in austrian economics, we work until the value or utility Of the return from working is exceeded by the disutility of giving up leisure. So we're constantly Weighing What we get from labor Versus the utility or satisfaction we get For leisure Okay, so this is a trade-off a taste that we have some people like leisure a lot Like one of my brothers And other people prefer to work hard all the time most of the time obviously What the minimum wage law does Is it denies low productivity workers the chance for a job? and we're going to talk about The specific austrian concept of productivity of workers But there's obviously people who have the lowest Productivity these people tend to be without skills without job experience Maybe handicaps of various sorts Another important aspect of the labor market is Job satisfaction. I've brought this up before Certain jobs are more desirable on the surface other Jobs are not so desirable There's risks hazards nasty things about the job So there's these great jobs Jobs that everybody wants You know, they want to be tiger woods. They want to be michael jordan They want to be some hollywood celebrity. They want to be woody allen solve particular to your taste Okay, so for example making wedding cakes and being an austrian economist at the mesas institute Are highly desirable jobs As a matter of fact once people realize that I hear year-round I inevitably get a question at lunch Asking me so exactly how would I get a job like yours? No, but really yeah Well, I'll I'll tell you um, but not right now And you'd have to pay me too Okay, so The only problem with these great jobs like making wedding cakes. Okay, that's fun. It's hard work. I mean it takes a long time Uh, but it's fun working you get to deal with customers On the most important day of their lives where everybody's dressed up Everybody is having a good time. Everybody is optimistic and everybody is drunk by the time the cake comes out So Those types of jobs tend to not Get great wages relative to Um similar types of jobs So if you were just you know baking Rolls or something like that that wouldn't you probably get maybe even more money if you were good at that Uh, and if I had to teach economics at Auburn high school, they'd have to pay me a lot more money And then some jobs are displeasing. These are the jobs that we don't want to think about that we're in college in order to avoid In balmers, this is one that was never on my choice set. Didn't want to do that Prison guards. I didn't want to do that Did not want to be in a coal mine or something like that Uh, and sanitation engineers Also not a very desirable Job cleaning the sewers and things like that So these are dirty dangerous jobs, but they tend to come up with some nice uh economic Results as a result Um The minimum wage law if employers are forced to pay more monetary wages They'll reduce the amenities And make work less satisfying by making all sorts of adjustments in the job Benefits and taxes also affect Um employers do not have to pay more than your discounted marginal value product or revenue product Um the consequence is if you get increased benefits You'll get a decrease in take home Home return or wages So if we get free coffee at the institute, um, that's going to lower our Take home pay by a very very small amount But they can afford to give us free coffee And uh, we don't have to go out to get coffee. We don't have to go to starbucks to get coffee We don't have to pay five dollars to get coffee. So it works out for everyone Uh mandated benefits like obama care also tend to decrease take home pay Increased taxes decreases your take home pay Uh employers don't ever pay your taxes for you. You pay your taxes. So you pay your social security tax And you effectively pay the employer's contribution to your social security They never pay more than what you're worth to the company So all three of these factors have contributed to stagnating wages and employment And the minimum wage reduces the side benefits of From the workplace So if you're at a if you're at an establishment where a lot of the workers Are getting the minimum wage and it's increased you can expect to see some side benefits reduced Okay wages In the austrian literature and you can look this up. We don't have to know it for today, but The discounted marginal value product of workers wages Start with the product what is being produced Value how much is What you're producing worth in terms of revenue And then marginal refers to at the margin or declining So if we add one more worker How much is going to be contributed in revenue to the firm? And discounted simply means the fact that say for example, you bring your bicycle into me I fix it and charge you $30 and you pay me. There's no discounting necessary there But if i'm a pharmaceutical researcher working on coming up with a new drug That isn't going to likely uh be in the pharmacy for the next 10 years Then what they're paying me now has to be discounted For that 10 year period because they're paying me a hundred thousand dollars now And they're not getting any revenue for 10 years So it's not an important point for today, but this is the austrian perspective There's an example in Rothbard's man economy and state that sort of lays this discounting factor out If I plant something on your farm today That will yield Revenue of $20 a year from now at the end of the crop season And if the interest rate is 5% Then the most i'm willing to pay you is $19 If you were willing to accept my offer of $15 to plant something on my farm I would earn eventually a four dollar profit and one dollar interest So if your discounted marginal value product is 19 Then we would expect that other entrepreneurs Would tend to bid up your wages. Okay, so if if you were somebody who could Plant something that was going to be worth $20 a year from now And I was only paying you $15 an hour other entrepreneurs or farmers Would see that and be willing to pay me say $16 for that same service Therefore in this competition between entrepreneurs We would expect to see that labor was paid something pretty close to what it's actually worth So in other words in a market economy We would expect to see laborers receiving wages that were approximately equal to Their discounted marginal revenue product or what they're actually worth Okay, the supply of labor Obviously labor has alternative uses if you think about the job market today if you were a dropout of college There's various places where you could fit in To the u.s economy However, we don't want to work all the time We value leisure And so we don't want to necessarily You know sleep eight hours and work 16 hours and the more work we do the marginal value of The first hour of leisure increases So the supply of labor is upward sloping just like every other market Uh, therefore the logic says that more labor By an individual more labor in the economy as a whole is only going to be supplied at higher wage rates And so that's the basis of our upward sloping supply curve of labor As wage rates increase for an individual or for a particular market of labor We would expect to see more people enter that market and People be willing to work more hours per week So this is you know, this is just looking at the labor economics that we looked at before about leisure Being to trade off with labor Um, and then that pops up as the supply of labor being upward sloping The way it typically is now as you get really high wages Uh, this supply curve of labor can At some very very high levels start to go backwards Okay, so if you're a guitarist And you're getting paid a thousand dollars per show You may be willing to you know go out more and more shows But if you become famous And you get 40 million dollars per concert Well, and it's not necessary to do three or four shows a week you may do A dozen shows a year and you've got all the money you can possibly spend so some really really high Level of wages it can turn backwards The demand for labor Again, basically based on the discounted marginal value product of labor Labor is demanded as it is value producing So we're really looking at how much does that marginal employee contribute? To the overall revenue profile and success of a company So we could be talking about just adding a janitor to the company Somebody who is going to go clean up Dump the trash sweep the floors not really producing any product not really producing any revenue But because that janitor is there that means a lot of the employees who are generating revenue Can actually spend more time on that revenue generation process And so by looking at the guy that we're adding we don't see any dollars and cents But if we look at the overall profile of the company We may be freeing up 25 workers 15 minutes each per day Creating revenue for the company And as I said before labor productivity is a little bit misleading There's only so much a worker can do under the circumstances they're placed into They have a job to do they have a certain set of tools. They're given a mission They've only got a certain number of hours So they can try to become more productive working frantically and so forth but generally speaking load labor productivity Is an is set in an institutional framework And that we really get more labor productivity from the capitalists the capitalists who give us better tools Or economic professors who make people so much smarter So it's not really the productivity of labor rather. It's the increase in capital The tools that we have and the extension and expansion of the structure of production So that social division of labor that you've been Exposed to as a concept. This is where it really becomes a reality as we become More specialized As we get better specific tools at what we're doing We become more productive and as a consequence wages rise So you can very well imagine a world where there's lots of lawyers And then you can imagine another world where there's lots of lawyers, but there's also specialists people who Late, excuse me lawyers who specialize in tax issues lawyers that Specialized in international business questions Lawyers who specialize in patents They're specifically specializing They've got the proper tools to specialize in that and they become more productive and they have more revenue So This is what actually increases The marginal physical product of labor and the discounted marginal revenue product of labor And ultimately that tells us what's going to happen to wage rates. And so the demand curve for labor Is like the demand curve for anything else. It's downward sloping to the right As wages rise per hour On the vertical axis The quantity of labor Demanded decreases So in a static setting the demand curve for labor is downward sloping to the right So supply and demand is what determines wage rates in a market economy On the left hand side, we've got the earnings per year of registered nurses So nurses with a high skill set Um, and then on the right we have hotel motel and resort desk clerks. Okay people without Any apparent training whatsoever um And so it's easier to supply These this type of jobs because a lot of people can do it. You don't need any specific training Our certification This job is hard You work long hours. You're exposed to sick people For usually 12 hour shifts Um And bad things happen in hospitals It's one of the leading causes of death Whereas the desk clerk The desk clerk, um Is just standing there more or less And plugging things into the computer And handing you a credit card So, um The conclusions Wait a second Oh, yeah, these are the conclusions about the labor market Wages are determined by the market Uh, there's no unemployment in a pure market economy. There are people without jobs But in a pure market economy, there's nothing that that we would call unemployment Um, and then wage rates are driven by increases in And improvements in the tools that we use that we do our jobs In my case, it's better laptops and these things That I just love to play with The minimum wage hurts, uh, the intended beneficiary The intended beneficiary is the low income low skilled worker However, a minimum wage Is sets a floor so we can't go through the floor Legally, we cannot go through the floor The equilibrium wage determined by market forces is down here The equilibrium quantity of unskilled workers is q star If to help people in this area These low skilled workers we create a minimum wage above the equilibrium wage What happens is that, um Employers because of that higher wage will have a smaller quantity of labor demanded And so the quantity demanded shrinks to qd And the quantity of labor supplied increases to qs So more people want, uh, those Jobs at the minimum wage rate and so Typically what happens is That when you have this minimum wage increase substantially above equilibrium, what happens is is that Minorities teens and unskilled unexperienced workers Cannot get access to the job market And the increase in the quantity supplied tends to be um non minorities And spouses Non-working spouses seeking a second income So a long time ago when I was in school, they would they would talk about this being the house the The the housewife entering the workforce And this the minority teens getting shut out of the labor force and Teenage unemployment in the us Is about three to three and a half to four times The overall unemployment rate. So teens are obviously being systematically shut out of The workforces result of the minimum wage And minority teen unemployment is twice The non minority teen unemployment. So currently It's close to 40 percent of minority teens are unemployed. They're forced out. They're not allowed to compete Okay, so minimum wage laws When they're quote unquote effective When they're set above far above the market rate That's why that's when they're effective if the minimum wage Today was 34 cents. We wouldn't have this class It causes compulsory unemployment Okay, so not being able to get a job against your will It decreases side benefits from the job All the various things that employers Benefits sometimes that's health insurance Sometimes that's sick leave. Sometimes that's free coffee and tea Sometimes it's all sorts of things it worsens working conditions lighting air conditioning Size of your office Having to work in a cubicle rather than an office By the way I just found this out One of the reasons there's so many jobs in cubicles Is because of the federal tax code If you want to write off or depreciate an office With four walls and a door and a window you have to depreciate it over 38 years If you have a cubicle That cubicle is considered office furniture and you can depreciate it over seven years So employers are given the incentive to use cubicles rather than offices Which everybody hates by the way And it was two german guys That invented cubicle office space Okay, uh, and the big thing here is that it hurts marginal workers teens and minorities people without Work experience job experience skills and training These are the types of jobs that give you experience skills and training Even if they're basic skills and training And so the intention here was to help these marginal workers And what actually happens is that those marginal workers are the ones that face the negative consequences of the minimum wage law And as I pointed out it increases the demand for high skilled workers particularly union workers So it's all the opposite of the intentions Now some people say let's just pass the minimum wage increase to customers But that doesn't work Businesses cannot pass increases on to customers If they could just raise their price To their customers they would have already done it There's nothing more than a business person wants is but to raise their price So this is not a possibility but in mainstream economics. It's kind of a mystery. Can they or can't they? Well, they basically can Uh, so the minimum wage law only increases cost but not revenue Therefore profits are lower Or even turn to losses And losses of course Lead to reduced output or the shutting down bankruptcy of the firm Uh bankruptcies and shutdowns reduce supply And reduced supply leads to higher prices So yes The prices do get raised But they're not just passed on to somebody. Okay, what's happened From the minimum wage to the shift in supply and the higher prices Is that you've cost people jobs you shut companies down You've made a lot of other companies less profitable And so it's not just a pass on So we just can't pass on costs regulations and taxes It ultimately destroys jobs That's what's going on That's what ultimately leaves to the shift Of the curve any questions Yes, sir We'll talk about the design ability of the job and if the minimum wage is raised and people will find that The dirty jobs will not compensate anymore and they will go to the Amenity job, but there there will not be so many amenities So do you think that the minimum wage would decrease the people seeking for dirty jobs and there will be less profits for these companies Well, I mean when you increase the minimum wage and you create unemployment there is going to be More people unemployed looking for work and also people coming in to take advantage of those higher wages So there would be more people searching for jobs In all areas that are relevant to the minimum wage. It doesn't really You know, it doesn't affect college professors in that sense Yes, sir The minimum wage doesn't really apply on a survival basis It's only in the in the american economy 2.6 percent of the workforce and most of them are not Full-time workers supporting a family or supporting a household. They're usually All those people are making at least above the minimum wage and so it doesn't apply But you know as with inflation you see workers particularly in the u.s economy, their real income is falling while the Incomes for the top one percent are rising And there is this economic inequality. It's basically explained by federal reserve policy and federal reserve policy cannot be positively affected by something like the minimum wage. So it's a concern for low-income workers, but the whole point here today is That the minimum wage law does not address the concerns Of very low-income workers. It actually hurts those very workers Thank you very much