 Good afternoon. I'm Mark Thornton. I work here at the Mises Institute and it's a pleasure to address you all this afternoon. Our topic today is the minimum wage, which seems to be a big step down from some of the giant topics that we've been discussing here the first two, two and a half days. You know, competition by itself is a huge topic. But the minimum wage comes at the end or towards the end of the second day as an application of what you've learned so far. You know, subjectivism, marginalism, money in banking, the business cycle, entrepreneurship, competition and within that there was a very technical lecture on prices, price theory, price determination, what are prices and how do they come about? Human beings had no understanding or very little understanding of what prices were, you know, only in the last two or three hundred years really. You know, that it was just kind of something that came from external factors or maybe some devious person inside the marketplace. And prices really applied to labor, that's what wages are. It's the compensation to labor. And so the application here, the minimum wage is an application of government intervention into the price system. So we could have picked any price control and showed you all of the results and basically any kind of price control including minimum wage laws are going to upset the marketplace. It's going to cause disturbances, it's going to cause disruptions and it's going to distort the market for labor and in this case the market for unskilled or low skilled workers. Now the great thing about this application is it's all tangled up in a great ethical debate. The minimum wage law really only applies to about one percent of the workforce in the United States. So if you looked at that one percent, the amount of discussion by politicians, the words printed online and in newspapers and on TV news and elsewhere, the minimum wage gets a whole lot of coverage. It's a great ethical debate in the American populace and yet the statistical impact of the minimum wage is very small. If we looked at the overall workforce and the overall unemployment rate and we increased or decreased the minimum wage, it would have a very, very small, almost negligible impact. So we not only want to understand what the minimum wage does but we also want to sort of weave through this great ethical debate and the debate that's actually developed within the economics profession. At one time everybody in the economics profession was more or less agreed that the minimum wage law caused unemployment and it hurt the people that it was designed to help. And we'll also learn to understand why this is now more of a debate. As a matter of fact, there was a letter to, I think it was in the New York Times and the Washington Post and the Wall Street Journal many years ago where 75 leading U.S. economists or economists in the United States, they weren't all American citizens, but they supported an increase in the minimum wage and that included people who had won the Nobel Prize in economics, people who were part of the President's Council of Economic Advisors, leading government officials and so forth. So what is this minimum wage law? Well, you probably all have a pretty good idea. It's a law that establishes a minimum wage which employers must pay that wage per hour or more than that per hour or face, fines and other penalties. There's a federal minimum wage law which currently is $7.25 per hour mandatory minimum wage. There's state level minimum wage laws and there's local minimum wage laws. Here in Alabama we don't have a minimum wage law. So employers and employees are forced to use the federal minimum wage as the barrier. This is a quote-unquote progressive policy that was developed more than 100 years ago by the progressives in the progressive movement. It was a leading intellectual, academic, political movement that was very influential in the United States. You probably have learned a little bit about the progressive era, the early 1900s in the United States, all of the constitutional amendments that were passed during that time period, women's right to vote, for example, we got legislation for a central bank for an income tax, a constitutional amendment, we had a constitutional amendment to ban, prohibit the sale of alcohol within the United States. So plenty of crazy things or radical things or revolutionary things for good or bad. Now this progressive policy was designed to reduce employment for certain groups. It was designed to create an incentive for employers to discriminate in the workforce against women, children, and minorities. So the idea, the construction of the minimum wage law was not anything like we think today. And as a matter of fact, just like any other government law or government policy, it usually is called something that everybody can agree on, but its effect is usually designed to help this half of the room and to hurt this half of the room. Can you think of any policy that is named properly for its effect? Can you think of any policy that doesn't make some people worse off, making other people better off? That's sort of a general result of government intervention within the Austrian framework. It was designed to help high skilled union workers, high skilled factory workers, particularly white men, get all of the jobs and to get children out of the workforce for sure, but get women out of the workforce and get minorities out of the higher paying jobs, the factory jobs, and to relegate all of these people to homes and to secondary type jobs. So in that case, I mean people were asking me, I've given this lecture many times before, and people were asking me, well are you going to come out in favor of the minimum wage this time? And I do try to change this up. So if you go back and listen to my lectures from other years, they're going to be at least somewhat different from year to year. And so this year, my statement is that the minimum wage does work. It works as it was intended 100 years ago. Now this is obviously not a libertarian policy. This is obviously not the free market at work. Okay, in the free market, in the libertarian world, the employer and the employee should be willing or should be able to negotiate any contract they want as long as they can come to an agreement on it. This sets a bar. This sets a block to the prevention of certain types of labor contracts. Now in the US debate, I'll just go over a few points and then try to summarize. One side says that the minimum wage law is necessary and critical. This is not necessarily the progressives that I'm talking about here. It's the modern progressives or modern mainstream media or modern politicians, that sort of thing, that we have to have a minimum wage that it's absolutely necessary and critical and we need to raise it. We need to raise it to a living wage and things of that nature. The other side says the minimum wage causes unemployment. Boom, end of story. Now the actual confusion between these two points of view and reality is that typically the minimum wage involves, if it involves any analysis whatsoever, it's only a short-term analysis, which is not really relevant to a long-run policy. At the end of this lecture, we're going to circle back and look at the long-term effects of the minimum wage. In other words, after a teenager has or has not had a job, after they have or have not gone to college, what happens to that individual over the long haul? I'm interested in that. We all should be interested in that. And it's a wage-rate only analysis. And by gosh, wages are an important consideration to any job, but it's not the only consideration. And Austrians look at every angle in any kind of market, any kind of contract. But price is obviously important, but it's not the only thing. It's not a single aspect of your life or your career, even though it is important. A third part of this debate is that it's carried on largely on a statistical basis, even though there are so many confounding factors in the real world. In other words, this debate is entirely missing the wisdom of Frederick Bastia, Henry Haslett, and so many others. So it's only the Austrian approach that provides a correct method for understanding this issue and it's theoretical. And it's also going to be consistent with the facts, no matter how confusing, convoluted, and unreported they may be. Now, the positions on the minimum wage law and its debate currently, I break it down into three different categories. First is the hysterical sort of category. They're not actually hysterical most of the time, but it's a good reference point to remember this. This side of the debate says that the minimum wage is absolutely necessary, that it's critical, that people's lives depend upon it, that people are going to starve and die, and so on and so forth. It's necessary for the very survival of people. Of course, there's equity in fairness considerations, and then, inevitably, in recent years, you'll hear statements, well, the rich are getting richer, but the poor are getting poorer. I'm not going to talk about that now because I have another lecture on Friday morning at 11 o'clock that you won't want to miss, where I completely debunked that whole idea. The second position is empirical. This is the position of most economists now, since the Card and Krueger publication in 1996, where they raised empirical questions that showed that an increase in the minimum wage can increase the number of jobs. A whole lot of economists who are mostly progressive-minded latched on to that idea, latched on to that one empirical study which we'll talk about. And then there's the theoretical side, which is the Austrian side, which is based on economic theory. Now, we generally hold with most of the empirical economists that say that the minimum wage laws do cause unemployment, but we also look at the bigger picture. And the big picture reality is that you can't raise wages and benefits for everybody in any kind of economy. You can't just legislate higher standards of living really in any shape or form except for redistributing money from the unfavored group to the favored group. So the debate is characterized by two separate points of view other than this Austrian view that I'm going to explain today. On the one hand, the left hand, I'm going to quote a prominent economist, 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 law of supply and demand occurs because, quote, the market for labor isn't like the market for, say, wheat, because workers are people. So that's the left hand of the one hand. The other right hand is the more normal approach. Quote, any econ 101 students can tell you the answer. The higher wage reduces the quantity of labor demanded and hence leads to unemployment. Clearly these advocates of the minimum wage law very much want to believe that the price of labor unlike the price of gasoline or Manhattan apartments can be set based on considerations of justice not supply and demand without unpleasant side effects. Now, the left hand view is represented by a very prominent economist. There he is. That's Paul Krugman, Nobel Prize winner, lead economic columnist for the New York Times and good buddy of Bob Murphy. They actually made an agreement long ago that they would motivate and elevate each other's careers. Paul would say something stupid and Bob would say something really smart and so that represents the left hand view. The right hand view is also Paul Krugman. Surprise. Paul gets to say a lot and he says a lot of things. Some of them actually pretty good but mostly bad. So let's get it down to brass tax here. Economic analysis 101. This is a graph where we have the wage rate for the market of unskilled labor on the vertical axis and the quantity of labor in the market along the horizontal axis. We have supply and demand curves which you've all looked at. You've all been exposed to Jeffrey Herbender's lecture and other lectures and this will continue throughout the week about the laws of supply and demand. And with those particular supply and demand curves there's an equilibrium wage at W0 resulting in a equilibrium level of employment L0 along the horizontal axis. Now if the government comes in and intervenes in this market with a minimum wage law you see that jumping from the equilibrium wage to the minimum wage of W1 and this means that the supply of labor actually looking or having jobs expands from L0 to L1. So there's more people looking for jobs. In other words if we went from yesterday's equilibrium and then we impose the minimum wage there would be more people who were actually looking seeking jobs at those higher wages. But employers at this point would be wanting to get rid of some of those workers that they had to pay higher wages to. There are certain workers within the company that they'd like to have that they'd be willing to pay the market wage for but the productivity of those additional workers are all unprofitable and so they have to do something about that. They have to reduce the amount of labor or more particularly they have to reduce the overall labor bill that they have to pay somehow some way. Now this market doesn't represent the entire labor market it's only the low skilled part of the market it's a small part even though markets are all linked. Most importantly a graph has how many dimensions? Two dimensions. There are no jobs really out there with just two dimensions. Jobs are multi-dimensional and you're going to learn that if you're college students and you're going to be looking for a job you're going to learn firsthand the jobs are multi-dimensional. As a matter of fact you know UPS and the auto I think it's the auto workers or the teamsters or something they're threatening to strike and they they're trying to negotiate a new contract and it's not all about their wages. Some of it is a lot of it is it's an important issue but it's not the most important one. You know one of the ones that they're interested in that I would never think of if I wasn't such an excellent lecture on the minimum wage is they want all air conditioned trucks for all the drivers. I can believe that living in Auburn Alabama I can I can definitely believe that and of course we're abstracting away from other government interventions so we're not looking at government schools and welfare and you know other types of analysis that are relevant more generally. The elasticity of those curves can change the way I've drawn them on that graph. The supply and the demand curve are relatively elastic in other words a small change in price can give you a big change in quantity but we can also imagine any elastic supply curves for unskilled workers and any elastic demand curves for low skilled workers. The minimum wage is still going to give us unemployment it's just going to give us less unemployment so elasticity does matter to the statistical results. You know in what other alternatives do employers have in terms of can they switch it for high skilled workers can they use robotics can they use capital machinery to do the job and reduce their reliance on low skilled workers. Another thing that's shown on the graph is that with the number of workers at L1 looking for jobs or having jobs and the number of jobs available L2 it means that we have a whole lot more people interested in working at that minimum wage than there are jobs and so it's at this point where employers get to discriminate you know they might hire just people from their family they might just hire people from their church they might hire people based on sex or race or hair color or what kind of car you drive anything can come into play here and does employers will now find high skilled labor and production techniques to be more profitable than low skilled high school oriented production techniques so not surprisingly unions pay the biggest portion of the the pro minimum wage propaganda effort okay somebody's got to pay for that right somebody's paying I get a newsletter every week from a group that's basically financed by unions and so everything they write is slanted in a pro union high wage minimum wage direction and then underneath this as part of the economic analysis we derive from that that the minimum wage can impact the number of hours that you work it can affect how employers set up different shifts eight hour shifts is standard but four hour shifts three hour shifts five hour shifts are all possible the minimum wage affects your benefits do you get health care do you get retirement do you have to pay to clean your own uniforms you know all sorts of different things that can come into play and then working conditions I mentioned the you know the poor ups drivers who have those old trucks without air conditioning well that's working conditions folks that's part of the job that's one of the dimensions that's part of the labor contract okay in terms of statistical obfuscation of course the Austrian view and analysis is couched in terms of Ceteris paribus or Keteris paribus where we hold all other things constant and that's important that's important for statistical analysis too this is only impacts directly a small part of the market but it influences many parts of the market the minimum wage is typically increased is increased in small incremental amounts during my heyday as an unskilled worker the minimum wage was increased a half a dozen times it hasn't been increased lately at the federal level but it's been increased at the city level the local level and typically they'll say okay we're going to raise the minimum wage from seven twenty five to fifteen dollars an hour but they're going to implement that over an eight-year period so the incremental increase is typically very small still today and so the amount of Q the quantity of labor is really all of those factors puts the Q up in the air how much is that quantity going to be and then if we relax the Ceteris paribus conditions we realize that there's just really an unlimited number of things that can change between the implementation of a minimum wage law increase and its impact on the market things like an increase in the demand for labor things like economic growth things like price and wage inflation more generally and the natural impact that that's going to have on unskilled labor so if we look at the impact on the job we find that the minimum wage causes a combination of the following and this is not an exhaustive list it's just sort of a top five list it distorts employment it can result in fewer jobs but it can also result in fewer hours it can also result in fewer employers you know in the on the west coast or the left coast on the map where the progressives sort of dominate the cities out there and have put their minimum wage increases in place they're all whining and complaining oh my favorite restaurant went out of business and big big surprise who has the hardest time dealing with a minimum wage increase aunt fanny's country cabin kitchen out in eastern oregon or mcdonald's with super computers lawyers and now robot you know you take your order you walk in and you don't even see a person they've got robots okay aunt fanny's country cabin kitchen doesn't there's not going to be any robots there okay fewer hours too decreased job benefits i mentioned health insurance vacations sick days uniforms etc decreased job desirability harder work concentrated effort less potential for advancement less sanitary conditions i worked in a cafeteria food service of a hospital when i was in high school and believe me the sanitary conditions could get really bad really quite disgusting i wish i had you know an iphone back then where i could take pictures of this stuff but didn't do that less lighting less air conditioning less everything okay you can you can imagine lots of things being impacted by the job or lots of things about a job that can be impacted okay so this is reality and it's understandable from the theory that you know the theory about price controls affecting distorting disrupting the labor market and on the two-dimensional diagram the only result possible is unemployment when we relax that assumption and we consider jobs as multi-dimensional we realize that all of these things are likely to happen and then comes along david card and alan kruger in their 1994 publication i think that was actually the working paper in 1994 um nber um alan kruger was a prominent economist i think at princeton and he was a high official in the labor department in either the clinton or the obama administration card won the nobel prize um and their study looked at the minimum wage law in new jersey and pennsylvania and new jersey and pennsylvania um you know they share a border and pennsylvania stayed with the federal four dollar and twenty five cent minimum wage in 1994 new jersey raised theirs to five dollars and five cents card and kruger took a sample based on four hundred or so fast food restaurants that were on that border or close to that border between those two states and so they declared this a natural experiment and economics doesn't really have experiments like scientists um have where they can determine in a laboratory you know how many seeds will grow out of a pack or how long will light bulbs last you know when they tell you something about the product they basically tested it in some way and found out that yes 99 of our light bulbs last for five years at least five years and so they can test these things kind of in economics we don't but this was a great anomaly that impacted the profession and shifted all of our pro-government friends in the economic profession to change their view on the minimum wage so there was a um increase in the number of minimum wage jobs in fast food restaurants in new jersey but of course this doesn't take into consideration the time the locations the differences in the economy the differences in substitution that might occur in restaurants such as um in new jersey they may have used fewer high skilled workers like managers and cooks and more low skilled workers um to do more a higher percentage of the overall work including cooking uh doesn't take into consideration cross-border effects where unskilled workers might commute to new jersey can you imagine you're living on the pennsylvania border you're living in philadelphia and the government says well you know you can go from 425 to 405 if you drive across the border and work for mcdonald's there rather than working for mcdonald's in pennsylvania so there's substitutions and there's been many many replies and criticisms of this study but i'm not going to get into them i will point out a study by hoffman and trace published in 2009 that showed that the 1996 increase in the minimum wage cost low skilled jobs um in pennsylvania so that this euphoric notion that the minimum wage can increase jobs should have gone out the window fairly quickly okay the next study i want to bring to your attention by mu mancade and shunko 2021 in the harvard business review they looked at uh chain fashion stores in california and texas from 2015 to 2018 and they found that for every one dollar increase in the minimum wage there was an increase in employment the number of jobs went up by 27 percent however the number of hours that each individual worker had on their schedule declined by 21 percent so there were more boots on the ground it's just that the boots on the ground were not getting as many hours per week um and this resulted in a decrease in the average paycheck by about 14 percent so even though you got a raise you lost hours so your paycheck got smaller so naturally they had to hire more people to fill it okay workers um working solid part-time jobs 20 hours or more 23 percent of them lost retirement benefits so you know the old ladies working in the fashion store um who were able to contribute to the retirement package or whatever in some way they got cut out as a result of this because their hours got cut people with 30 hours or more which is almost full time uh 15 percent lost their health care benefits because of the cutting hours so higher wages and more jobs don't necessarily make people better off in any economic way that i can think of i mean i no longer interact with a lot of people who earn the minimum wage or who are in low skilled jobs but i've heard it often enough how pissed people are when they don't get the same number of hours or they're required to work the night shift instead of the day shift or the day shift instead of the night shift that's what people bring to my attention so it matters and it matters in an important economic way that is not a way that's raising our standard of living or raising these people's standard of living it's hurting these people okay and i'm going to turn to an important study by numark and nizlova 2007 they studied youths ages 16 to 19 and compared them to ages 25 to 29 and found these long run effects quote exposure to minimum wages at young ages or minimum wage dominated markets at young ages could lead to adverse long run effects via decreased labor market experience and tenure okay so the most important thing you you learn a lot of important things doing unskilled jobs they really are very important it's something that employers look for it's a foundation that's very critical to your overall career just like grade point average or internships the evidence so market experience tenure and diminished education and training the evidence suggests that as individuals reach their late 20s they earn less the longer they were exposed to a higher minimum wage at younger ages and the adverse longer run effects are stronger for blacks such longer run effects of minimum wages are likely more significant than contemporaneous effects on use that are the focus of research and policy debate so what they're saying is that you know the focus on of most minimum wage research in the policy debate they're really only looking at the current market they're not looking at what happens to these people over the long run and what happens to these people over the long run is detrimental to their long run career success they may be hanging out with the wrong people they may be just hanging out with people who don't have a job and hanging out with people who have a job turns out to be with even if you don't have a job you still are better off than hanging out with people who don't have jobs ah um this was supposed to get cut out but we do have two minutes so can you read this in the back okay so i can't just make up whatever i want okay this is the average unemployment rate of EU countries european countries with and without minimum wage laws so there's a subset of european economies with minimum wage laws and there's another subset of european countries without minimum wage laws okay and this only looks at from 2004 to 2012 but i'm sure it's relatively consistent over the long run is that countries with minimum wage laws is the red line that doesn't work okay uh this is the red line it's higher this is nine this is nine percent right uh the blue line is countries average unemployment um with uh where countries without the minimum wage law so a lot of eastern european countries but not exclusively the eastern european countries their unemployment rate is about 7.3% and it's consistent throughout this whole time period it actually gets the divergence gets worse over time where the minimum wage countries have much higher unemployment 12 compared to the non-minimum wage laws countries which is 8 and of course young adult unemployment is a huge problem in europe it's a huge problem in china right now it was a big a part a big part of you know the egyptian uprising and you know a lot of these other countries is they've got this huge population of young adults sometimes young college graduates and they don't have any jobs they don't have any work experience they don't know what to do they don't have a lavish student loan programs in most of those countries but you know that young adult college graduate uh that's a really intense problem you want people getting into the workforce getting started gaining that experience developing over time any disruption to that whether it's as if you're 16 21 24 28 those disruptions are very detrimental to um people's long-term economic job outlook and i'll uh i'll show you my other slides but i'm out of time so thank you very much