Price Floors

Summary

In this insightful discussion, George Frost delves into the concept of price floors, specifically the minimum wage, and their effects on the labor market. He introduces the idea of price floors as a minimum legal price, using the labor market to demonstrate its implications. Frost examines the role of employers and employees within this framework, the impact of minimum wage on employment, and the potential unintended consequences such as unemployment. He further explores the perspectives of unions and the debate over whether such regulations genuinely benefit unskilled workers or inadvertently favor the skilled workforce.

Highlights

• Introduction to price floors and their definition in economic terms 📚.
• Graphical representation of the labor market and price floor's impact 📊.
• Discussion on how minimum wage laws influence employer and employee dynamics 👥.
• Examination of labor supply and demand curves in relation to wage changes 📈.
• Consideration of unions' support for minimum wage as a strategy to benefit skilled workers 🏗️.

Key Takeaways

• Price floors set a minimum price for goods or services, impacting the market dynamics 🤔.
• Minimum wage laws are a common example of price floors, intended to assist unskilled workers 💸.
• Such regulations can lead to a labor surplus, causing unemployment or reduced work hours for some workers 📉.
• Unions often support minimum wage laws, despite primarily representing skilled workers 🛠️.
• For policies to effectively benefit unskilled workers, it's crucial to assess their broader impacts on the labor market and employment trends 📊.

Overview

George Frost opens the discussion by defining price floors as a type of government regulation setting the minimum legal price for a good or service, using minimum wage as a key example. He explains the basic economic principles through the lens of the labor market, where wages represent the price of labor, and employers and employees form the supply and demand.

Utilizing a supply and demand graph, Frost illustrates how minimum wage impacts the labor market. He notes that while the intention is to increase worker pay, it can inadvertently lead to a surplus of labor, as more individuals seek jobs than there are positions available, which is often manifested as unemployment or reduced working hours.

Frost further explores the role of unions in supporting minimum wage laws, highlighting the complex interplay between skilled and unskilled workers. He prompts listeners to consider whether these laws genuinely assist those they are intended to help or if alternative policies might offer more effective solutions without adverse side effects.

Chapters

• 00:00 - 00:30: Introduction to Price Floors The chapter introduces the concept of a price floor, which is a type of government regulation and price control. It is defined as a minimum legal price below which a good or service cannot be sold. The chapter also indicates a plan to explore the effects of a price floor through a graphical presentation.
• 00:30 - 01:00: Setting Up the Labor Market The chapter introduces the concept of setting up the labor market, specifically focusing on the implementation of a price floor, exemplified by the minimum wage. It explains that a labor market can be understood similarly to other markets, with supply and demand determining the dynamics. Key components will be identified on respective axes, setting a foundation to explore how labor market regulations, like minimum wage laws, affect supply and demand.
• 01:00 - 03:00: Demand and Supply in the Labor Market In this chapter, the focus is on the concept of demand and supply in the labor market. The author emphasizes different aspects of the labor market by describing how to measure the price of labor (wage) and the quantity of labor (number of employees or hours worked). The text illustrates this economic concept through a diagram that uses 'W' for wage (price of labor) and 'L' for the quantity of labor on the respective axes. This chapter helps to understand the framework of wage determination and labor demand and supply dynamics.
• 03:00 - 04:30: Equilibrium and Minimum Wage The chapter discusses the differences in measuring labor demand using the number of employees versus the number of hours worked. It highlights that using hours worked provides a more precise understanding of the labor market. The concept of demanders in the labor market is explored, emphasizing that while it might seem that employees demand work, traditionally, it's employers who demand labor.
• 04:30 - 07:00: Effects of Minimum Wage on Labor Market The chapter discusses the effects of minimum wage on the labor market. The narrative frames the employer as the buyer of labor, emphasizing that labor demand mirrors typical demand curves with a negative slope. This reflects the law of demand, indicating that as wages decrease, employers are inclined to demand more labor (i.e., hire employees for longer hours or more employees) due to lower costs, and conversely, as wages increase, demand decreases.
• 07:00 - 10:00: Graphic Analysis of Minimum Wage The chapter 'Graphic Analysis of Minimum Wage' examines the dynamics between employers and employees in the labor market. Employers are identified as the demanders of labor, and employees as the suppliers. The chapter explores the supply curve of labor, which typically has a positive slope, meaning employees are generally inclined to work more hours as wages increase. However, an anecdote is shared where a student challenged this notion, suggesting that higher wages might not always encourage more work, to which the instructor offered some counter-explanations. The discussion highlights the application of the law of supply in a real-world context, reflecting on how minimum wage impacts labor supply.
• 10:00 - 16:00: Unions and Minimum Wage In this chapter, the discussion revolves around the relationship between wages and work motivation. The speaker seems to be demonstrating a point about how wage increases don't necessarily lead to individuals wanting to work more hours. An illustrative scenario is presented where the speaker asks the listener to imagine their wage increasing from $50,000 to $100,000 per hour. The listener's response indicates that with a higher wage, they would choose to work even less, opting for just half an hour of work instead of one hour a year, to retain the same annual income. This example serves to underline the argument that higher wages might actually encourage people to work less, as they can earn the same or more income by working fewer hours.
• 16:00 - 21:00: Alternative Policies to Increase Wages The chapter explores alternative policies to increase wages. It delves into the conversation with an individual who is content with earning $50,000 a year despite having the opportunity to earn $200,000 with extra work. This person's outlook, labeled as unproductive, is subjected to scrutiny, prompting a reflection on work-life choices even when pay rates increase substantially. The chapter raises questions about the expected increase in work hours when wages are doubled, challenging readers to rethink traditional productivity and economic assumptions.
• 21:00 - 23:00: Conclusion and Evaluation The chapter "Conclusion and Evaluation" discusses the concept of a backward bending labor supply curve. Initially, as wages increase, people are motivated to work more. However, beyond a certain point of wage growth, individuals might choose to work less, exploiting higher wages to reduce working hours for leisure or personal time. The discussion points out that this pattern creates a labor supply curve that first rises and then bends backward as wages increase further.

Price Floors Transcription

• 00:00 - 00:30 okay another example of a government uh regulation that we can talk about another kind of price control is called a price floor here's a definition of a price floor a minimum legal price below which no good or service can be sold and so what i want to do now is turn to a graphical um presentation of the effects of a price
• 00:30 - 01:00 floor on a market so we'll do that now okay for our example of a price floor we're going to talk about the minimum wage now to understand this we have to set up what's called the labor market which is really the same thing that we've been doing all the way through but it's just going to have a few different things on the axis okay so supply uh when you're supplying mastery i have an axis now what normally goes on the vertical axis in a supply and demand
• 01:00 - 01:30 diagram it's price so i'm going to put the price of labor up there now i'm labeling with a w this panic some students like what do you mean a w supposed to be a p well yeah but w in this case is the wage which represents the price of labor on the horizontal axis we're going to put l and l is going to be for the quantity of labor now how should we measure the quantity of labor well you could measure it with either the number of employees or the amount of hours hours is that more accurate sometimes i
• 01:30 - 02:00 use number of employees because it makes it easier to explain some things but ours is is clearly more precise right if i'm a employer i could hire two workers and hire them each for 20 hours a week it's a total of 40 hours or i could hire one worker for 40 hours right but hours is the more accurate understanding of what's going on in the labor market so who are the demanders of labor now this is confusing for students so students like sometimes like to say well i demand work so employees are the demanders of labor but that's not really
• 02:00 - 02:30 true right let me put you this way do you buy your job or does the employer buy your time right the employer buys your time so it's actually the employer who are the demanders um so what does the demand curve look like here's the good news looks the same as any other demand curve we've ever drawn it has a negative slope so the demand curve is gonna have a negative slope and we'll put it in there like that law of demand right by the way does it make sense logically as the wage goes down employers are going to want to hire employees for more hours right because they're cheaper and as the wage goes up
• 02:30 - 03:00 they want to hire them for less now let's take a look at the supply of labor now who are the suppliers of labor well since we've already picked the employers as the demanders of labor the suppliers of labor are the employees right and what's it going to look like well it's going to have a positive slope right as the wage goes up they're going to want to work more and this is an application of the law of supply now i did have a student once who challenged this he said if the wage goes up i'm not going to want to work more and i said well sometimes
• 03:00 - 03:30 you're going to want to work more he says never the wage went up i'd never want to work more i said all right let's try this example let's say you make fifty thousand dollars an hour because that's pretty good i imagine you work one hour a year he says that's awesome so your income i said if we did some quick math is fifty thousand dollars um for the year he said good i said now imagine your wage goes up from fifty thousand dollars an hour to a hundred thousand dollars an hour so what would you do he says that is awesome now i only have to work half an hour a year and i said what and he said yeah now i
• 03:30 - 04:00 make my 50 000. i said but if you work one extra hour you'll make 200 000 a year he said yeah but i would have to work more he was the single least productive person i've ever met in my entire life however before we just throw his his insights away think about it for a second though he may be honest something imagine you made a thousand dollars an hour and you worked 70 hours a week and then your wage went up to 2 000 an hour are all of you gonna turn
• 04:00 - 04:30 around and try to work 75 80 hours a week i think a lot of you are going to try to use that extra money and maybe cut back on the number of hours that you work which means you'd have a very strange labor supply curve it would start low right at low wages people are going to work more as the wage goes up but then as you get the higher wages they might turn around and work less it's actually called a backward bending labor supply curve your labor supply curve would go like this let me just erase that though because we're not going to use that we're just going to assume that the wages at which um the um
• 04:30 - 05:00 that the backward bend would take place are going to be so high they're going to be kind of like off the chart so we're not going to worry about that all right so here's our labor market hey guess where equilibrium is it's where the demand and the supply intersect right where the amount demanded equals the amount supplied again why because there's not a surplus to push wages down and not a surplus to push wages up all right so that's that's equilibrium so some people say um well i don't we don't like this equilibrium we think the wage is too low and too low for whom
• 05:00 - 05:30 it's not lebron james's wage isn't too low even my wage people wouldn't describe this too low when we say too low we're probably talking about who we're talking about the unskilled right or the less skilled worker lower income workers maybe some of you might say i favor the minimum wage because i want to help young workers that's typically why people want to raise the minimum wage so if we take a look at our graph at what happens when you raise the minimum wage the wage will go from w0 and we'll put the minimum wage we're going to put it below or above equilibrium we have to
• 05:30 - 06:00 put it below equilibrium right if the equilibrium wage in the market was let's say five dollars an hour and you made a minimum wage law that says that the prior the wage can't go um above uh i'm sorry you can't go below two when the wage is already five it's not going to have any any effect so you're going to put the minimum wage law above equilibrium you're trying to raise wages right so that is the minimum wage now that is your example of a price floor all right so when you raise that wage what happens oh workers what do
• 06:00 - 06:30 they want to do they want to work more right when you raise that minimum wage they want to work more so the amount of labor supplied increases but on the other hand what do the firms do when the wage is higher the workers are more expensive they want to hire less so when you look at this particular graph you can see that we have a surplus right the amount supplied is out here the amount demanded is over here so the amount being supplied exceeds the
• 06:30 - 07:00 amount demanded you have a surplus of labor right this is the labor market so what normally happens in the face of the surplus in the face of the surplus the it's going to have the market forces are going to push the price in this case which is the wage down but that can't happen according to the law right the law says that the wage has to stay higher so what's going to happen well we're going to be stuck with this surplus so in everyday english what does the surplus mean well if you have a surplus of labor
• 07:00 - 07:30 you have more people looking for jobs than people are hiring that's called unemployment or if you want to phrase it a different way people are looking for more hours and firms are hiring less hours that's a cut in people's hours so when you look at the competitive labor market the effect of the minimum wage is to either cause unemployment or to cause a cut in hours now you're hoping that it's going to be a cut in the war in the skilled workers hours or the skilled workers um jobs right because your goal was to help the unskilled worker
• 07:30 - 08:00 that's there's a real question we're going to talk about that in a little bit about whether raising the minimum wage helps the skilled worker helps the unskilled worker but for now what i need you to see is it causes a surplus of labor which means there'll be an increase in the uh amount of unemployment or increase in the amount or a cut in people's cut in people's hours what i want to do next is try to use those efficiency the the market efficiency concepts to try to see whether the new result as a result of the minimum wage is efficient or inefficient and we're going to do
• 08:00 - 08:30 that next okay i want you to take a look at this labor market with the um with the various uh regions underneath the demand curve and above the supply curve labeled okay so uh before the law we're at equilibrium right we're at equilibrium so the amount of consumer surplus it's really employer surplus here but we'll continue to use the words consumer surplus for practice consumer surplus is the area between the demand
• 08:30 - 09:00 curve and the wage so consumer surplus was at area a plus area b plus area d and producer surplus was in this case is the employee surplus is area c plus area e so as a result of the law we're going to raise the minimum wage up here right we're gonna raise the minimum wage and when we raise the minimum wage you can see now that the amount that's going to be demanded is only over here now so
• 09:00 - 09:30 you might be saying what about the amount that's being supplied doesn't that matter well no they're not going to have their just because they're supplying their labor doesn't mean that they're going to be getting those those jobs right as i said before i'm willing to quit my job teaching and being the be the shooting guard for the boston celtics and why am i not the shooting guard for the boston celtics don't you dare say it's because i can't play basketball it's because um they don't want me right and so just because you want a job doesn't mean you have one so while these workers might want jobs might want hours this is all the labor
• 09:30 - 10:00 demand is all the firms are hiring all right so now that you see that what happens when there's the minimum wage law what happens to the surpluses well consumer surplus now is only area a right employers unequivocally lose when you raise the minimum wage because their surplus went from a plus b plus d just down to area area a so what happened areas b and d well what you should be able to see is now the workers are being paid this wage the minimum wage and those who are
• 10:00 - 10:30 keeping their jobs right they're being hired from all the way out here to labor demand so their surplus is the difference between what they were willing to offer their services for which is found in the supply curve and the price the wage that they're now getting it for which is the minimum wage so the area producer surplus has now become areas b plus c right so you have picked up that that area now is
• 10:30 - 11:00 there a loss yeah if you notice there's that deadweight loss problem again right there are these these hours of work were efficient from society's point of view and they're not going to take place because the minimum wage has priced those those hours out of existence so we now have areas of deadweight loss which is equal to d plus e now who's better off who's worse off as i said the employers are unequivocally worse off they used to get a plus b plus d but now they only have a uh what about the workers are they better off as a
• 11:00 - 11:30 group well some workers are better off some workers are worse off again you're hoping it's going to be the unskilled workers who are made better off by the policy whether workers as a group are better off or not well that depends right because producer surplus used to be c plus e and now it's just b plus c so it really depends on what is larger you've lost area e but you've picked up area b and this is an empirical question depending on the elasticities of the demand supply for labor a topic we haven't talked
• 11:30 - 12:00 about yet so it's possible workers as a group are better off as a result of the policy now the question is which workers are better off it's also possible the workers as a group are worse off right because if area um uh e is larger than then that's the deadweight loss to the to the suppliers is worse than the um than the gain they get in in b then they could be worse off as a group but this is an empirical question but in terms of efficiency uh this is the amount that was would maximize the equilibrium labor was the
• 12:00 - 12:30 amount that would maximize total surplus and we obviously have less than that we have dead weight loss of dna all right now that you understand both how minimum wage creates a surplus that is price floors by the way minimum wage or example of price floors create a surplus and how price floors minimum wage be an example of a price floor our price floors are also inefficient we want to talk about who does the minimum wage help does it doesn't help skilled workers or unskilled workers and that's an issue
• 12:30 - 13:00 which i'm going to turn to next one of the interesting questions that i like to ask students as a result in our discussion of the minimum wage law is do unions favor minimum wage the answer is they do which is pretty interesting answer if you think about it and if you ask unions why do you support minimum wage laws they'll say because we want to help all people make more money even though the purpose of the union is supposed to make people in the union more money so why do unions favor is
• 13:00 - 13:30 there another explanation for why unions favor minimum wage laws well think about this who do unions typically represent skilled workers or unskilled workers they typically represent skilled workers and do union workers typically make more than minimum wage or less they typically make more so the interesting question is why do unions favor increases the minimum wage let's try this thought experiment for a second let's imagine let's imagine you run an airline and i run an airline i run a a luxurious airline i have reclining
• 13:30 - 14:00 seats with large screen tvs playing first run movies where outback delivers um outback steak and macaroni and cheese for every meal you on the other hand run a no no frills airline doesn't even have seats it's like that's shoulder straps it's like a subway in the sky you don't serve food you don't serve drinks you hurt people like they're into cattle cars but you get them on their on their way now will people take your airline
• 14:00 - 14:30 of course they will because it's cheap will people take my airline of course they will because it's awesome now can you imagine if i went to the government and i said you know i'm really concerned have you seen the no frills airline i think they're having problems feeding themselves on that on those prices i think we need to help them will you pass the law says everybody has to charge a higher price am i really trying to help them i think most of you can see right away i'm not trying to help them try to help myself right the minute people have to pay more money for the airline they're not going to take the no frills airline they're going to turn around and take and take my airline
• 14:30 - 15:00 so let me ask you this question who does the minimum wage really help why do unions support it well unions support are organized around skilled workers and and uh and unskilled workers are non-unionized workers as a general rule so when you raise the minimum wage what have you done well think about this why do work why do uh why do firms hire unskilled workers because they're cheap right why do they hire skilled workers well because they've got skills but if you pass a law raising the minimum wage
• 15:00 - 15:30 you've reduced the only incentive people have to hire unskilled workers they're not cheap anymore so when you pass that law to raise wages firms are gonna have an incentive to turn away from the unskilled worker and toward the skilled worker which is again why unions support it because they're organized around skilled workers but again if the purpose of the minimum wage law if your purpose was to help poor people who tend to be low skill low skilled or unskilled workers less skilled workers um if your goal is to help those workers then you have to ask yourself the
• 15:30 - 16:00 question is the minimum wage really helping them or is it really just going to incentivize firms to substitute away from the unskilled worker towards a skilled worker or towards a machine and it may hasten the unskilled work the loss of the unskilled workers job so these are things you have to keep in mind again there's a difference between the intent of the law and what the effect of the law might be so if you're trying to help unskilled workers you really should ask yourself the question is raising the price of the unskilled worker really the way to help them or are there other alternatives
• 16:00 - 16:30 okay so what i want to do is draw the graph of a labor market right let's re redraw that graph if you remember the demanders of labor are the employers the suppliers of labor are the employees here's the equilibrium wage and we've been discussing what about a situation where we find this wage simply too low that we want to use some sort of policy to raise people's wages and the minimum wage as an example of a price floor is one
• 16:30 - 17:00 such way but we did see that first it may have some negative consequences associated with it well all policies have negative consequences but it may have negative consequences that we would like like to avoid right because it might be causing increase in unemployment and it might be causing a cut in people's hours and interestingly the wages that we are raising might be of skilled more skilled workers and we might be actually hurting uh less skilled workers which is generally the goal of policies to generally help the unskilled because they're the people who
• 17:00 - 17:30 are having the hardest time making it so how do we raise wages in a way that doesn't work against supply and demand does it work against market forces but works with market forces well if you can find some way to get the employers to increase the demand for labor right the demand for labor would shift demand for labor would shift to the right right we'd have a new demand for labor and wages would be higher equilibrium wages would be higher and
• 17:30 - 18:00 equilibrium quantity would be higher so we'd have higher wages and we'd have people working for more hours or more people working right so this seems to be a a policy which has exactly the kind of effects that we're looking for higher wages and more people working the question becomes how do you increase the demand for labor how do you give employers a greater incentive to hire higher workers um one way you might be able to do this is if you remember one of the factors which shifts demand is is quality right so
• 18:00 - 18:30 why do unskilled workers makes a little money well because they don't have skills so if government for example came up with policies which strengthened employees skills that is increase the quality of the worker to the employer then that would have the incentive incentive of raising wages well what kinds of policies do that well any kind of policy which lowers the cost of workers acquiring what's known as human capital will have the ins will have the tendency to raise their raise their
• 18:30 - 19:00 skills so government for example uh could invest uh more in schools maybe not just more money but maybe change the way schools educate students so that the the quality of the graduate is is higher so that students come out of schools with with more skills with better critical thinking skills which may be more practical skills as well the community college is an example of a policy which is designed to raise wages right it's a policy which gives kids an affordable um education so that they can invest in
• 19:00 - 19:30 skills they can further their education and this may have the effect of raising wages so anything that lowers the the cost of human capital also physical capital tools machines and equipment now you might think oh that's not a good policy because maybe tools machines and equipment are really a substitute for workers but in general throughout history physical capital has been a complement to workers right if obviously a machine does display some workers but machines also raise the demand for workers because you
• 19:30 - 20:00 need people to operate the machines to fix the machines and then there's a more complicated argument that you might have learned in your macro classes at least from me that machines overall raise the demand for labor by making uh markets work more efficiently you can go back if you took me for macro that's covered in economic principle number number 13. but if you didn't just think the question really becomes are machines a substitute for labor are they a compliment for labor well a simple way of thinking about this is is that if you had a policy in place which expanded uh
• 20:00 - 20:30 trucking companies incentive to have trucks then you'd need more truck drivers but so the question is if you can lower the cost of human capital or physical capital that will give businesses an incentive to hire more workers hire more workers because they're higher quality or hire more workers because the business has expanded and if so if you can do that then that'll raise the demand for labor and raise and raise wages of course again just like we saw with price ceilings or attempt to work
• 20:30 - 21:00 with market forces and price ceilings you might this might not be so politically successful so because what sorts of things will give businesses incentive to expand well if you lower taxes for example on businesses that's going to give them incentive to expand and then hire more more workers but if you advocate a policy of lowering taxes on businesses you might be accused for example of just favoring the rich when actually your goal is to raise worker wages again so what i want you to do is think about alternative ways that you can use
• 21:00 - 21:30 market forces to achieve the goals that you want of raising wages as opposed to just using a policy which kind of works against market forces and that's kind of what we're talking about about here okay that concludes our discussion of price floors in particular the minimum wage um as an example of a price floor and again i'll ask you the same to do the same thing that i asked you to do when we discuss price ceilings if you're in favor of certain laws to help people
• 21:30 - 22:00 and again i think helping people achieve higher wages helping suppliers sell at higher prices or helping suppliers make more money these are all notable laudable goals noble efforts the real question becomes though are are these policies that we're we're advocating are they actually helping the people we're trying to help and secondly are they doing so in such a way that produces less downsides than other policies and that's why i try to show you alternative ways that you could help
• 22:00 - 22:30 suppliers in the case of the labor market the suppliers of labor workers employees make more money with without necessarily achieving the downsides and helping the actual people you want to help right most of the time when you're trying to help poor people or help workers you're trying to help poor workers so what policies do that how do you how do you um what policies have the least amount of secondary effects the least amount of costs associated with them and actually achieve the results that you want that's
• 22:30 - 23:00 the tricky thing about being an economist is you have to try to analyze the effects of these policies if i again same thing i said earlier with regard to price ceilings you know if i could wish these results if i could wish uh poor people more money i'd wish it to them today but we're left in a world where we have to enact policies which actually uh help poor people make more money that's the goal of the minimum wage so the question becomes do these policies actually achieve those goals and this is something you have to evaluate on your own