One thing I think we need to keep in mind is that in this example Sal is showing what would happen if we raised the minimum wage above the average wage. In the United states right now the average wage is almost $17 per hour and most minimum wages are between $7 and $8 per hour.
Man, you explain things so well. I am definitely subscribing to your channel. In about six minutes, you explain what my professors take an hour to explain and you do it way better! Keep up the good work!
LucisFerre1 No the MW lifts many people out of poverty so they are less reliant on tax funded programs and actually become tax contributors, thus increasing total tax revenue. The CBO has a report on this, Google it, it's easy to find
It causes people to be fired from their jobs and decreases their likelihood for employment. For those who remain employed, it helps them in the short term but also harms them in the long term. The reason for this is when the minimum wage is increased, it prices many businesses out of the labor market either causing them to go under or to not hire as many employees. This allows those that are still hiring to reduce benefits since they are competing with less people to buy that labor. I would advise searching up Thomas Sowell's book "Basic Economics" for a more elaborate and eloquent rundown on how minimum wage laws harm everyone except for the large businesses.@@TheOldirishfan3130
It seems as though many people have pointed out the error already, but to clarify for anyone that missed it; the economics of this lesson become distorted around 7:25, as the presenter mistakenly converts Labor Quantity, (stated as millions of hours per month), into "$1 million per month of surplus". The introduction of the unknown variable by the presenter is accidental, "$1 million per month of surplus" does not have meaning in the context of the lesson. Perhaps the presenters logic was $1 * 1,000,000 hours = $1,000,000-but where does the $1 derive its value from in the market, as stated, $7 - $5 = $2. The value of one million dollars appears to have been selected arbitrarily by the presenter. The correct solution is "1 million hours of labor" -or by the presenters logic, albeit using correct math, "$2 million deadweight loss". Imagine the impact this $2 million would have on payroll taxes. By raising the minimum wage in this scenario, the government introduced a price floor, which inadvertently caused a deadweight loss in the market. This is highly interesting because if we quantified the payroll taxes in this scenario only to extrapolate the data over twelve months to account for compounding interest, we can confidently infer government intervention in the wages market acted as the sole catalyst in the payroll taxes market-causing the total amount of revenue generated by taxes to decrease (meaning less money for government budgets). If we believe the government in this scenario would have otherwise acted in the financial interest of their taxpayers by making responsible investments with taxpayer money, then we know the value of the total deadweight loss will continue to grow as time elapses, (this is assumed under the known principles of compounding interest and surely this government would partake in such an investment strategy).
So basically, a minimum wage enriches the people that will still be employed after passing the law, will put a lot of people out of their jobs and will also shrink the economy overall.
Kalli No. That's all debunked nonsense. A shrinkage in production is a good idea at this point anyways, considering the colossal overproduction issue we have.
@harj2009 This is free market economics. This is where there are no subsides, bailouts or special favors by the government. The market makes things cheaper and efficient for the people.
@Shakespeare1612 But in a healthy market the employees are free to choose where they work, and with competition over labor, employers have to take that into account when employee treatment/wages is being calculated. It actually allows for more mistreatment of employees as it removes the competition that would drive employees to other, more decent, employers.
In physics, when something involves simplifications, they usually mention what a couple of them are. Like, no friction, no air resistance, etc. So exactly what are the simplifications here?
Assuming we’re all profit seeking. Assuming prices react immediately, and uniformly. Basically assuming instantaneous re-alignment of every aspect of a given economy. Just because some of those assumptions may never happen doesn’t mean that the directional relationships aren’t valid.
@polvotierno No. Consumer demand is not dependent on the amount of labor or wage the laborers receive but on the available goods and their cost/ benefit ratios to the consumers. ( Common false association that most people make ) Even if people had "more money" per say the prices of goods would simply rise and everyone would be at the same economic buying power they were at before their money level rose.
They will have more money to spend but the workers who are laid off have less to spend and the companies have less to invest. Even if the employed workers gave their entire additional surplus to employers the employment would not rise to pre-minimum wage levels because of the deadweight loss.
The thing that gets me, is why is 6 dollars too low? where is the "high" cost of living coming from? from farmers, to suppliers, to land sellers, machine and tool sellers, landlord's rent, truckers, etc.. why does inflation increase at a rate much faster than equilibrium wages? that then has people feeling "priced-out", and then turning to some politician or government to save them?
@polvotierno The "socially optimum and sustainable" minimum wage is called the Q star point which is not a "minimum wage" but an efficient wage or the point at which it is most efficient and cost effective for both the demander and supplier to do business.
Excellent presentation. Thank you for the disclaimer about oversimplification. I remember learning these theories at university, and in theory it does all makes sense. However, in reality, demand for labour does not drop as per the model you are using. The assumptions required in order for the market to react like this just aren't realistic. It is fine having a theory, but it is more important to look at studies to determine whether or not a minimum wage increase is positive for the economy.
@lf2game it doesnt. As demand increases the wage goes down. Look at the graph again. (There are two lines. One is demand which is slanted down and the other supply slanted up.)
and where do think the extra capital would come from when raising wages would cause a natural price increase. Also meaning less labor to be paid. And yes I agree it is call investment because no businessmen would want to invest in a place where cost is so expensive. Back to my original statement that why jobs is being ship over sea where it is so cheap to INVEST.
@Afrotechmods That "historical data" is incorrect because most "minimum wage" workers are high school or college students which the government doesn't count as "unemployed" because they are "students". So when a minimum wage is implemented there is a surplus of high school and college students that cant get a job and so they turn completely to their education and miss out on valuable work experience and extra cash that could be used for their student loans. It is not an old economic theory.
@Shakespeare1612 Also employees will simply move to another company that isn't mistreating them which puts pressure on employers to not mistreat their employees so they don't leave. In this way decent employers will stay and the ones that mistreat will be forced out. Not the other way around.
I know this is very much a gross oversimplification, but this really makes the picture seem way different than what it really is. Rising wages corresponds with increasing demand due to more spending money. It isn't just a oh no, jobs are gone. Doesn't work that way.
It's the disconnect that Thomas Sowell speaks so excellently about. It's all about intentions and feel good simple solutions, not their real economic outcomes. People don't know that there are no simple solutions in economics, only trade offs. Everyone wants to believe that there are easy answers to all the problems, like this jackass I was talking to, he has no concern for the costs of his stupid ideas.
@polvotierno Those are factors that explain the quantity of labor demanded. These forces in no way change the fact that wages at equilibrium will be based on demand and supply. Employers do not dictate wages any less or more than employees do. If this were true everyone would pay the minimum.
@daiitokumyouou899 The short term result of small minimum wage hikes is that they shift money away from the business' net profits, towards the employees paychecks. Depending on if you are the employer or the employee, this may be perceived as good or bad. But overall, a growing economy needs sufficient disposable income in the hands of employees so they can spend/invest it, so the money eventually becomes revenue/capital for other desirable businesses.
@a2m4m60 LIke I said, the minimum wage will rise to a level that is socially efficient and then equalize there... it is not ever-increasing... still, minimum wage has to cover social costs of labor; education, healthcare, etc... If wages don't cover these things, society will deteriorate or taxes have to be levied to cover them through public goods.
@cool70200 because the government is introducing money into the system faster than the market can catch up with which skews the equilibrium and causes inflation. Its a circular cycle where the government wants to get reelected and the people figured out they can vote themselves more money in the mean time while the rest of the system falls out.
I don't think the assumption that total available labour hours is entirely dependent on wage rate. If I need an employee then I will still need an employee if I am forced to pay $1 more a hour. So I disagree with this model, empirically I doubt it holds up to its premise.
-.-.....yeah raise the minimum wage so that firm have a difficult time operating business, then they ship jobs over sea where it is cheaper and less regulated.
@harj2009 The unskilled laborer is hurt the most because they are the ones who become unemployed when an employer wants to maximize the output of workers who are paid the minimum wage. He just won't hire anyone else and have his current employees work harder. While the best intentions are at heart with minimum wage laws, the outcomes actually help keep huge corporations huge because smaller companies can't compete. You don't want to look at the FACTS, you just want to feel good.
@polvotierno You just described a universe in which an ever increasing minimum wage would create an ever increasing consumer demand. So if a farmer is harvesting a limited resource of corn, he needs a few laborers to harvest the corn. If you increase their minimum wage exponentially there is a point at which the cost of harvesting the corn would add an exponential cost to the price killing consumer demand. So that theory has no logical, rational, nor mathematical basis.
@Afrotechmods No a growing economy simply needs efficiency and risk taking not more money in either the hands of employers, employees or government officials.
@FrankiePoker "Thinking that economic theory has anything to do with political parties is just nonsense". I was going to entertain a discussion with you but that comment made me take an arrow to the knee...
Do you have a video with explanation what happens when the minimum wage is increased, demand for labour decreases but at the same time, those workers that now have a higher wage, will use more money on consumption, so the demand in the market for products will increase, and firms can hire more people to produce those products... Right?
increase the wage artificialy reduce the demand of labour, that reduce the production of goods but also increase the consume power of buyers that increase the demand. This combination leads to a increase of prices that finally is equal to an increase of inflation in the economy. is that how the laws of economy take the revenge of this artificially increase of wage.
@a2m4m60 you are only thinking of the private interests of business, you are not expanding your view to social optimums... also there are forces that force down wages due to employers dictating wages, employees job insecurity, etc...
What I don't get is that these graphs and this knowledge is in 90%+ of econ texts, and yet it is considered "flawed" by only 25% of the economic community, yet minimum wages exist in 90% of developed countries... wait wtf?
This model doesn't account for minimum demand. There are a minimum amount of man hours required to operate a store. You cut too many employees you can't run the store. This either leads to the store closing, or employers taking a loss in profit to cope with the new wage. I tend to lean towards employers taking a loss of profit, because they'll still be making profit. What I don't believe is that no one will tap the market should this minimum demand not be met.
MrAnalyticalCritic What happens often is it is no longer worth as much and they do close, or they gradually raise prices to cope contributing to inflation, or they come up with some creative automation to ease the burden of the remaining workers.
@daiitokumyouou899 Your complete misunderstanding of the graph baffles me. The X axis is labor hours (independent variable) and the Y axis is wage (dependent variable). So in the downward sloped Demand function (the employer) the more labor required the less the employer wants to pay. The Supply Function (laborers) demand more wage the longer they work. Both parties (laborers and employers) enter an agreement at an equilibrium point called the wage per hour. How is that for empirical modeling.
they tried to get rid of child labor in Bangladesh by passing a law. Well those kids needed those jobs to support their families. What happened instead was those kids became prostitutes both male and female to support their families. You can raise the minimum wage but that does not force employees to hire you in fact they won't hire you because you would simply be a drain on resources if you don't merit the wage. Also sweat shop workers get payed more than they did before when they were farmers.
@xanas3712 Almost always there are more people seeking work than jobs available... This suppresses wages and then when you add in globalization, there are even more people available for the jobs... Realize that wages have lagged way behind increases in productivity since the 80's... This reflects loss of power of labor and an increase of power of employers. If wages were higher at this point, the recovery would be easier.
@harj2009 That's because minimum wage itself allows for a price floor for labor across the market, so there is no competition between employers over productive low skilled workers. Since the manager market is not burdened by minimum wage, the employers have to compete with other companies so that they can keep their best employees. I.E. The managers will get paid more over time because the market is competitive.
@polvotierno Why would there be more people seeking work than jobs available? I have and I'm sure you have and everyone else here has unfulfilled desires, things we'd like that we don't have or services that we would like performed/etc. So it seems to me that it can't be that there is truly a lack of needs. It must be that there is a reason these needs don't become jobs. Some reasons for that include uncertainty, dis-coordination, regulation, and taxation. Minimum wages don't help either.
@Shakespeare1612 You're absolutely right! I was appalled when i heard my friend's economics professor (in the UK) stated "removing the minimum wage would be a good thing for the market". All i could think was; well yeah, so is slave labor, but that doesn't change the fact that it's wrong.
I'm a little confused....If I can find a job that pays better it doesn't make me want to work longer hours. I would actually probably work fewer hours since I could still be making more even though I worked less. (e.g. $6/hr minimum wage at 40 hrs/wk is $240/wk, before tax. $7/hr at 35 hrs/wk is $245/wk. I'm making more money and I have more free time).
"You want to force little kids in places like Malaysia or Thailand" Forced labor is pretty fucking rare in sweatshops. People often CHOOSE to work in these places because the wages are BETTER than anywhere else they could work. I am not forcing them to do anything. You are the one who would FORCE producers to pay them above market wages.
Increasing minimum wage will also increase consumer demand which will increase business demand for labor which will shift the labor demand curve to the right... ultimately there is a minimum wage which is socially optimum and sustainable...
No. Increase the minimun wage decrease the goods of a employer can produce because the work force is more expensive. The quantity of good decrease. At same time the artificially increase of wage rise up the demand and make that price goes up. This is inflacionary and the increase of consuption power decrease balancing the initial artificially alteration.
@@Nemesis190292 Prices have an optimal level to maximize profits. As well, wages have an optimal level to maximize net social benefits. This is the most important concept of economics to understand. You cannot see the minimum wage as linear where a rise is always inflationary. Inflation will not happen when the aggregate profit rate is sufficiently high over the cost of money. The key is to understand that either raising the minimum wage or dropping it would increase net social benefits. The secret is to know how to calculate the optimal minimum wage.
@@polvotierno i think that is neccesary raise the wage in organic way. in other words. raise the wage by the increment in the competency and production of good and services. Is the most difficult form of increase the wage, but is the most solid. Increase the wage only by the force of law is a short cheat to the system that then the system make us to pay. This is the most important concept of economy. We can not hack the system AKA: exchange of millons of individuals AKA: market.
@@Nemesis190292 Well, the problem is that business owners are not calculating the marginal cost of labor anymore. They simply push politicians to keep the minimum wage low. We have seen great improvement in productivity for decades, but the value of that increased productivity has simply gone to the upper incomes. A good economic system is not being calculated fairly. The optimal minimum wage is not being calculated. It is simply being kept low as productivity increases move to the top incomes. Keep in mind that the aggregate corporate profit rates are extremely high in comparison to historical numbers. Labor share fell after the recessions and is not rising. We have an economic system that is not using good economic calculations. it is simply being directed toward benefiting the upper incomes in any way possible.
@@polvotierno the problem is the concept of minimun wage. The fact that the state can put a price floor in the market. This produce a deadweight only analizing the basic macro theory. Imagine the rest of inestability that produce this fact. The size of inestability that can produce the add of a arbitrary law that simply put a ceiling based only in political and demagogic incentive.
@Shakespeare1612 So you would rather have a lot of unemployed people that cant feed themselves verses an employer that is considered "undignified"?? Wage laws don't enforce human dignity. Government laws enforcing peoples property rights based on the fact that people have value are what enforce their dignity. Like the property right to live, or to do business, or to own land, etc.
The minimum wage is a bad thing and should be removed. There is no right for a wage. The minimum wage laws could be rewritten another way: anybody that has skills not sufficient for the minimum wage, say $8.00 an hour, he should be unemployed. This leads to hiring discrimination.
You're welcome to go work for 50 cents a day in Indonesia making my sneakers for me. Have fun. You seem to think that you will have better working conditions there.
Hey, but when they could be making $8.00 and hour elsewhere, I think it's pretty safe to say "forced" ...forced by what? By not having a minimum wage in their country. Simple. Enjoy your sneakers.
You should have mentioned what types of workers would be affected. If there is a surplus of workers the employers have more interest in being selective. So those untrained unskilled workers are hurt, while white middle class teens benefit from medium wage.
Actually, if you'd bother looking up some unemployment statistics, it's white workers under 25 that are losing jobs while hispanics are growing in employment, this is happening with the current surplus of labour. If you increase the surplus of labour, the disparity between whites and hispanics will increase, potentially hurting asians and blacks too. So no, white middle class teens would be hurt the most.
@daiitokumyouou899 The example presented here is an old economic theory based on false assumptions and unfortunately this results in the divide between Republican & Democrat standpoints on minimum wage. The Rs believe in this model, and the Dems look at actual historical data which shows no decrease in employment rates whenever there have been small min wage hikes. (No offense to Sal, because this is what all schools teach as part of their curriculum and he has to do it too!)
I dunno, I think that if there wasn't a minimum wage, then corporations would exploit workers. I know there is competition, but that's assuming it's a 100% "free market." I don't think it is, because the worker has about 0 bargaining power. I think a capatilist system is good, but there need to be regulations. I don't think minimum wage should be arbitrarily raised. Maybe we could figure out a formula tied to a number of different factors like inflation, cost of living, cost of operating/profit, etc etc to determine a minimum wage for each company. That way you don't put struggling small businesses out of operation. I don't think a 15$ wage would work for most companies, and that's why we saw a massive massive spike in unemployment for ny. I don't think corporations should have 100% control, I think a mixed economy is the best system
I like the explanation, don’t like the concept because this can be used as an argument against raising minimum wages from 7.25 to something closer to what average value is produced from laborers which is closer to $15-$17 an hour. Wages should be correlated with value produced in the economy. Otherwise the value produced by the working class gets funneled up to the CEO’s and their shareholders.
Wow. Just wow. Allow me to disagree, will you? Most of the Western world during the years after war was becoming less and less "predatory". Yes, there is a cost to that, but there are also benefits - like less social distress. In my opinion it would be foolish to prevent such changes in the market out of some puritan values. We certainly should seek efficiency, but not at the cost of exploitation.
You make no sense--obviously you think that people in sweatshops everywhere really want to live in poverty. You should join them if you think that minimum wage is a bad idea. You want to force little kids in places like Malaysia or Thailand to make your sneakers for you and only pay them pennies--if you think they're treated better because they don't have minimum wage laws you are very, very mistaken.
Micro analysis fails on this topic. It has been demonstrated repeatedly that this model does not apply to the minimum wage. For starters: www.cepr.net/documents/publications/min-wage-2013-02.pdf
+Travis Kendall CEPR is not a reliable, objective source. It's difficult to actually collect reliable data to test this model, but here's a review that does a pretty good job: www.nber.org/papers/w12663.pdf
@harj2009 Spoken like a true propagandist.(March on comrade).Did it occur to you that illegal immigration increases labor competition,you lose bargaining power; when the education level and quality drops,you lose bargaining power. BTW - the education issue is where that management/worker thing comes in - Also factor in that some people are more skilled than others; then unions came in, guaranteeing wages based on the least contributing member.Higher labor cost.-IT'S CALLED ECONOMICS.
This all looks like mumbo jumbo considering the fact that Seattle has gained a lot of jobs in the restaurant business (1,800), and elsewhere since they raised the minimum wage earlier this year, according to the bureau census. Is that because demand in labor is relative to demand in goods, and not wages. A restaurant is not going to fire servers when they need people to serve the food. I know in my business, we hire and fire people relative to the amount of work we have. I'm not going to fire one of my builders whenever I need them to build for me. I don't hire extra employees, and if a company is capable of firing any because of a small wage increase,, that means they were expungeable, and I would consider them dead weight in the first place, which is inefficient business.
+Seaneiboy Demand or supply could be sticky for a mount of time but overallly speaking if the cost and income are imbalance the company should fire somebody in order to fullfill the equilibrium.
+Seaneiboy You say it's mumbo jumbo yet you provide no hard-modeled alternative. The only fault here is that it is very simple, which isn't really a fault, it gives you an idea of how markets will behave when labor price floor is increased, ALL OTHER VARIABLES REMAINING EQUAL. Of course other variables apply in the real world, but this doesn't mean the simplified model is wrong. For example, let's say that labor costs are artificially raised by a government of a community. But let's also assume that members of this community are "progressive", and almost everyone agrees that those working menial jobs need to get paid more, such that employers are happy to pay it (why weren't they already??? well...). So once the wage is raised, employers decide to eat the cost citing moral reasons. BUT STILL, that cost is absorbed somewhere, whether by the labor market as a whole, by the employers themselves, OR by the consumers of the products the wage-earners make. Employers are likely to increase prices of goods to avoid any financial loss as a result of paying higher wages. Increased consumer costs mean an increase in the cost of living assuming the goods discussed are necessary for living. For those goods that aren't, then there is less incentive for a consumer to purchase them if the price has gone up. It's possible, of course, that a slight increase in minimum wage is simply ate by "ethical" consumers, who understanding the issue, choose to eat the cost because they believe the workers deserve higher wages. But still, the model, though simplified, demonstrates two things: 1) It generates a cost for SOMEONE, and 2) the higher the proposed wage increase, the less likely any players in the market are willing to eat the cost for ethical reasons.
Seaneiboy but is the number of jobs greater or less than the number of jobs that would have been gained anyway? In a growing economic market such as Seattle there is always an increase in jobs since the market is growing. The question is whether even more jobs would have been available if the min wage was increased by less or not increased at all.
Yeah, because lowering wages really drives votes. What kind of politician would propose something like this? The vast majority of people aren't unemployed and the few unemployed voters that would gain from a law such as this would get trumped by the millions of people that would lose money.
David Inc. it's a model, it's meant to abstract. And it is not wrong. You cannot infinitely raise the minimum wage and not expect unemployment. The reason we all complain about this topic is that the current minimum wage has an infitisemally small effect on the labor market.
HALO INSTINCTS 😂😂😂 that’s Khan Academy... it’s for learning, if he talked slower it’d be a 30minute vid and if he didn’t include the information you’d be missing a LOT of necessary info. You can turn the speed of the video up or down.
One thing I think we need to keep in mind is that in this example Sal is showing what would happen if we raised the minimum wage above the average wage. In the United states right now the average wage is almost $17 per hour and most minimum wages are between $7 and $8 per hour.
Man, you explain things so well. I am definitely subscribing to your channel. In about six minutes, you explain what my professors take an hour to explain and you do it way better! Keep up the good work!
Love the mealy mouthed apology at the beginning for the inevitable conclusion, that MW laws harm the unskilled, uneducated labor force.
LucisFerre1 No the MW lifts many people out of poverty so they are less reliant on tax funded programs and actually become tax contributors, thus increasing total tax revenue. The CBO has a report on this, Google it, it's easy to find
It causes people to be fired from their jobs and decreases their likelihood for employment. For those who remain employed, it helps them in the short term but also harms them in the long term. The reason for this is when the minimum wage is increased, it prices many businesses out of the labor market either causing them to go under or to not hire as many employees. This allows those that are still hiring to reduce benefits since they are competing with less people to buy that labor. I would advise searching up Thomas Sowell's book "Basic Economics" for a more elaborate and eloquent rundown on how minimum wage laws harm everyone except for the large businesses.@@TheOldirishfan3130
It seems as though many people have pointed out the error already, but to clarify for anyone that missed it; the economics of this lesson become distorted around 7:25, as the presenter mistakenly converts Labor Quantity, (stated as millions of hours per month), into "$1 million per month of surplus". The introduction of the unknown variable by the presenter is accidental, "$1 million per month of surplus" does not have meaning in the context of the lesson. Perhaps the presenters logic was $1 * 1,000,000 hours = $1,000,000-but where does the $1 derive its value from in the market, as stated, $7 - $5 = $2. The value of one million dollars appears to have been selected arbitrarily by the presenter.
The correct solution is "1 million hours of labor" -or by the presenters logic, albeit using correct math, "$2 million deadweight loss". Imagine the impact this $2 million would have on payroll taxes. By raising the minimum wage in this scenario, the government introduced a price floor, which inadvertently caused a deadweight loss in the market. This is highly interesting because if we quantified the payroll taxes in this scenario only to extrapolate the data over twelve months to account for compounding interest, we can confidently infer government intervention in the wages market acted as the sole catalyst in the payroll taxes market-causing the total amount of revenue generated by taxes to decrease (meaning less money for government budgets). If we believe the government in this scenario would have otherwise acted in the financial interest of their taxpayers by making responsible investments with taxpayer money, then we know the value of the total deadweight loss will continue to grow as time elapses, (this is assumed under the known principles of compounding interest and surely this government would partake in such an investment strategy).
So basically, a minimum wage enriches the people that will still be employed after passing the law, will put a lot of people out of their jobs and will also shrink the economy overall.
Kalli No. That's all debunked nonsense. A shrinkage in production is a good idea at this point anyways, considering the colossal overproduction issue we have.
Wonderful Explanation........
Thanks for clearing my doubts
@harj2009 This is free market economics. This is where there are no subsides, bailouts or special favors by the government. The market makes things cheaper and efficient for the people.
@Shakespeare1612
But in a healthy market the employees are free to choose where they work, and with competition over labor, employers have to take that into account when employee treatment/wages is being calculated.
It actually allows for more mistreatment of employees as it removes the competition that would drive employees to other, more decent, employers.
In physics, when something involves simplifications, they usually mention what a couple of them are. Like, no friction, no air resistance, etc. So exactly what are the simplifications here?
Michael Pearson probably government subsidies that keep certain businesses (like Walmart) afloat.
Assuming we’re all profit seeking. Assuming prices react immediately, and uniformly. Basically assuming instantaneous re-alignment of every aspect of a given economy.
Just because some of those assumptions may never happen doesn’t mean that the directional relationships aren’t valid.
@polvotierno No. Consumer demand is not dependent on the amount of labor or wage the laborers receive but on the available goods and their cost/ benefit ratios to the consumers. ( Common false association that most people make ) Even if people had "more money" per say the prices of goods would simply rise and everyone would be at the same economic buying power they were at before their money level rose.
thanks
last comment: "if you believe this model..." LOL
minimum wage should be tied to inflation but with a central bank as inflationary and expansionary as ours, it would be burdensome on smaller business.
They will have more money to spend but the workers who are laid off have less to spend and the companies have less to invest. Even if the employed workers gave their entire additional surplus to employers the employment would not rise to pre-minimum wage levels because of the deadweight loss.
The thing that gets me, is why is 6 dollars too low?
where is the "high" cost of living coming from?
from farmers, to suppliers, to land sellers, machine and tool sellers, landlord's rent, truckers, etc..
why does inflation increase at a rate much faster than equilibrium wages?
that then has people feeling "priced-out", and then turning to some politician or government to save them?
@polvotierno The "socially optimum and sustainable" minimum wage is called the Q star point which is not a "minimum wage" but an efficient wage or the point at which it is most efficient and cost effective for both the demander and supplier to do business.
This is called investing.
good illustration on the minimum wage
Excellent presentation. Thank you for the disclaimer about oversimplification. I remember learning these theories at university, and in theory it does all makes sense.
However, in reality, demand for labour does not drop as per the model you are using. The assumptions required in order for the market to react like this just aren't realistic. It is fine having a theory, but it is more important to look at studies to determine whether or not a minimum wage increase is positive for the economy.
AJHornet Are there any specific simplifications you know about?
@lf2game it doesnt. As demand increases the wage goes down. Look at the graph again. (There are two lines. One is demand which is slanted down and the other supply slanted up.)
Do a video on the externalities and social costs of labor... you will find that the minimum wage is socially inefficient...
The most impotant simplification assumption is that of perfect competition.
and where do think the extra capital would come from when raising wages would cause a natural price increase. Also meaning less labor to be paid. And yes I agree it is call investment because no businessmen would want to invest in a place where cost is so expensive. Back to my original statement that why jobs is being ship over sea where it is so cheap to INVEST.
@Afrotechmods That "historical data" is incorrect because most "minimum wage" workers are high school or college students which the government doesn't count as "unemployed" because they are "students". So when a minimum wage is implemented there is a surplus of high school and college students that cant get a job and so they turn completely to their education and miss out on valuable work experience and extra cash that could be used for their student loans. It is not an old economic theory.
@a2m4m60 meant to say "more or less money in the hands of employees, employers, or government officials." *
Mr khan do price ceiling and price floor is good for a market or not ?
@Shakespeare1612 Also employees will simply move to another company that isn't mistreating them which puts pressure on employers to not mistreat their employees so they don't leave. In this way decent employers will stay and the ones that mistreat will be forced out. Not the other way around.
I know this is very much a gross oversimplification, but this really makes the picture seem way different than what it really is. Rising wages corresponds with increasing demand due to more spending money. It isn't just a oh no, jobs are gone. Doesn't work that way.
It's the disconnect that Thomas Sowell speaks so excellently about. It's all about intentions and feel good simple solutions, not their real economic outcomes. People don't know that there are no simple solutions in economics, only trade offs. Everyone wants to believe that there are easy answers to all the problems, like this jackass I was talking to, he has no concern for the costs of his stupid ideas.
@polvotierno Those are factors that explain the quantity of labor demanded. These forces in no way change the fact that wages at equilibrium will be based on demand and supply. Employers do not dictate wages any less or more than employees do. If this were true everyone would pay the minimum.
@daiitokumyouou899 The short term result of small minimum wage hikes is that they shift money away from the business' net profits, towards the employees paychecks. Depending on if you are the employer or the employee, this may be perceived as good or bad. But overall, a growing economy needs sufficient disposable income in the hands of employees so they can spend/invest it, so the money eventually becomes revenue/capital for other desirable businesses.
@a2m4m60 LIke I said, the minimum wage will rise to a level that is socially efficient and then equalize there... it is not ever-increasing... still, minimum wage has to cover social costs of labor; education, healthcare, etc... If wages don't cover these things, society will deteriorate or taxes have to be levied to cover them through public goods.
This hypothetical worker earns more than I earn as a student working part-time.
wait, what??
Since when does one have to prove a negative position? The burden of proof is on the claimant.
@cool70200 because the government is introducing money into the system faster than the market can catch up with which skews the equilibrium and causes inflation. Its a circular cycle where the government wants to get reelected and the people figured out they can vote themselves more money in the mean time while the rest of the system falls out.
I don't think the assumption that total available labour hours is entirely dependent on wage rate. If I need an employee then I will still need an employee if I am forced to pay $1 more a hour. So I disagree with this model, empirically I doubt it holds up to its premise.
-.-.....yeah raise the minimum wage so that firm have a difficult time operating business, then they ship jobs over sea where it is cheaper and less regulated.
@harj2009
The unskilled laborer is hurt the most because they are the ones who become unemployed when an employer wants to maximize the output of workers who are paid the minimum wage. He just won't hire anyone else and have his current employees work harder.
While the best intentions are at heart with minimum wage laws, the outcomes actually help keep huge corporations huge because smaller companies can't compete.
You don't want to look at the FACTS, you just want to feel good.
@polvotierno You just described a universe in which an ever increasing minimum wage would create an ever increasing consumer demand. So if a farmer is harvesting a limited resource of corn, he needs a few laborers to harvest the corn. If you increase their minimum wage exponentially there is a point at which the cost of harvesting the corn would add an exponential cost to the price killing consumer demand. So that theory has no logical, rational, nor mathematical basis.
I miss the good ol' days when gas was 75 cents a gallon, inflation is a nuisance.
@Afrotechmods No a growing economy simply needs efficiency and risk taking not more money in either the hands of employers, employees or government officials.
@FrankiePoker "Thinking that economic theory has anything to do with political parties is just nonsense".
I was going to entertain a discussion with you but that comment made me take an arrow to the knee...
WOW 7 DOLLARS AN HOUR!?!?! It makes sense for me to work now :P thats enough to COME OUT OF RETIREMENT!
Bearded Eddie it was an example... get that stick out of your butt. Khan Academy is for learning, they always use random examples. -_-
I watched this on twice the speed, and managed to follow the entire lesson.
huh? Don't you get the idea of incentive investment in places where it is much cheaper? And what you mean from whom pockets?
Do you have a video with explanation what happens when the minimum wage is increased, demand for labour decreases but at the same time, those workers that now have a higher wage, will use more money on consumption, so the demand in the market for products will increase, and firms can hire more people to produce those products... Right?
increase the wage artificialy reduce the demand of labour, that reduce the production of goods but also increase the consume power of buyers that increase the demand. This combination leads to a increase of prices that finally is equal to an increase of inflation in the economy. is that how the laws of economy take the revenge of this artificially increase of wage.
@a2m4m60 you are only thinking of the private interests of business, you are not expanding your view to social optimums... also there are forces that force down wages due to employers dictating wages, employees job insecurity, etc...
What I don't get is that these graphs and this knowledge is in 90%+ of econ texts, and yet it is considered "flawed" by only 25% of the economic community, yet minimum wages exist in 90% of developed countries... wait wtf?
This model doesn't account for minimum demand.
There are a minimum amount of man hours required to operate a store. You cut too many employees you can't run the store.
This either leads to the store closing, or employers taking a loss in profit to cope with the new wage.
I tend to lean towards employers taking a loss of profit, because they'll still be making profit.
What I don't believe is that no one will tap the market should this minimum demand not be met.
MrAnalyticalCritic What happens often is it is no longer worth as much and they do close, or they gradually raise prices to cope contributing to inflation, or they come up with some creative automation to ease the burden of the remaining workers.
@daiitokumyouou899 Your complete misunderstanding of the graph baffles me. The X axis is labor hours (independent variable) and the Y axis is wage (dependent variable). So in the downward sloped Demand function (the employer) the more labor required the less the employer wants to pay. The Supply Function (laborers) demand more wage the longer they work. Both parties (laborers and employers) enter an agreement at an equilibrium point called the wage per hour. How is that for empirical modeling.
Can we not turn this into a political debate? People are, I assume, here to learn microeconomic theory, not political doctrine.
they tried to get rid of child labor in Bangladesh by passing a law. Well those kids needed those jobs to support their families. What happened instead was those kids became prostitutes both male and female to support their families. You can raise the minimum wage but that does not force employees to hire you in fact they won't hire you because you would simply be a drain on resources if you don't merit the wage. Also sweat shop workers get payed more than they did before when they were farmers.
@xanas3712 Almost always there are more people seeking work than jobs available... This suppresses wages and then when you add in globalization, there are even more people available for the jobs... Realize that wages have lagged way behind increases in productivity since the 80's... This reflects loss of power of labor and an increase of power of employers. If wages were higher at this point, the recovery would be easier.
Where would you find the level of wage that corresponds to the units of labour supplied (21)? Would that be $5 per hour?
What is maximum price lagignation???
@harj2009
That's because minimum wage itself allows for a price floor for labor across the market, so there is no competition between employers over productive low skilled workers.
Since the manager market is not burdened by minimum wage, the employers have to compete with other companies so that they can keep their best employees. I.E. The managers will get paid more over time because the market is competitive.
Why does the quality decrease if you remove a Price Floor?
@a2m4m60 Why would prices rise when there is the exact same amount of money in the economy, all things being equal...
would you mind explaining why 0.5 was multiplied instead of being divided? i didn't get it
it's a formula to calculate the area of the triangle. 1/2*base*height
this is the first Khan video I don't get...
otherwise, thanks for the help in preparing for my finals!
Valerie Urdich If you watched the "Rent Control and Deadweight Loss" first it would make sense.
@polvotierno Why would there be more people seeking work than jobs available? I have and I'm sure you have and everyone else here has unfulfilled desires, things we'd like that we don't have or services that we would like performed/etc.
So it seems to me that it can't be that there is truly a lack of needs. It must be that there is a reason these needs don't become jobs. Some reasons for that include uncertainty, dis-coordination, regulation, and taxation. Minimum wages don't help either.
If you have the customers they dictate how many workers
@Shakespeare1612 You're absolutely right! I was appalled when i heard my friend's economics professor (in the UK) stated "removing the minimum wage would be a good thing for the market". All i could think was; well yeah, so is slave labor, but that doesn't change the fact that it's wrong.
It’s funny people still don’t understand basic economics after this.
In one word, you mean arbitrage. I get it.
The money would come from their pockets.
Bahahaha, you would a great politician with that plan!
I'm a little confused....If I can find a job that pays better it doesn't make me want to work longer hours. I would actually probably work fewer hours since I could still be making more even though I worked less. (e.g. $6/hr minimum wage at 40 hrs/wk is $240/wk, before tax. $7/hr at 35 hrs/wk is $245/wk. I'm making more money and I have more free time).
You money would eventually become less valuable.
"You want to force little kids in places like Malaysia or Thailand"
Forced labor is pretty fucking rare in sweatshops. People often CHOOSE to work in these places because the wages are BETTER than anywhere else they could work. I am not forcing them to do anything. You are the one who would FORCE producers to pay them above market wages.
Increasing minimum wage will also increase consumer demand which will increase business demand for labor which will shift the labor demand curve to the right... ultimately there is a minimum wage which is socially optimum and sustainable...
No. Increase the minimun wage decrease the goods of a employer can produce because the work force is more expensive. The quantity of good decrease.
At same time the artificially increase of wage rise up the demand and make that price goes up.
This is inflacionary and the increase of consuption power decrease balancing the initial artificially alteration.
@@Nemesis190292 Prices have an optimal level to maximize profits. As well, wages have an optimal level to maximize net social benefits. This is the most important concept of economics to understand. You cannot see the minimum wage as linear where a rise is always inflationary. Inflation will not happen when the aggregate profit rate is sufficiently high over the cost of money. The key is to understand that either raising the minimum wage or dropping it would increase net social benefits. The secret is to know how to calculate the optimal minimum wage.
@@polvotierno i think that is neccesary raise the wage in organic way. in other words. raise the wage by the increment in the competency and production of good and services.
Is the most difficult form of increase the wage, but is the most solid. Increase the wage only by the force of law is a short cheat to the system that then the system make us to pay.
This is the most important concept of economy. We can not hack the system AKA: exchange of millons of individuals AKA: market.
@@Nemesis190292 Well, the problem is that business owners are not calculating the marginal cost of labor anymore. They simply push politicians to keep the minimum wage low. We have seen great improvement in productivity for decades, but the value of that increased productivity has simply gone to the upper incomes. A good economic system is not being calculated fairly. The optimal minimum wage is not being calculated. It is simply being kept low as productivity increases move to the top incomes. Keep in mind that the aggregate corporate profit rates are extremely high in comparison to historical numbers. Labor share fell after the recessions and is not rising. We have an economic system that is not using good economic calculations. it is simply being directed toward benefiting the upper incomes in any way possible.
@@polvotierno the problem is the concept of minimun wage. The fact that the state can put a price floor in the market. This produce a deadweight only analizing the basic macro theory. Imagine the rest of inestability that produce this fact. The size of inestability that can produce the add of a arbitrary law that simply put a ceiling based only in political and demagogic incentive.
should it not be affect? and how about some humanity in econ? minimum wage is hardly what it should be. too much to explain in a mere comment.
nope. Not a republican nor a democrat. I am independence. Just a regular guy who want to be a small employer in the future.
WE ASSUME CETERIS PARIBUS!!!!!! :D
How long ago was that? 1970s?
@Shakespeare1612 So you would rather have a lot of unemployed people that cant feed themselves verses an employer that is considered "undignified"?? Wage laws don't enforce human dignity. Government laws enforcing peoples property rights based on the fact that people have value are what enforce their dignity. Like the property right to live, or to do business, or to own land, etc.
The minimum wage is a bad thing and should be removed. There is no right for a wage. The minimum wage laws could be rewritten another way: anybody that has skills not sufficient for the minimum wage, say $8.00 an hour, he should be unemployed. This leads to hiring discrimination.
You're welcome to go work for 50 cents a day in Indonesia making my sneakers for me. Have fun. You seem to think that you will have better working conditions there.
Hey, but when they could be making $8.00 and hour elsewhere, I think it's pretty safe to say "forced" ...forced by what? By not having a minimum wage in their country. Simple.
Enjoy your sneakers.
Where is the boat shipping all the jobs to CHina, no matter what happens.
You should have mentioned what types of workers would be affected. If there is a surplus of workers the employers have more interest in being selective. So those untrained unskilled workers are hurt, while white middle class teens benefit from medium wage.
Actually, if you'd bother looking up some unemployment statistics, it's white workers under 25 that are losing jobs while hispanics are growing in employment, this is happening with the current surplus of labour. If you increase the surplus of labour, the disparity between whites and hispanics will increase, potentially hurting asians and blacks too. So no, white middle class teens would be hurt the most.
Raise the minimum wage and the real economy will grow since poor people buy things since they need things.
Then small businesses raise prices.
Just add in some single payer healthcare, a dash of mandated union compensation and a handful of green jobs and I could beat Obama!
@daiitokumyouou899 The example presented here is an old economic theory based on false assumptions and unfortunately this results in the divide between Republican & Democrat standpoints on minimum wage. The Rs believe in this model, and the Dems look at actual historical data which shows no decrease in employment rates whenever there have been small min wage hikes. (No offense to Sal, because this is what all schools teach as part of their curriculum and he has to do it too!)
This is why government shouldn't intervene the market
I agree.
I dunno, I think that if there wasn't a minimum wage, then corporations would exploit workers. I know there is competition, but that's assuming it's a 100% "free market." I don't think it is, because the worker has about 0 bargaining power. I think a capatilist system is good, but there need to be regulations. I don't think minimum wage should be arbitrarily raised. Maybe we could figure out a formula tied to a number of different factors like inflation, cost of living, cost of operating/profit, etc etc to determine a minimum wage for each company. That way you don't put struggling small businesses out of operation. I don't think a 15$ wage would work for most companies, and that's why we saw a massive massive spike in unemployment for ny.
I don't think corporations should have 100% control, I think a mixed economy is the best system
austrian>keynesian
will tthere not be 2 million unenployed people
I like the explanation, don’t like the concept because this can be used as an argument against raising minimum wages from 7.25 to something closer to what average value is produced from laborers which is closer to $15-$17 an hour. Wages should be correlated with value produced in the economy. Otherwise the value produced by the working class gets funneled up to the CEO’s and their shareholders.
Wow. Just wow.
Allow me to disagree, will you?
Most of the Western world during the years after war was becoming less and less "predatory". Yes, there is a cost to that, but there are also benefits - like less social distress.
In my opinion it would be foolish to prevent such changes in the market out of some puritan values. We certainly should seek efficiency, but not at the cost of exploitation.
r0galik So you want people to be unemployed?
You make no sense--obviously you think that people in sweatshops everywhere really want to live in poverty. You should join them if you think that minimum wage is a bad idea. You want to force little kids in places like Malaysia or Thailand to make your sneakers for you and only pay them pennies--if you think they're treated better because they don't have minimum wage laws you are very, very mistaken.
Micro analysis fails on this topic. It has been demonstrated repeatedly that this model does not apply to the minimum wage. For starters: www.cepr.net/documents/publications/min-wage-2013-02.pdf
+Travis Kendall Notice who authored that study. It's very hard for me to believe that an organization like that is immune to confirmation bias.
+Travis Kendall
CEPR is not a reliable, objective source. It's difficult to actually collect reliable data to test this model, but here's a review that does a pretty good job:
www.nber.org/papers/w12663.pdf
@harj2009 Spoken like a true propagandist.(March on comrade).Did it occur to you that illegal immigration increases labor competition,you lose bargaining power; when the education level and quality drops,you lose bargaining power. BTW - the education issue is where that management/worker thing comes in - Also factor in that some people are more skilled than others; then unions came in, guaranteeing wages based on the least contributing member.Higher labor cost.-IT'S CALLED ECONOMICS.
This all looks like mumbo jumbo considering the fact that Seattle has gained a lot of jobs in the restaurant business (1,800), and elsewhere since they raised the minimum wage earlier this year, according to the bureau census. Is that because demand in labor is relative to demand in goods, and not wages. A restaurant is not going to fire servers when they need people to serve the food. I know in my business, we hire and fire people relative to the amount of work we have. I'm not going to fire one of my builders whenever I need them to build for me. I don't hire extra employees, and if a company is capable of firing any because of a small wage increase,, that means they were expungeable, and I would consider them dead weight in the first place, which is inefficient business.
+Seaneiboy Yeah, you know what, this youtube comment debunks econ 101. dailysignal.com/2015/10/22/seattle-hiked-the-minimum-wage-to-15-an-hour-heres-what-happened-to-seattles-job-market/?mkt_tok=3RkMMJWWfF9wsRouvqrLZKXonjHpfsX86e4vWqezhYkz2EFye%2BLIHETpodcMTcBrNrvYDBceEJhqyQJxPr3NLtQN191pRhLiDA%3D%3D
+Seaneiboy Demand or supply could be sticky for a mount of time but overallly speaking if the cost and income are imbalance the company should fire somebody in order to fullfill the equilibrium.
+Seaneiboy You say it's mumbo jumbo yet you provide no hard-modeled alternative. The only fault here is that it is very simple, which isn't really a fault, it gives you an idea of how markets will behave when labor price floor is increased, ALL OTHER VARIABLES REMAINING EQUAL. Of course other variables apply in the real world, but this doesn't mean the simplified model is wrong.
For example, let's say that labor costs are artificially raised by a government of a community. But let's also assume that members of this community are "progressive", and almost everyone agrees that those working menial jobs need to get paid more, such that employers are happy to pay it (why weren't they already??? well...). So once the wage is raised, employers decide to eat the cost citing moral reasons. BUT STILL, that cost is absorbed somewhere, whether by the labor market as a whole, by the employers themselves, OR by the consumers of the products the wage-earners make. Employers are likely to increase prices of goods to avoid any financial loss as a result of paying higher wages. Increased consumer costs mean an increase in the cost of living assuming the goods discussed are necessary for living. For those goods that aren't, then there is less incentive for a consumer to purchase them if the price has gone up.
It's possible, of course, that a slight increase in minimum wage is simply ate by "ethical" consumers, who understanding the issue, choose to eat the cost because they believe the workers deserve higher wages. But still, the model, though simplified, demonstrates two things: 1) It generates a cost for SOMEONE, and 2) the higher the proposed wage increase, the less likely any players in the market are willing to eat the cost for ethical reasons.
Seaneiboy but is the number of jobs greater or less than the number of jobs that would have been gained anyway? In a growing economic market such as Seattle there is always an increase in jobs since the market is growing. The question is whether even more jobs would have been available if the min wage was increased by less or not increased at all.
You are so scatterbrained you post two replies for every comment.
Your arguments are invalid.
If this was true and not just a fraud, government would want to lower the minimum wage to increase employment.
Yeah, because lowering wages really drives votes. What kind of politician would propose something like this? The vast majority of people aren't unemployed and the few unemployed voters that would gain from a law such as this would get trumped by the millions of people that would lose money.
See, according to this 1:1 line and this 1:-1 line intersecting on this arbitrary graph, the minimum wage is bad for 'Merica.
David Inc. it's a model, it's meant to abstract. And it is not wrong. You cannot infinitely raise the minimum wage and not expect unemployment. The reason we all complain about this topic is that the current minimum wage has an infitisemally small effect on the labor market.
videos are great, but talk more slowly Jesus...
are u a republican?
Facts aren’t political.
You talk too damn much!!! It confuses me. Next time try giving examples that are more easily understood.
HALO INSTINCTS 😂😂😂 that’s Khan Academy... it’s for learning, if he talked slower it’d be a 30minute vid and if he didn’t include the information you’d be missing a LOT of necessary info. You can turn the speed of the video up or down.