Minimum wage and price floors | Microeconomics | Khan Academy

How a minimum wage might effect the labor market

Microeconomics on Khan Academy: Topics covered in a traditional college level introductory microeconomics course

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[TheIntJuggler]

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.

[LucisFerre]

Love the mealy mouthed apology at the beginning for the inevitable conclusion, that MW laws harm the unskilled, uneducated labor force.

[ZonbiBros]

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!

[hazwell]

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).

[kallianz]

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.

[IssacDigali]

Wonderful

Thanks for clearing my doubts

[mpo]

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?

[yuothineyesasian]

@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.

[abbasakbar]

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.

[bigboywasim]

@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.

[yomamasofat]

last comment: "if you believe this model..." LOL

[Ferrus]

The most impotant simplification assumption is that of perfect competition.

[amm]

@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.

[pakistaniart]

Mr khan do price ceiling and price floor is good for a market or not ?

[polvotierno]

Do a video on the externalities and social costs of labor... you will find that the minimum wage is socially inefficient...

[palasandaram]

good illustration on the minimum wage

[amm]

@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.)

[amm]

@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.

[CRGreathouse]

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.

[amm]

@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.