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Main content
Current time:0:00Total duration:9:06
AP.MICRO:
POL‑1 (EU)
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POL‑1.A (LO)
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POL‑1.A.1 (EK)

Video transcript

let's think a little bit about the labor market and in all of these videos whether we're talking about renting units or hiring people these are huge oversimplifications but we're doing in this way so we can apply some of these basic basic ideas that we're being exposed to in this kind of survey of microeconomics so that we can apply those basic ideas to a kind of real-world things but it's important to realize we're making huge oversimplifications and oftentimes the real context can be more complicated or a little bit nuanced but it gives us a way of thinking about things so this is the unskilled labor market so people who don't have any specific training or experience for a given job the vertical axis is their wage rate per hour it's essentially the price of labour this little gap here shows I started at zero but then I jumped up to five six seven and this right here is a quantity of labour and we're measuring that in terms of millions of hours per month and once again we have this little gap here so we can jump to 20 20 million hours 21 million hours it's important to realize when we think about demand in the labor market we're not talking about individual consumers we're talking about employers in most cases demand comes from individual consumers but now the demand is coming from employers these are the people who are essentially buying labour and the supply is not coming from corporations the supply is coming from the people who provide labour so now it's coming from individual workers so now it is coming from workers so let's just say that this market starts off and completely unregulated and so it has a natural equilibrium equilibrium price for equilibrium range at $6 or equilibrium wage at $6 an hour and an equilibrium quantity of Labor supplied which is 20 to 22 millions of hours per month but let's say the government in this this hypothetical city or country says you know what six dollars is a really low wage we have trouble imagining how people live well off of a six dollar an hour wage so they say that this right over here is too low the government does not like it and maybe many of their voters are people making that wage so they say hey you know what we are going to pass some well-intentioned legislation we are going to pass a minimum wage we were going to pass a law minimum wage that says any employer has to pay at least at least $7 an hour $7 an hour so it has to be at least $7 an hour's so this right over here is a price this is a price floor this is a minimum price in the market when we talked about rent control that was a price ceiling that was a maximum price for rent now this is a minimum price for labor and width since the price floor this minimum price is higher than the actual clearing price is going to distort the market so our price floor is right over here $7 so this right over here is our minimum wage so this right over here is our minimum wage so what's going to happen here well if you look at the demand side of things the employers are going to say wow if I have to pay $7 an hour now I can only afford 21 million hours of labor so they're going to say I can only afford now 21 million hours of labor but if you look at the if you look at the workers they're gonna be they're gonna say gee if I can if I can make $7 an hour if I can make $7 an hour then I more people are going to be willing to work either an individual might say well like if I was working 40 hours a week making $6 an hour if I'm making $7 an hour I'm willing to make work 45 hours a week or there might be a student who's on the fence who says wow now wages have gone up enough that it makes sense for me to work there might be a maybe someone who's retired and now at $6 wasn't enough for them to come out of retirement but $7 is maybe a stay-at-home parent now says $7 is enough for them to come out of retirement or or not stay at home anymore and so it actually the labor the supply the quantity supplied of Labor in terms of hours will increase and so it's $7 an hour people will be willing to supply that much labor but what's going to happen what's going to happen in this situation right over here well in this situation you have all these people who want to work but there's only demand for this much work so this is right here this is going to be an oversupply of labor over supply of Labor so another way to think about it there's only jobs for 21 million people now and now 23 million people want to work for your so you're gonna have two million people who are by the classical definition of unemployed people who are looking for work who can't find work now and it once again this is completely oversimplified because at this point right over here based on the way I just view that you would have no unemployment and we all know even when the economy is humming maximally and there's no regulation there is some unemployment just due to frictions in the market people just randomly quitting jobs or firing getting or or or looking for a new job but so you could almost view this as excess unemployment or you could view this as just a very oversimplified model and in the ideal world you get close to zero unemployment now you have more people looking for jobs and you because the wages have gone but fewer jobs because the employers are forced to pay more if we make all the assumptions of the model you just want to say how many fewer jobs are there because this obviously we're talking about more people even looking for jobs because the perceived wages have gone up but in the absolute level if you you know based on these these linear supply and demand curves before there was demand for twenty two million jobs and that was actually where this or the quantity demanded was and that's also where the quantity supplied was but now it's only 21 million so based on this model you're going to have 1 million 1 million fewer jobs 1 million fewer jobs now when you think about it in terms of surplus so before the minimum wage the entire surplus was this entire area over here so this entire area that's below the demand curve and above the supply curve this entire was a total surplus and it was being divided between the consumer surplus and the producer surplus so this right over here so the between the price and the supply curve was a producer surplus and the producer surplus remember the producers of Labor are the individual workers so this was the benefit above and beyond the opportunity cost that the workers were getting was this area right over here that I'm doing kind of in dark white or filled in white and the consumer surplus or the employer surplus here was the value that the employers were getting the value that the employers were getting above and beyond the price that they had to pay now in this situation of a minimum wage now this is the set price this is the quantity of labor that is demanded and so what you lose now the surplus that we whose is this quantity right over here this quantity right over here and we could figure out that area quite easily let's see this this height right over here is 1 million hours per month so it's going to be 1 1 million I'll just write one for will just remember it's on millions times this height times this height right over here which is $2 per hour so times 2 times 1/2 if we just multiply these we get this whole rectangle for the area of the triangle we multiply it times 1/2 times 1/2 that gives us that cancels out that gives us exactly 1 and the units are dollars per hour times millions of hours per month gives us dollar millions of dollars per month so it becomes 1 million dollars 1 million dollars per month of surplus of benefit of benefit above-and-beyond AB of total benefit that is lost to this market because of this regulation if you if you assume all of the things in this model so just like we talked about in the last video we have a 1 million dollar per month deadweight loss deadweight a deadweight loss now not everyone loses here because the price was set up because the price is set up over here for the people who are working those those first 21 million hours of per month they're their producer surplus has now increased because the space between what they're getting and their opportunity cost has now increased so for those lucky enough to produce to actually have a job they are those workers now do have a higher surplus but for those and for those employers which is on the demand side right now their surplus who are employing those first 21 million hours of labour they now have a smaller have a have a smaller consumer surplus or demand surplus or employer surplus right there so for the first for the first 21 million units of Labor it is it is it's redistributing the pie between the employers and the work but then because you are making the the wage higher it's reducing the overall demand so there is if you believe this model some job destruction taking place
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