Video Transcript: Minimum Wage and Floor Prices

Hello, welcome back. In this video, we're going to discuss the minimum wage and price floor.  So we're going to graph this out, right? And we're going to discuss what does a price  floor do to wages, and what kind of deadweight loss does it create? Right, so we'll  work through this pretty easy illustration. Right, so so we're going to look at the  unskilled labor market. Right, okay, unskilled labor market right, and so we're going to  draw out our graph. Okay, so so now let's let's look at this. This will be the wage rate.  Okay, this will be the wage rate. It's in dollars per hour. Okay, right. So then now we  have the labor quantity, labor quantity supplied. Okay, labor supply, the quantity, right?  And this is in millions of hours per week. Okay, so now we'll draw out our supply and  demand curves. Okay, so here is our demand curve. Okay, here is our supply curve.  Okay, so this will be our supply of workers. Okay, and here's our demand for  employees. Okay, so now let's price this out. Okay, so here's the$8 price point. So $8  per hour, $7 per hour, 6, and 5, right? Accordingly. So so now let's look at the millions  of hours worked, so we'll start at 2021, 2223, Okay, millions of hours. Now, so this is  the pay scale per hour, right? $8 down to $5, right? But but the government comes in  and they say whoa whoa whoa we cannot be paying our workers $5 per hour right so  let's look at the equilibrium price in the market for this labor this unskilled labor job  right so the market is determining the price at $6 per hour. Okay, you can see we're in  equilibrium here. So at $6 per hour, we will demand 22 million hours per week, but the  government steps in and they put in a minimum wage. Now, the minimum wage $7.25, right? So now we can plot that out here. Okay, so here is our demand for employees,  and here is the supply of workers, right? So this will be called our price floor. Why is it  a floor? Because it is a minimum wage, right? This is the floor here. We cannot break  below this line. This is the minimum wage, right? So we cannot pay our employees by  law any less than this. So we have created a floor. We cannot break through that floor  because it's by law. Government has set the minimum wage law. All right. So now the  market is saying, "Wait a minute! We want to pay $6 per hour, right? Okay, but but but  the government says, no, no, no, you cannot do that. You've got to pay, you've got to  pay $7.25 for minimum wage. There's your floor, right? Okay, so so this is too low,  right? We're too low here, right? We're too low here. So now we have got to move our  prices up or our wages up. So now you'll look the demand for employees. Now we  wanted to at equilibrium at the $6 price point. We were demanding. 22 hours of work  or you know labor, 22 labor hours, 22 million labor hours per week at $6. Well, now  our demand for employees at $7.25 has decreased. Why? Because the price went up. Now we are only demanding 21 million hours, right? Because the price went up. We  don't demand so many hours now because we, as as a corporation, do not want to  pay the higher price. But because the prices went up, the workers, they want to work  more. They want to work 23 million hours. So they want to they want to work 2 million  hours more per week than the demand for employees will allow. So so as we look at  this, we want to calculate next. Well, what is the implication of implementing a wage  rate floor, right? So this will create what is called a dead weight loss, right? So we  want to to draw out our dead weight loss? Okay, so so here we are going to calculate  the area of this triangle. This triangle Represents our dead weight loss, and it has a  monetary value. Okay, it has a monetary value. Okay, and and we can we can simply  calculate this just like we did in the previous dead weight loss calculation. Okay, so  now we have here. We are demanding 1 million fewer. We are demanding at this point here. This point here. We are demanding 1 million fewer employees from from here to  here. We are demanding 1 million employees less. Okay. Now we want to find what 

this value is. Okay, so how we're going to do that? It's a very simple equation, just like  we're solving again for a triangle, right? That's how we will determine our dead weight  loss, right? So, so we can see that the $7 minimum wage, just for simplicity, we'll say  

$7, right? And the $5 wage that we'd be willing to pay our employees, right? So, our  so if we had our choice as a company, we would pay $5, but the government says no.  We'll pay seven $7, right? You have to pay $7. So so now we need to subtract out  what we're willing to pay versus the price floor. So we have the price floor is at $7.  We're willing to pay $5. Right. So now the floor leads to this two-dollar discrimination,  this two-dollar price variance, right? So, so because at this equilibrium rate, right, we  are demanding one less fewer jobs, right? So now we need to multiply. So this is a  million. Think about it as a million, right? So so now we need to multiply this two-dollar  figure. Okay, we need to multiply that by 1 million because at the equilibrium price, we  are demanding 22 million hours, but at the $5 price, what we want to pay, right? There  will be 1 million hours less demanded by workers at five. So we need to multiply that  by the 1 million hours lost from moving the 5 figure to the 6 figure in equilibrium, right?  So we either multiply by that, and then we're finding we're we're solving for the area of  a triangle. So so we need to divide or divide by two or multiply by a half. So we'll just  multiply by a half here. Okay, we'll just multiply by a half. So. Now our dead weight  loss, our dead weight loss, will equal $1 million, $1 million per month, and a dead  weight loss due to so we so if if we could if we could if if we could charge 5 if we could  charge $5 if we pay $5 for labor right we can retain this $1 million we would keep that  and add it to our retained earnings put it on our balance sheet as equity, and we could  distribute that out to shareholders. But because the government has come in and they  put in a minimum wage price floor, right now we have to elevate our prices, and we  can't fall below. So now because we want to pay 5, but the government the  government makes us pay 7, right now we are going to lose the $1 million and what  we could have made up because we still want to have you know 21 million employees  work right but but but they may not they may not want to they want to work okay they  want to work 23 hours, right? But we only want to pay for 21 million hours, right? So,  so because of that, we create this dead weight loss, right? And so now, because of the price floor, we will be losing a million dollars a month that we could have retained.