1 There are three types of seat in the room: Blue Labor Red Labor Firm Sit one person to each seat. If you are comfortable doing a lot of rudimentary math, sit at a Firm seat. Resist the temptation to open the bag.

2 Minimum Wage

3 The Players and the Goals In this experiment, there are WORKERS and FIRMS. WORKERS sell labor to the FIRMS. FIRMS make and sell stuff.

4 The Players and the Goals Two types of worker Red workers Blue workers Each worker’s goal: Maximize happiness One thing makes you happy: Money

5 The Players and the Goals One type of firm Firms hire Red Labor and Blue Labor to produce their products. Firms automatically sell everything they produce for $2 per unit. Each firm’s goal: Maximize profit Profit = Ending $ – Starting $

6 The Objects = 1 hour of Blue labor = 1 hour of Red labor = 1 dollar Labor $ = $5 dollars (each)

7 Labor Market Red workers and Blue workers sell as much labor as they can to firms for $. Labor $ $

8 Production and Goods Market Hired labor produces product. Product is automatically sold for $2 each. Red labor hired Blue labor hired Units of output produced

9 Example: Labor Market Blue worker Sells 6 to the Firm for $5 each. Red worker Sells 8 to the Firm for $5 each. How much product does the Firm produce? $40 $30

10 Example: Labor Market The Firm manufactures 87 units of product. The product will be automatically sold for $2 per unit. 87

11 Example: Labor Market and Goods Market Blue Worker Ends the experiment with (6)($5) = $30. Money = $30. Red Worker Ends the experiment with (8)($5) = $40. Money = $40. Firm Spent $70 on labor, and Produced and sold 87 output at a price of $2 each.  Firm’s profit is $174 – $70 = $104.

How much am I producing right now? 1 Red and 3 Blue  43 output 2.What happens to my output if I hire 1 more Red worker? Output increases from 43 to 53  + 10 output 3.What does that do to my revenue? (10 output)($2) = + $20 revenue 4.What does it do to my costs? Cost of 1 Red worker = $6  + $6 cost 5.What does it do to my profit? + $20 revenue & + $6 cost  + $14 profit Example: Cost/Benefit of Hiring More Labor Suppose you can hire 1 Red for $6 or 1 Blue for $7. So far, you have hired 1 Red and 3 Blue.

What happens to my output if I hire 1 more Blue worker? Output increases from 43 to 45  + 2 output 7.What does that do to my revenue? (2 output)($2) = + $4 revenue 8.What does it do to my costs? Cost of 1 Blue worker = $7  + $7 cost 9.What does it do to my profit? + $4 revenue & + $7 cost  – $3 profit Example: Cost/Benefit of Hiring More Labor Suppose you can hire 1 Red for $6 or 1 Blue for $7. So far, you have hired 1 Red and 3 Blue.

14 Conclusion Hiring 1 more red hour increases profit by $14. Hiring 1 more blue hour decreases profit by $3  Hire 1 more red hour. Example: Cost/Benefit of Hiring More Labor Suppose you can hire 1 Red for $6 or 1 Blue for $7. So far, you have hired 1 Red and 3 Blue.

15 The Mechanics FirmsWorkers $5.50 $5.00

16 The Mechanics FirmsWorkers $5.50

17 The Mechanics FirmsWorkers $5.00

18 Ready to begin…

19 Labor Market Red workers sell your labor to firms for $. Blue workers sell your labor to firms for $. Firms:Every unit of output you produce is automatically sold for $2.

20 Report 1. Red workers report unsold labor and ending money. 2. Blue workers report unsold labor and ending money. 3. Firms report labor hired and ending money.

21 New Rules The wage rate that some workers receive is too low. In the interest of assuring a minimum standard of living, we now impose a minimum wage. LAW:Henceforth, no firm may pay less than per hour.

22 Ready to begin…

23 Labor Market Red workers sell your labor to firms for $. Blue workers sell your labor to firms for $. Firms:Every unit of output you produce is automatically sold for $2. FIRMS MUST PAY NO LESS THAN PER HOUR.

24 Report 1. Red workers report unsold labor and ending money. 2. Blue workers report unsold labor and ending money. 3. Firms report labor hired and ending money.

25 Results…

26 What effect do you believe the minimum wage has on average wage rates?

27

28 What effect do you believe the minimum wage has on workers’ incomes?

29

30 What effect do you believe the minimum wage has on unemployment rates?

31

32 What effect do you believe the minimum wage has on production (GDP)?

33

34 What effect do you believe the minimum wage has on firms’ profits?

35

36 Did the minimum wage make anyone better off?

37

38

39 First Principles First Principles are truths that are not derived from other truths. assumed to be true, or so self-evident as to be beyond dispute. When thinking about economic and policy issues, we should begin at first principles, not outcomes.

40 First Principles Debate: We must help the poor by imposing a minimum wage. We must help employers by removing the minimum wage. F A I L Debate: The rights to life and property are natural rights. The rights to life and property are not natural rights.

41 First Principles The rights to life and property are natural rights. Others have the duty not to take your life. Others have the duty not to prevent you from using your property. Others may not prevent you from selling your labor. Others may not prevent you from paying for labor. We should not have a minimum wage.

42 Unintended Consequences If it is true that the rights to life and property are natural rights, then government policies that are inconsistent with this truth will yield unintended consequences.  Bad things will happen that we didn’t intend to happen.

43 Unintended Consequences of Price Controls How do you cure a fever? Prices are not levers that set value, they are metrics that respond to value. Price controls fail on two counts: legislating price does not legislate value, legislating price prevents price from signaling value.

44 How to Pay for a Minimum Wage There are three ways in which a firm can find additional money to pay workers. 1. Layoff some workers and shift their wages to the remaining workers. 2. Keep all the workers and pay for the additional wages out of profits. 3. Keep all the workers and pay for the additional wages by raising prices.

45 Is this true?

46 Data source: Statistical Abstract of the United States, and Bureau of Labor Statistics

47 Data source: Statistical Abstract of the United States, and Bureau of Labor Statistics

48 Data source: Statistical Abstract of the United States, and Bureau of Labor Statistics

49 But, we have to do something! Most workers earn the minimum wage! Single parents earn the minimum wage!

50 Data source: Bureau of Labor Statistics, 2008

51 Data source: Bureau of Labor Statistics, 2008

52 But, we have to do something! The rich are getting richer while the poor get poorer!

53 Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668. % of Households in Each Income Bracket (2006$)

54 Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668. % of Households in Each Income Bracket (2006$)

55 Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2009, Table 668. % of Households in Each Income Bracket (2006$)

56 wtf?

57 Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2010, Table 678. The Rich Get Richer and the Poor Get Poorer Argument fails on two counts: 1.Assumes that total income is the same across the years. 2.Assumes that the people are the same across the years.

58 Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2010, Table 678. Total Income Is Not The Same Across Years Total Personal Income (2007$) 2000$10.3 billion 2007$11.9 billion 3.8% x $8.6 billion = $392 million3.4% x $11.9 billion = $405 million

59 Data source: Statistical Abstract of the United States, U.S. Bureau of the Census, 2010, Tables 8, 9. People Are Not The Same Across Years In 2000, the average age of the youngest 20% of Americans was 7.1. In 2010, the average age of the youngest 20% of Americans was 6.9.

60 Source: Pew Economic Mobility Project Median Income Within Each Quintile (2006$) 100% 52% 27% 25% 0%

61 Beyond the minimum wage, our welfare system as a whole encourages poverty.

62 Source:Clifford Thies, Shenandoah University A person who is earning $25,000 gets a $1,000 raise. After changes in taxes, credits, and benefits, the person is $1,400 worse off than before the raise. $25, % 1 – (change in after-tax and after-subsidy income) / (change in earned income)

63 Conclusions 1.Everything is scarce and will be rationed. 2.Prices signal information about value. 3.Price controls prevent prices from conveying value information and force rationing to be based on some other (usually unanticipated) factor. 4.Despite no (real) increase in the minimum wage from 1980 to 2006, the poor got richer (in real terms).

64 Political freedom makes economic freedom possible. Economic freedom makes political freedom meaningful.

65 To freely choose to purchase is to cast a vote. How is a free market vote different from a political vote? Political vote:One size fits all. Free market vote:Multiple sizes for multiple recipients. Political vote:Speed of change is driven by the election cycle. Free market vote:Speed of change is driven by the accounting cycle. Political vote:Signal is distorted because the vote is for a “bundle” of issues embodied by one candidate. Free market vote:Signal is clear because the vote is for a specific issue. How Should Society Choose?

66 Banned Ivory Trade Mozambique17,0001,495 Somalia2, Did not Ban Ivory Trade Zimbabwe52,00081,855 Botswana20,00080,174 Source:McPherson, M.A. and M.L. Nieswiadomy, African Elephants: The Effect of Property Rights and Political Stability. Contemporary Economic Policy. Elephant Population

67 Data Source: NHTSA, US Dept. of Transportation, DOT HS , June First car design laws National 55 Airbags Mandatory Dual Airbags Mandatory National 0.08 DUI Seat belts Mandatory Partial Repeal 55 Full 55 Repeal

68 Data Source: NHTSA, US Dept. of Transportation, DOT HS , June First car design laws National 55 Airbags Mandatory Dual Airbags Mandatory National 0.08 DUI Seat belts Mandatory Partial Repeal 55 Full 55 Repeal

69 Data Source: NHTSA, US Dept. of Transportation, DOT HS , June First car design laws National 55 Airbags Mandatory Dual Airbags Mandatory National 0.08 DUI Seat belts Mandatory Partial Repeal 55 Full 55 Repeal