# 1 www.antonydavies.org 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.

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1 www.antonydavies.org 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 www.antonydavies.org Minimum Wage

3 www.antonydavies.org 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 www.antonydavies.org 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 www.antonydavies.org 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 www.antonydavies.org The Objects = 1 hour of Blue labor = 1 hour of Red labor = 1 dollar Labor \$ = \$5 dollars (each)

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

8 www.antonydavies.org 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 www.antonydavies.org 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 www.antonydavies.org Example: Labor Market The Firm manufactures 87 units of product. The product will be automatically sold for \$2 per unit. 87

11 www.antonydavies.org 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.

12 www.antonydavies.org 1.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.

13 www.antonydavies.org 6.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 www.antonydavies.org 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 www.antonydavies.org The Mechanics FirmsWorkers \$5.50 \$5.00

16 www.antonydavies.org The Mechanics FirmsWorkers \$5.50

17 www.antonydavies.org The Mechanics FirmsWorkers \$5.00

19 www.antonydavies.org 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 www.antonydavies.org 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 www.antonydavies.org 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.

23 www.antonydavies.org 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 www.antonydavies.org 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 www.antonydavies.org Results…

26 www.antonydavies.org What effect do you believe the minimum wage has on average wage rates?

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28 www.antonydavies.org What effect do you believe the minimum wage has on workers’ incomes?

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30 www.antonydavies.org What effect do you believe the minimum wage has on unemployment rates?

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

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34 www.antonydavies.org What effect do you believe the minimum wage has on firms’ profits?

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36 www.antonydavies.org Did the minimum wage make anyone better off?

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39 www.antonydavies.org 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 www.antonydavies.org 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 www.antonydavies.org 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 www.antonydavies.org 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 www.antonydavies.org 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 www.antonydavies.org 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 www.antonydavies.org Is this true?

46 www.antonydavies.org Data source: Statistical Abstract of the United States, and Bureau of Labor Statistics

47 www.antonydavies.org Data source: Statistical Abstract of the United States, and Bureau of Labor Statistics

48 www.antonydavies.org Data source: Statistical Abstract of the United States, and Bureau of Labor Statistics

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

50 www.antonydavies.org Data source: Bureau of Labor Statistics, 2008

51 www.antonydavies.org Data source: Bureau of Labor Statistics, 2008

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

53 www.antonydavies.org 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 www.antonydavies.org 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 www.antonydavies.org 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 www.antonydavies.org wtf?

57 www.antonydavies.org 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 www.antonydavies.org 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 www.antonydavies.org 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 www.antonydavies.org Source: Pew Economic Mobility Project Median Income Within Each Quintile (2006\$) 100% 52% 27% 25% 0%

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

62 www.antonydavies.org 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. \$25,000 140% 1 – (change in after-tax and after-subsidy income) / (change in earned income)

63 www.antonydavies.org 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 www.antonydavies.org Political freedom makes economic freedom possible. Economic freedom makes political freedom meaningful.

65 www.antonydavies.org 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 www.antonydavies.org Banned Ivory Trade19891994 Mozambique17,0001,495 Somalia2,000130 Did not Ban Ivory Trade Zimbabwe52,00081,855 Botswana20,00080,174 Source:McPherson, M.A. and M.L. Nieswiadomy, 2000. African Elephants: The Effect of Property Rights and Political Stability. Contemporary Economic Policy. Elephant Population

67 www.antonydavies.org Data Source: NHTSA, US Dept. of Transportation, DOT HS 811 346, June 2010. 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 www.antonydavies.org Data Source: NHTSA, US Dept. of Transportation, DOT HS 811 346, June 2010. 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 www.antonydavies.org Data Source: NHTSA, US Dept. of Transportation, DOT HS 811 346, June 2010. First car design laws National 55 Airbags Mandatory Dual Airbags Mandatory National 0.08 DUI Seat belts Mandatory Partial Repeal 55 Full 55 Repeal

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