Unemployment: Minimum Wage Laws and Efficiency Wages

Now let's discuss how minimum wage laws and the efficiency wages can affect the unemployment rate. So we're gonna talk about a topic here, that that's come up before price floors. And if you want more detail, I'm gonna kind of do an overview here. You're gonna want to go back to a video price floors and price ceilings. And I go into a lot more detail on how these price floors and price ceilings work. Um But let's go ahead and and use it here to describe minimum wages. So a price floor is illegally determined minimum, right? It's the bottom, it's it's the floor, it's the legally determined minimum price for a good. So let's go to the graph here and let's talk about how minimum wages can affect the labor market. So we've got a common graph that we've seen all the time here in economics, this X. Graph where we've got our downward demand d and our upward supply. S. So this d. Is the demand. We're talking about the labor market here. So this is the demand for labor which is coming from the firm's, right, The firms are demanding labor demanding people to work for them, and the workers are supplying the labor, right? So we've got the supply of supply of labor and the demand for labor going down. So let's go ahead and look at this graph, like we usually would, so what we would see is we would have this equilibrium wage here in the middle right. We have an equilibrium wage and that's gonna occur right here in the middle and what's the equilibrium wage. mean? Well that means that if this market is left alone, the equilibrium quantity would be right here. Q. Star. And we would have an equilibrium wage. Let's make up a number here. Let's say the equilibrium wage is $10 right? $10 is the equilibrium wage that this market would pay. And the government steps in and says hey $10 is just not enough for people to live on. We need to give a minimum wage that's higher than that. People need more money than that. So let's set a minimum wage Of $15, right? They need to set a minimum wage above that equilibrium for it to be effective. So let's see what happens when we have this higher minimum wage. So at this higher minimum wage. Well it's gonna affect the demand and supply of this of of this product of the labor in this market, right? So what's gonna happen to the demand for labor in this market? So with a minimum wage of $15, there's gonna be less labor demanded because the price is higher. So people are gonna want less of it. The firms are gonna want less of the labor and that's going to be down here quantity demanded. And over here the quantity supplied, people are like hey $15 an hour. I want a job, let's all get jobs at $15 an hour. But what are they gonna find is that notice the quantity supplied is way up here where the quantity demanded is down here. So what's happened in this market, there's now an oversupply of labor. There's a lot of people looking for jobs but there's no jobs available. So what do we have? We have a surplus of labor, right? There's a surplus of labor which in essence translates to no jobs available, right? So people are looking for the jobs at this higher wage, but nobody wants to hire anybody at the higher wage. Higher. Higher. Higher. Higher. Okay, so 22 ways we're saying higher there. So what are some conclusions we can make here when it comes to a minimum wage law that first for a price floor to be effective? Where did it have to be above or below equilibrium? It had to be above equilibrium. Right. And if you want more information, I would definitely suggest going to that other video where we discuss price floors and ceilings in more detail. But basically, if there was a price, let's say down here of $5, well, the market's already trading at $10. So why would they care if the minimum wage is five? Well, $10 is above five. So they're not breaking any rules, they would keep trading at that equilibrium wage. Okay, so the effective price floors, what have they caused in the market? They caused a surplus in the market, a surplus of of the supply, a surplus of the supply of labor and there's no demand for that labor. So there's a surplus of supply which leads to unemployment, right? There's people looking for jobs but no jobs available. So the topic here was the minimum wage law. So what does this lead to? It leads to a compromise when we have minimum wage? Because generally minimum wage we think of as a good thing for the workers, right? But it's a good thing for the workers who can find work. It gives a living wage for workers with jobs, but unemployment for the ones who can't find jobs right there behind me, Right? So living wage for workers with jobs but higher unemployment for the ones who can't find jobs. So that's how minimum wage affects unemployment in the market. Let's go ahead. And in the next video, let's discuss efficiency wages.

Alright. So now let's discuss efficiency wages a little bit. So some employers pay a a wage above equilibrium as an incentive to their employees. So they're gonna say, I know this job should pay 10 bucks an hour, but I'm gonna pay you 12 bucks an hour. Why would they do that? Well there's a few reasons this wage above the equilibrium is called an efficiency wage and it's supposed to increase the efficiency of the worker. So how does it do it first? It deals with decreased worker turnover, it decreases worker turnover. So why is that beneficial? Well you don't have to re train new workers if you can keep the same workers. Well that's going to improve your efficiency, right? And why does it decrease worker turn turn over? Well in the workers mind they're making $12 an hour when similar people are making $10 an hour, if they lost this job, they would have to accept a lower paying job. So the opportunity cost of losing this job is higher to them, right? Because they would have to take a lower paying job. So in this case the worker wants to keep the job because of the higher wage. Next is the worker quality. If you're fired, you're likely going to have to accept a lower paying job. Right? Same idea. So the quality of the work of the The workers that you can attract is higher. So you're gonna get higher worker quality. So when you put out the job ad and you're saying, Hey I'm hiring for $12 an hour every you're gonna get a lot more people applying to the job. So you can hand pick who you think is going to be the best because you have uh more more people applying to your job and you can get a better worker out of it. Lastly, the worker effort, the workers are going to be motivated to perform well to avoid being fired, right? They want to avoid being fired. So they're gonna have higher worker effort because they don't want to be fired. So they want to make sure that you see that they're doing a great job and they're doing their best so that they would keep this higher paying job. So the efficiency wage, in essence, acts as an incentive to the employee, uh, to, to work harder to be more efficient. Cool efficiency wave wage. Higher, higher wage, more efficient worker that's about it here, let's go ahead and pause and move on to the next video.