1 00:00:00,040 --> 00:00:02,460 The following content is provided under a Creative 2 00:00:02,460 --> 00:00:03,870 Commons license. 3 00:00:03,870 --> 00:00:06,910 Your support will help MIT OpenCourseWare continue to 4 00:00:06,910 --> 00:00:10,560 offer high-quality educational resources for free. 5 00:00:10,560 --> 00:00:13,460 To make a donation or view additional materials from 6 00:00:13,460 --> 00:00:16,180 hundreds of MIT courses, visit mitopencourseware@ocw.mit.edu. 7 00:00:23,924 --> 00:00:29,230 PROFESSOR: OK, so what we're going to do today is the last 8 00:00:29,230 --> 00:00:31,780 in what I'd say are the core set of lectures. 9 00:00:31,780 --> 00:00:33,910 Our core set of lectures, we started with 10 00:00:33,910 --> 00:00:35,170 talking about the market. 11 00:00:35,170 --> 00:00:37,466 We then moved on and talked about consumer theory and did 12 00:00:37,466 --> 00:00:39,130 a series of lectures on that. 13 00:00:39,130 --> 00:00:40,340 Now we're doing producer theory. 14 00:00:40,340 --> 00:00:43,070 This is the last in our series of lectures on producer theory 15 00:00:43,070 --> 00:00:45,110 and then basically we move on to topics. 16 00:00:45,110 --> 00:00:47,020 So the remainder of the section we'll talk about 17 00:00:47,020 --> 00:00:50,480 things like international trade, uncertainty, equity and 18 00:00:50,480 --> 00:00:53,920 efficiency, asymmetric information 19 00:00:53,920 --> 00:00:54,610 in insurance markets. 20 00:00:54,610 --> 00:00:57,980 We'll move on to in the last part of the course showing you 21 00:00:57,980 --> 00:00:59,855 how you can apply what we've learned in the basics to 22 00:00:59,855 --> 00:01:02,250 answer a bunch of interesting, real world questions. 23 00:01:02,250 --> 00:01:05,450 So this is the last of our core basics lectures. 24 00:01:05,450 --> 00:01:08,040 What we're going to do here is fit in something that's fallen 25 00:01:08,040 --> 00:01:13,150 through the cracks, which is we've talked about firms and 26 00:01:13,150 --> 00:01:15,700 their decisions about how much to produce. 27 00:01:15,700 --> 00:01:17,820 And we've talked about the output side. 28 00:01:17,820 --> 00:01:20,250 But we haven't talked about the input side at all. 29 00:01:20,250 --> 00:01:24,070 How do firms decide what kind of the inputs to use and in 30 00:01:24,070 --> 00:01:25,230 what ratio to use et cetera. 31 00:01:25,230 --> 00:01:26,560 We talked a bit about it. 32 00:01:26,560 --> 00:01:30,350 We talked about isoquants and isocosts and doing that 33 00:01:30,350 --> 00:01:31,800 tradeoff between inputs. 34 00:01:31,800 --> 00:01:35,160 We haven't really talked about the input markets themselves. 35 00:01:35,160 --> 00:01:37,940 So firms go and they say, look I've done my isoquants and 36 00:01:37,940 --> 00:01:40,200 isocosts and I want 63 workers. 37 00:01:40,200 --> 00:01:42,960 Well they've then got to go to a market for labor and hire 38 00:01:42,960 --> 00:01:45,340 those workers and how does that actually work. 39 00:01:45,340 --> 00:01:47,830 So today what we want to focus on is the demand 40 00:01:47,830 --> 00:01:49,760 side of input markets. 41 00:01:49,760 --> 00:01:53,520 That is, what's the actual market analysis by which a 42 00:01:53,520 --> 00:01:56,640 firm having maximized its profits and deciding how many 43 00:01:56,640 --> 00:02:01,940 workers it wants goes and actually finds those workers. 44 00:02:01,940 --> 00:02:04,470 So we're going to do is talk about demand for factors. 45 00:02:04,470 --> 00:02:06,670 In particular today we'll focus on the demand for labor. 46 00:02:06,670 --> 00:02:08,530 Although the demand for capital, the analysis will be 47 00:02:08,530 --> 00:02:09,789 very similar. 48 00:02:09,789 --> 00:02:13,460 But today we're going to focus on the demand for labor. 49 00:02:13,460 --> 00:02:16,490 And what we're going to do is begin by focusing on the 50 00:02:16,490 --> 00:02:19,540 demand for labor in a competitive factor market. 51 00:02:19,540 --> 00:02:24,160 So we're going to begin by talking about competitive 52 00:02:24,160 --> 00:02:25,410 factor markets. 53 00:02:36,170 --> 00:02:40,890 What I mean by that is that a perfectly competitive factor 54 00:02:40,890 --> 00:02:45,320 market is one where, just as perfect competition and output 55 00:02:45,320 --> 00:02:48,260 markets means there's lots of sellers selling the same good, 56 00:02:48,260 --> 00:02:51,710 a perfectly competitive factor market means there's lots of 57 00:02:51,710 --> 00:02:54,790 sellers, in this case workers, selling an identical good. 58 00:02:54,790 --> 00:02:56,000 That is their labor. 59 00:02:56,000 --> 00:02:58,230 So the notion is we're in a market where there's many, 60 00:02:58,230 --> 00:03:00,770 many workers firms could hire, all of whom are equally 61 00:03:00,770 --> 00:03:02,640 qualified for a job. 62 00:03:02,640 --> 00:03:05,310 So this is not, obviously, a high-tech market. 63 00:03:05,310 --> 00:03:07,740 This is some low-tech, construction, other sort of 64 00:03:07,740 --> 00:03:10,630 blue collar market, where there's lots of workers out 65 00:03:10,630 --> 00:03:13,930 there who could equally well be qualified for a job. 66 00:03:13,930 --> 00:03:16,280 In fact what we're going to assume is that there's a 67 00:03:16,280 --> 00:03:19,100 perfectly flat labor supply curve. 68 00:03:19,100 --> 00:03:22,040 Let's assume a perfectly flat labor supply curve. 69 00:03:22,040 --> 00:03:24,720 Perfectly elastic labor supply just to make life easy. 70 00:03:24,720 --> 00:03:26,140 Obviously it's not true in reality. 71 00:03:26,140 --> 00:03:27,770 Let's assume we're looking at some market with perfectly 72 00:03:27,770 --> 00:03:31,320 elastic labor supply. 73 00:03:31,320 --> 00:03:36,090 Now how do we think about what happens in factor markets in 74 00:03:36,090 --> 00:03:36,520 that world? 75 00:03:36,520 --> 00:03:38,290 Well once again let's start with the short run. 76 00:03:42,030 --> 00:03:46,040 So in the short run capital's fixed. 77 00:03:46,040 --> 00:03:50,520 So a firm has said, look, I've done my short run profit 78 00:03:50,520 --> 00:03:52,780 maximization, my isoquants and isocosts. 79 00:03:52,780 --> 00:03:54,790 I've decided how many workers I want given a 80 00:03:54,790 --> 00:03:57,310 fixed level of capital. 81 00:03:57,310 --> 00:04:02,210 And that gives me some demand for labor. 82 00:04:02,210 --> 00:04:05,130 I can derive a demand for labor curve by essentially 83 00:04:05,130 --> 00:04:09,270 saying, at different wage rates, given a fixed capital 84 00:04:09,270 --> 00:04:14,620 price, that will shift my isocost curve, going back to 85 00:04:14,620 --> 00:04:17,269 the producer theory, at different wage rates that will 86 00:04:17,269 --> 00:04:19,769 shift my isocost curve, that will cause me to demand 87 00:04:19,769 --> 00:04:20,670 different amounts of labor. 88 00:04:20,670 --> 00:04:26,830 So that traces out a demand curve for labor. 89 00:04:26,830 --> 00:04:30,550 And we can see that graphically in figure 18-1. 90 00:04:30,550 --> 00:04:34,920 So you've got a perfectly elastic labor supply curve and 91 00:04:34,920 --> 00:04:38,870 then you've got a downward sloping labor demand curve. 92 00:04:38,870 --> 00:04:43,060 And that labor demand curve comes from the profit 93 00:04:43,060 --> 00:04:44,330 maximization. 94 00:04:44,330 --> 00:04:46,190 The other way to think about how we get there though is 95 00:04:46,190 --> 00:04:46,590 interesting. 96 00:04:46,590 --> 00:04:52,100 You say, how do we think about the marginal benefit versus 97 00:04:52,100 --> 00:04:54,595 the marginal cost of hiring another worker. 98 00:04:54,595 --> 00:04:58,150 We know the marginal cost is the wage, that's easy. 99 00:04:58,150 --> 00:05:02,590 What's the marginal benefit of hiring another worker? 100 00:05:02,590 --> 00:05:08,150 Well recall that another unit of labor raises output by the 101 00:05:08,150 --> 00:05:10,100 marginal product of labor. 102 00:05:10,100 --> 00:05:11,420 Remember the marginal product of labor. 103 00:05:11,420 --> 00:05:13,120 We talked about this a while ago. 104 00:05:13,120 --> 00:05:19,690 This is delta q delta l. 105 00:05:19,690 --> 00:05:24,310 So the next worker raises your output by an amount marginal 106 00:05:24,310 --> 00:05:25,940 product of labor. 107 00:05:25,940 --> 00:05:29,190 That's what you get from the next worker. 108 00:05:29,190 --> 00:05:31,820 But that's a quantity. 109 00:05:31,820 --> 00:05:33,380 The firm cares about profit not quantity. 110 00:05:33,380 --> 00:05:35,480 So what it cares about is revenues. 111 00:05:35,480 --> 00:05:40,190 So the revenues from the next worker would be the marginal 112 00:05:40,190 --> 00:05:44,860 revenues that are made on that next unit times the marginal 113 00:05:44,860 --> 00:05:47,430 product of labor. 114 00:05:47,430 --> 00:05:51,290 That's the marginal benefit to the firm of the next unit of 115 00:05:51,290 --> 00:05:55,240 labor is the marginal product that that worker produces 116 00:05:55,240 --> 00:05:57,630 times the marginal revenue the firm raises from 117 00:05:57,630 --> 00:05:59,970 selling that next unit. 118 00:05:59,970 --> 00:06:03,370 So they have to consider two things, two margins. 119 00:06:03,370 --> 00:06:07,910 How much is it worth them to sell that next unit and how 120 00:06:07,910 --> 00:06:11,540 much will be produced by that next unit of worker? 121 00:06:11,540 --> 00:06:26,100 So if we have a perfectly competitive labor market, the 122 00:06:26,100 --> 00:06:28,740 marginal cost is going to be the wage. 123 00:06:28,740 --> 00:06:31,640 So we're going to set this equal to the wage. 124 00:06:31,640 --> 00:06:34,640 So in a perfectly competitive labor market the marginal cost 125 00:06:34,640 --> 00:06:37,140 of another worker is the wage and this is the marginal 126 00:06:37,140 --> 00:06:38,520 benefit of another worker. 127 00:06:38,520 --> 00:06:40,630 So this is going to be the condition the firm's going to 128 00:06:40,630 --> 00:06:42,240 use to decide how many workers to hire. 129 00:06:47,300 --> 00:06:49,570 We're going to call this the marginal 130 00:06:49,570 --> 00:06:52,340 revenue product of labor. 131 00:06:52,340 --> 00:06:54,260 So you're going to set the marginal revenue product of 132 00:06:54,260 --> 00:06:55,430 labor equal to the wage. 133 00:06:55,430 --> 00:06:57,400 That's going to be your profit maximizing condition-- 134 00:06:57,400 --> 00:06:58,760 the marginal revenue product. 135 00:06:58,760 --> 00:07:01,040 The marginal product is about quantities. 136 00:07:01,040 --> 00:07:02,990 Marginal revenue product is about dollars. 137 00:07:02,990 --> 00:07:05,900 What's the dollars that the next unit of labor produces 138 00:07:05,900 --> 00:07:09,390 for you is your marginal revenue product. 139 00:07:09,390 --> 00:07:15,310 Now if the output market is also perfectly competitive. 140 00:07:15,310 --> 00:07:17,720 That is, imagine for a minute now, take one further step. 141 00:07:17,720 --> 00:07:21,175 Not a perfectly competitive labor supply but also a 142 00:07:21,175 --> 00:07:23,620 perfectly competitive output market. 143 00:07:23,620 --> 00:07:25,740 So it's not a monopolist. It's selling in a perfectly 144 00:07:25,740 --> 00:07:26,620 competitive output market. 145 00:07:26,620 --> 00:07:28,780 Then we know what the marginal revenue is. 146 00:07:28,780 --> 00:07:31,310 We know the marginal revenue is the price. 147 00:07:31,310 --> 00:07:37,860 So for a perfectly competitive output market we could rewrite 148 00:07:37,860 --> 00:07:40,570 this as price times marginal product of 149 00:07:40,570 --> 00:07:44,810 labor equals the wage. 150 00:07:44,810 --> 00:07:46,620 Because we know the marginal revenue is the price in a 151 00:07:46,620 --> 00:07:47,920 perfectly competitive output market. 152 00:07:51,020 --> 00:07:53,710 And basically this makes it even easier to see which is to 153 00:07:53,710 --> 00:07:56,740 say, look, how many workers do you hire? 154 00:07:56,740 --> 00:08:00,610 You hire until the wage you pay that worker is equal to 155 00:08:00,610 --> 00:08:03,540 the price you sell your good for times how many goods that 156 00:08:03,540 --> 00:08:04,790 worker produces. 157 00:08:06,975 --> 00:08:10,190 If one worker produces 100 goods and each good sells for 158 00:08:10,190 --> 00:08:15,430 100, then you'll only pay the worker $10,000. 159 00:08:15,430 --> 00:08:19,725 Basically that is going to determine your 160 00:08:19,725 --> 00:08:20,870 labor demand curve. 161 00:08:20,870 --> 00:08:26,150 And so the labor demand curve is also labeled the marginal 162 00:08:26,150 --> 00:08:27,540 revenue product of labor curve, I'm sorry. 163 00:08:31,300 --> 00:08:32,355 Why is this diminishing? 164 00:08:32,355 --> 00:08:33,650 Why is it downward sloping? 165 00:08:33,650 --> 00:08:35,820 Because remember the marginal product of labor's 166 00:08:35,820 --> 00:08:37,380 diminishing. 167 00:08:37,380 --> 00:08:39,830 The marginal product of labor's diminishing. 168 00:08:39,830 --> 00:08:45,050 As a result this curve is downward sloping. 169 00:08:45,050 --> 00:08:47,910 Now here price is fixed, so it doesn't matter. 170 00:08:47,910 --> 00:08:49,980 Marginal revenue also is diminishing so that's going to 171 00:08:49,980 --> 00:08:50,950 make it even more downward sloping than the 172 00:08:50,950 --> 00:08:52,060 more general case. 173 00:08:52,060 --> 00:08:54,370 But in this specific case of perfectly competitive output 174 00:08:54,370 --> 00:08:57,140 markets where this is just a constant price you get this 175 00:08:57,140 --> 00:08:59,760 downward sloping marginal revenue product of labor curve 176 00:08:59,760 --> 00:09:02,770 because the marginal product of labor is diminishing, as we 177 00:09:02,770 --> 00:09:04,020 talked about. 178 00:09:09,180 --> 00:09:13,240 So that's the analysis of what we see for a perfectly 179 00:09:13,240 --> 00:09:15,320 competitive factor market. 180 00:09:15,320 --> 00:09:19,610 So the equilibrium is where the labor supply curve, which 181 00:09:19,610 --> 00:09:23,480 is perfectly elastic, intersects this marginal 182 00:09:23,480 --> 00:09:26,870 revenue product curve, which is determined by how 183 00:09:26,870 --> 00:09:28,880 productive the workers are and how much money they're making 184 00:09:28,880 --> 00:09:30,520 for you with each unit they produce. 185 00:09:30,520 --> 00:09:31,770 And that gets you the short run equilibrium. 186 00:09:39,910 --> 00:09:41,290 Questions about that? 187 00:09:41,290 --> 00:09:42,460 Questions about what we're doing here? 188 00:09:42,460 --> 00:09:46,500 So that just says the underlying analysis of where 189 00:09:46,500 --> 00:09:50,780 demand for labor comes from or where the equilibrium level of 190 00:09:50,780 --> 00:09:51,480 labor is going to come. 191 00:09:51,480 --> 00:09:53,470 It's going to come from intersection of this demand 192 00:09:53,470 --> 00:09:56,080 with the supply, which is flat. 193 00:09:56,080 --> 00:09:59,620 Now how is this going to differ in the long run? 194 00:09:59,620 --> 00:10:01,730 Well let me ask the question this way, forget the math, 195 00:10:01,730 --> 00:10:03,810 forget the graphs, I'm just going to ask you intuitively. 196 00:10:03,810 --> 00:10:09,100 In the long run, do we think the long run demand for 197 00:10:09,100 --> 00:10:12,790 workers will be more elastic or less elastic than the short 198 00:10:12,790 --> 00:10:17,020 run demand, in general. 199 00:10:17,020 --> 00:10:19,080 Will the long run demand curve, this is short run 200 00:10:19,080 --> 00:10:21,500 demand curve, will the long run demand curve typically be 201 00:10:21,500 --> 00:10:23,690 more elastic or less elastic than the short run demand 202 00:10:23,690 --> 00:10:26,240 curve for workers? 203 00:10:26,240 --> 00:10:26,830 Somebody take a guess. 204 00:10:26,830 --> 00:10:27,524 Yeah. 205 00:10:27,524 --> 00:10:28,736 AUDIENCE: More elastic. 206 00:10:28,736 --> 00:10:29,690 PROFESSOR: More elastic. 207 00:10:29,690 --> 00:10:30,940 Why? 208 00:10:33,142 --> 00:10:34,380 It's more elastic. 209 00:10:34,380 --> 00:10:35,767 But intuitively, don't worry about the graph, I'm just 210 00:10:35,767 --> 00:10:36,320 looking for intuition. 211 00:10:36,320 --> 00:10:36,615 Yeah. 212 00:10:36,615 --> 00:10:38,006 AUDIENCE: Because in the long run you 213 00:10:38,006 --> 00:10:38,790 can substitute capital. 214 00:10:38,790 --> 00:10:39,960 PROFESSOR: Exactly. 215 00:10:39,960 --> 00:10:42,960 More substitutability equals more elasticity. 216 00:10:42,960 --> 00:10:45,380 General intuition you want to remember for this course. 217 00:10:45,380 --> 00:10:48,820 In the long run if I can substitute towards capital, 218 00:10:48,820 --> 00:10:51,360 then that long run demand curve for labor will be even 219 00:10:51,360 --> 00:10:53,140 more elastic than the short run demand curve. 220 00:10:53,140 --> 00:10:54,470 I'm not going to work through the math or anything. 221 00:10:54,470 --> 00:10:59,960 I just want you to remember that intuition that when you 222 00:10:59,960 --> 00:11:03,790 have more margins you can use, that's more substitutability, 223 00:11:03,790 --> 00:11:05,040 that means more elasticity. 224 00:11:08,390 --> 00:11:13,810 So the idea is in the short run, if the wage increases for 225 00:11:13,810 --> 00:11:17,850 workers all you can do is if you hire fewer workers you 226 00:11:17,850 --> 00:11:20,270 just produce less, so you're sort of stuck. 227 00:11:20,270 --> 00:11:22,140 But in the long run if the wage decreases you just say, 228 00:11:22,140 --> 00:11:24,640 fine, I'll just use machines instead. 229 00:11:24,640 --> 00:11:26,590 So in the long run you can substitute away from workers 230 00:11:26,590 --> 00:11:28,010 towards machines. 231 00:11:28,010 --> 00:11:30,910 So in the long run your demand curve is 232 00:11:30,910 --> 00:11:32,160 going to be more elastic. 233 00:11:34,920 --> 00:11:37,710 Questions about that? 234 00:11:37,710 --> 00:11:40,590 Now this is all relatively straightforward, just follows 235 00:11:40,590 --> 00:11:42,540 from producer theory. 236 00:11:42,540 --> 00:11:46,470 The sort of stuff you had to do in the exam last night. 237 00:11:46,470 --> 00:11:50,540 Let's now talk about a little more interesting case which is 238 00:11:50,540 --> 00:11:53,310 one of my other favorite words in economics which is the case 239 00:11:53,310 --> 00:11:53,970 of monopsony. 240 00:11:53,970 --> 00:11:56,410 Not monopoly, but monopsony. 241 00:12:02,240 --> 00:12:05,270 We've been talking in lectures about monopoly which is the 242 00:12:05,270 --> 00:12:08,700 case where one firm is the only seller 243 00:12:08,700 --> 00:12:11,230 in the output market. 244 00:12:11,230 --> 00:12:13,490 One firm is the only seller in the output market. 245 00:12:13,490 --> 00:12:16,780 A parallel case in input markets is the case of 246 00:12:16,780 --> 00:12:22,230 monopsony which is when one firm is the only demander in 247 00:12:22,230 --> 00:12:25,040 the input market. 248 00:12:25,040 --> 00:12:28,050 So monopoly is when one firm is the only seller in the 249 00:12:28,050 --> 00:12:29,160 output market. 250 00:12:29,160 --> 00:12:34,120 The parallel in input markets is monopsony which is where 251 00:12:34,120 --> 00:12:38,330 one firm is the only buyer in the input market. 252 00:12:38,330 --> 00:12:46,010 And the key thing that's going to drive monopsony is that 253 00:12:46,010 --> 00:12:52,930 when there are barriers to exit from a factor market it's 254 00:12:52,930 --> 00:12:54,400 going to create a monopsony. 255 00:12:54,400 --> 00:12:56,440 And any time there are barriers to exit, any time 256 00:12:56,440 --> 00:12:59,960 workers are stuck and cannot leave a market, workers are 257 00:12:59,960 --> 00:13:02,750 stuck working one place, that will give the employer market 258 00:13:02,750 --> 00:13:05,560 power over those workers. 259 00:13:05,560 --> 00:13:09,490 The classic example is the company town. 260 00:13:09,490 --> 00:13:14,510 In the 1800s when there were mining operations and they'd 261 00:13:14,510 --> 00:13:16,740 come in and they'd hire people. 262 00:13:16,740 --> 00:13:17,940 And basically there was nowhere else 263 00:13:17,940 --> 00:13:18,700 to work in the area. 264 00:13:18,700 --> 00:13:20,695 These were areas which were dying agricultural areas there 265 00:13:20,695 --> 00:13:21,910 was nowhere else to work. 266 00:13:21,910 --> 00:13:23,460 You'd go work for the mining company. 267 00:13:23,460 --> 00:13:25,940 That mining company had tremendous monopsony power 268 00:13:25,940 --> 00:13:28,900 over you because basically there was nowhere else to work 269 00:13:28,900 --> 00:13:29,740 within a decent area. 270 00:13:29,740 --> 00:13:30,490 There weren't cars yet. 271 00:13:30,490 --> 00:13:33,200 You couldn't just commute to somewhere else. 272 00:13:33,200 --> 00:13:37,920 A modern example is MIT's monopsony power over me. 273 00:13:37,920 --> 00:13:40,930 MIT has monopsony power over me. 274 00:13:40,930 --> 00:13:41,940 Why is that? 275 00:13:41,940 --> 00:13:45,420 Well that's because my life's pretty comfortable now. 276 00:13:45,420 --> 00:13:47,050 I'm in a house I've lived in a long time. 277 00:13:47,050 --> 00:13:48,260 My kids are in schools I like. 278 00:13:48,260 --> 00:13:49,880 I've got a lot of friends. 279 00:13:49,880 --> 00:13:52,720 It'd be a real pain in the ass for me to move. 280 00:13:52,720 --> 00:13:57,840 And as a result MIT has some, not unlimited, don't tell 281 00:13:57,840 --> 00:14:00,410 them, but they have some monopsony power over me 282 00:14:00,410 --> 00:14:03,970 because they know that that's a barrier to my exit. 283 00:14:03,970 --> 00:14:07,480 To my exiting MIT a barrier is that I'm very 284 00:14:07,480 --> 00:14:09,830 comfortable and satisfied. 285 00:14:09,830 --> 00:14:15,030 And given the nature tenets of psychology, it is harder to 286 00:14:15,030 --> 00:14:18,180 move someone with a pull than with the push. 287 00:14:18,180 --> 00:14:21,200 So someone could come and try to pull me away, but they're 288 00:14:21,200 --> 00:14:22,910 going to have to blow me away with an offer-- 289 00:14:22,910 --> 00:14:24,490 once again, don't tell MIT this-- 290 00:14:24,490 --> 00:14:25,490 they'll have to blow me away an offer 291 00:14:25,490 --> 00:14:27,490 because I'm pretty satisfied. 292 00:14:27,490 --> 00:14:30,760 And that satisfaction inherently gives MIT some 293 00:14:30,760 --> 00:14:32,220 monopsony power over me. 294 00:14:35,420 --> 00:14:38,720 Now the question is what implications does this have. 295 00:14:38,720 --> 00:14:41,140 And the implications are quite interesting. 296 00:14:41,140 --> 00:14:43,630 And what they are is a complicated flip of the 297 00:14:43,630 --> 00:14:44,330 monopoly case. 298 00:14:44,330 --> 00:14:46,760 Let's look at figure 18-2. 299 00:14:46,760 --> 00:14:48,460 Here's an example of a company town. 300 00:14:51,220 --> 00:14:54,000 Now let's imagine a labor market where you've got some 301 00:14:54,000 --> 00:14:56,260 labor demand curve, the marginal revenue product of 302 00:14:56,260 --> 00:15:00,530 labor, MRPL, and some labor supply curve. 303 00:15:00,530 --> 00:15:02,480 And now labor supply is upward sloping. 304 00:15:02,480 --> 00:15:07,930 This is a not a perfectly competitive labor market now. 305 00:15:07,930 --> 00:15:10,560 This labor supply is now upward sloping. 306 00:15:10,560 --> 00:15:14,800 So the demand curve for labor we're going to 307 00:15:14,800 --> 00:15:16,790 say is 60 minus l. 308 00:15:16,790 --> 00:15:20,740 So in our example the marginal revenue product of labor is 309 00:15:20,740 --> 00:15:22,690 going to be 60 minus l. 310 00:15:22,690 --> 00:15:25,140 The notion is you have some downward sloping demand curve 311 00:15:25,140 --> 00:15:28,105 for labor because of diminishing marginal product. 312 00:15:38,220 --> 00:15:41,270 The wage you're willing to pay is diminishing in the number 313 00:15:41,270 --> 00:15:41,800 of workers. 314 00:15:41,800 --> 00:15:44,050 To get that first worker you'll pay a high wage, 315 00:15:44,050 --> 00:15:45,310 because you got to produce something. 316 00:15:45,310 --> 00:15:47,030 But as you hire more workers the wage you're 317 00:15:47,030 --> 00:15:48,140 willing to pay falls. 318 00:15:48,140 --> 00:15:50,640 So the demand curve is downward sloping. 319 00:15:50,640 --> 00:15:53,490 And let's say that our labor supply curve is that the 320 00:15:53,490 --> 00:15:56,230 amount of labor workers are willing to supply is 321 00:15:56,230 --> 00:15:57,680 the wage over 2. 322 00:15:57,680 --> 00:15:58,950 I'm just making this up. 323 00:15:58,950 --> 00:16:02,080 These are just made up numbers just to make the math work. 324 00:16:02,080 --> 00:16:04,590 So this is it just an upward sloping labor supply curve. 325 00:16:04,590 --> 00:16:06,460 A higher wage calls forth more labor. 326 00:16:08,960 --> 00:16:16,110 So let's ask what happens in the competitive case. 327 00:16:16,110 --> 00:16:18,820 Well in the competitive case you set the supply equal to 328 00:16:18,820 --> 00:16:19,590 the demand. 329 00:16:19,590 --> 00:16:24,860 Well supply is that firms are going to set the wage equals 330 00:16:24,860 --> 00:16:27,170 60 minus l. 331 00:16:27,170 --> 00:16:29,850 Labor supply is l equals w over 2. 332 00:16:33,020 --> 00:16:35,790 So we could just have two equations and two unknowns we 333 00:16:35,790 --> 00:16:39,050 can solve and get that the amount of labor supplied in 334 00:16:39,050 --> 00:16:41,520 the competitive case is 20 units. 335 00:16:41,520 --> 00:16:44,320 20 hours, 20 days, weeks, whatever. 336 00:16:44,320 --> 00:16:47,600 20 units. 337 00:16:47,600 --> 00:16:49,280 That's the competitive outcome. 338 00:16:49,280 --> 00:16:54,060 And the wage we can read off the labor supply curve. 339 00:16:54,060 --> 00:16:55,980 If they're going to supply 20 units, they're going to need a 340 00:16:55,980 --> 00:16:58,030 wage of 40. 341 00:16:58,030 --> 00:17:00,520 So once again we can read that off the labor supply or the 342 00:17:00,520 --> 00:17:04,440 labor demand curve if there's going to be 20 workers the 343 00:17:04,440 --> 00:17:05,700 wage is going to be 40. 344 00:17:05,700 --> 00:17:09,089 So the wage, labor competitive and the wage 345 00:17:09,089 --> 00:17:11,260 competitive is 40. 346 00:17:11,260 --> 00:17:13,740 So in a competitive market with this demand and supply 347 00:17:13,740 --> 00:17:16,170 curve you should know by now you just set them equal, you 348 00:17:16,170 --> 00:17:21,630 solve, you get an outcome of 20 workers 349 00:17:21,630 --> 00:17:23,930 working a wage of 40. 350 00:17:23,930 --> 00:17:25,869 Now let's imagine this isn't the competitive case. 351 00:17:25,869 --> 00:17:27,359 Let's imagine it's the monopsony case. 352 00:17:27,359 --> 00:17:29,140 Let's imagine this firm has monopsony power. 353 00:17:29,140 --> 00:17:32,020 Workers can't exit. 354 00:17:32,020 --> 00:17:35,830 And let's further assume that the firm cannot wage 355 00:17:35,830 --> 00:17:37,110 discriminate. 356 00:17:37,110 --> 00:17:38,760 Just as we talked about monopolists that couldn't 357 00:17:38,760 --> 00:17:41,900 price discriminate, we're going to talk about a firm 358 00:17:41,900 --> 00:17:43,280 they can't wage discriminate. 359 00:17:43,280 --> 00:17:45,870 It has to pay one wage to all of its workers. 360 00:17:45,870 --> 00:17:47,400 And we'll come back once again with this assumption. 361 00:17:47,400 --> 00:17:49,800 Just as we talked about price discrimination we'll come back 362 00:17:49,800 --> 00:17:51,220 and talk about wage discrimination. 363 00:17:51,220 --> 00:17:54,740 But for now assume a non-wage discriminating monopsonist. 364 00:17:54,740 --> 00:17:58,500 They have to pay one wage to all their workers. 365 00:17:58,500 --> 00:18:04,470 Well what that means is just as when a monopolist wanted to 366 00:18:04,470 --> 00:18:08,020 sell more goods it had to lower the price, if a 367 00:18:08,020 --> 00:18:11,270 monopsonist wants to hire more workers it has 368 00:18:11,270 --> 00:18:14,150 to raise the wage. 369 00:18:14,150 --> 00:18:14,810 Parallel thing. 370 00:18:14,810 --> 00:18:16,950 Just as the monopolist had to lower the price to sell more 371 00:18:16,950 --> 00:18:19,730 units because it had to respect the demand curve, a 372 00:18:19,730 --> 00:18:22,460 monopsonist if it wants to hire more workers has to raise 373 00:18:22,460 --> 00:18:26,440 the wage because it has to respect the supply curve-- 374 00:18:26,440 --> 00:18:27,270 parallel. 375 00:18:27,270 --> 00:18:32,000 And what this will do is that will lead them to under hire 376 00:18:32,000 --> 00:18:34,920 workers ct too low a wage. 377 00:18:34,920 --> 00:18:38,460 Just as monopoly led firms to under produce at too high a 378 00:18:38,460 --> 00:18:41,550 price, monopsony will lead to under hiring 379 00:18:41,550 --> 00:18:43,660 at too high a wage. 380 00:18:43,660 --> 00:18:46,220 So once again, to think about this, let's think about the 381 00:18:46,220 --> 00:18:50,460 firm's decision to hire an extra worker. 382 00:18:50,460 --> 00:18:53,020 What is the firm's total expenditure on labor? 383 00:18:53,020 --> 00:18:57,170 Its expenditure on labor is the wage, which is a function 384 00:18:57,170 --> 00:19:00,640 of the amount of labor, times the amount of labor. 385 00:19:00,640 --> 00:19:03,430 That's the expenditure on labor. 386 00:19:03,430 --> 00:19:08,230 So its marginal expenditure, if you take the derivative, is 387 00:19:08,230 --> 00:19:16,050 going to be w plus dw/dl times l. 388 00:19:16,050 --> 00:19:17,300 That's its marginal expenditure. 389 00:19:19,630 --> 00:19:22,040 If you want to hire an additional worker what's the 390 00:19:22,040 --> 00:19:23,270 marginal cost. 391 00:19:23,270 --> 00:19:24,510 Well I want to hire an additional 392 00:19:24,510 --> 00:19:25,000 worker, what's the cost? 393 00:19:25,000 --> 00:19:30,050 I've got a pay him w and to hire him I have to raise the 394 00:19:30,050 --> 00:19:36,040 wage, so I have to pay all my previous workers more as well. 395 00:19:36,040 --> 00:19:38,770 So to hire one more worker I've got to pay that worker a 396 00:19:38,770 --> 00:19:42,120 wage and in order to entice him I've got to raise the 397 00:19:42,120 --> 00:19:43,850 wage, which means I've got to pay a higher wage to all my 398 00:19:43,850 --> 00:19:45,040 previous workers too. 399 00:19:45,040 --> 00:19:48,680 Once again, remember, I have to pay one wage. 400 00:19:48,680 --> 00:19:52,610 So if I'm going to hire that worker there is the same 401 00:19:52,610 --> 00:19:56,240 poisoning effect that we saw with monopolists. 402 00:19:56,240 --> 00:19:59,390 With monopolists the poisoning effect was if I want to sell 403 00:19:59,390 --> 00:20:01,350 one more unit I'm going to have to undercut my price on 404 00:20:01,350 --> 00:20:03,150 all previous units. 405 00:20:03,150 --> 00:20:06,622 For a monopsonist, if I want to hire one more worker I have 406 00:20:06,622 --> 00:20:09,160 to pay all my previous workers more. 407 00:20:09,160 --> 00:20:11,330 And that's going to mean that there's a poisoning effective 408 00:20:11,330 --> 00:20:12,220 in reverse. 409 00:20:12,220 --> 00:20:14,350 That's going to cost me a lot of money to 410 00:20:14,350 --> 00:20:17,140 hire that extra worker. 411 00:20:17,140 --> 00:20:20,870 So we can actually derive now a marginal expenditure curve 412 00:20:20,870 --> 00:20:23,100 just as we derived a marginal revenue curve for the 413 00:20:23,100 --> 00:20:24,310 monopolist. 414 00:20:24,310 --> 00:20:28,040 The marginal expenditure curve. 415 00:20:28,040 --> 00:20:33,010 So we know expenditure is w of l times l. 416 00:20:33,010 --> 00:20:42,090 And we know from the supply curve, we can rewrite this as 417 00:20:42,090 --> 00:20:44,960 w equals 2l. 418 00:20:44,960 --> 00:20:46,980 So that says that the expenditure on 419 00:20:46,980 --> 00:20:51,170 labor is 2l times l. 420 00:20:51,170 --> 00:20:55,240 So plugging in from the supply curve the expenditure on labor 421 00:20:55,240 --> 00:20:56,750 is 2l times l. 422 00:20:56,750 --> 00:20:58,880 Its wage is a function of labor times labor. 423 00:20:58,880 --> 00:21:00,930 So 2l times l. 424 00:21:00,930 --> 00:21:06,030 So that means that marginal expenditure is 4l. 425 00:21:06,030 --> 00:21:10,240 The marginal expenditure is 4l. 426 00:21:10,240 --> 00:21:13,430 So we can now draw a marginal expenditure curve that's 427 00:21:13,430 --> 00:21:14,980 steeper than the labor supply curve. 428 00:21:14,980 --> 00:21:17,280 Once again it's confusing but it's all parallel. 429 00:21:17,280 --> 00:21:18,570 It's just we're flipping everything around from 430 00:21:18,570 --> 00:21:22,620 monopolist. Instead of drawing that marginal revenue curve 431 00:21:22,620 --> 00:21:26,160 that was steeper than the product demand curve, now 432 00:21:26,160 --> 00:21:28,600 we're drawing a marginal expenditure curve which is 433 00:21:28,600 --> 00:21:31,920 steeper than the labor supply curve. 434 00:21:31,920 --> 00:21:36,150 And once again to find the outcome we'll find the 435 00:21:36,150 --> 00:21:39,010 intersection of that marginal expenditure curve with 436 00:21:39,010 --> 00:21:41,910 marginal cost. 437 00:21:41,910 --> 00:21:43,760 Well here we'll find the intersection of marginal 438 00:21:43,760 --> 00:21:45,700 expenditure curve, I'm sorry, with labor demand. 439 00:21:45,700 --> 00:21:47,510 I'm sorry, so the parallel was we found the intersection of 440 00:21:47,510 --> 00:21:50,070 marginal revenue with marginal cost. Now find the 441 00:21:50,070 --> 00:21:53,030 intersection of marginal expenditure with labor demand. 442 00:21:53,030 --> 00:21:57,280 That intersection is going to happen at 12 workers. 443 00:21:57,280 --> 00:22:01,360 So the firm is going to hire 12 workers. 444 00:22:01,360 --> 00:22:03,960 But what ways you're going to pay-- once again our first 445 00:22:03,960 --> 00:22:06,390 temptation is to look at that high intersection and say, 446 00:22:06,390 --> 00:22:08,260 well at that intersection what's the wage. 447 00:22:08,260 --> 00:22:10,140 We didn't put that on the diagram for a reason. 448 00:22:10,140 --> 00:22:12,160 Maybe we should have to throw you off. 449 00:22:12,160 --> 00:22:14,570 Remember, to figure out the wage you've got to respect the 450 00:22:14,570 --> 00:22:15,820 labor supply curve. 451 00:22:15,820 --> 00:22:18,180 Just like you have to respect the product demand curve to 452 00:22:18,180 --> 00:22:19,480 figure out the price. 453 00:22:19,480 --> 00:22:24,050 So what's the wage when I hire 12 workers they pay 24. 454 00:22:24,050 --> 00:22:28,180 So the monopsonist is going to hire 12 workers and pay 24. 455 00:22:28,180 --> 00:22:29,860 It's going to hire the number of workers where marginal 456 00:22:29,860 --> 00:22:33,620 expenditure equals the labor demand. 457 00:22:33,620 --> 00:22:34,970 That's going to determine the quantity. 458 00:22:34,970 --> 00:22:36,480 And the wage they're going to read off the 459 00:22:36,480 --> 00:22:37,730 labor supply curve. 460 00:22:40,090 --> 00:22:43,710 And as a result this firm is going to under hire at too low 461 00:22:43,710 --> 00:22:47,110 a wage relative to the perfect competition. 462 00:22:47,110 --> 00:22:48,540 Relative to the competition they're going to hire fewer 463 00:22:48,540 --> 00:22:50,215 workers at a lower wage. 464 00:22:53,090 --> 00:22:56,380 So if you think about this, let's come back to 465 00:22:56,380 --> 00:22:59,680 the example of MIT. 466 00:22:59,680 --> 00:23:04,990 MIT, say, would like to expand the economics department. 467 00:23:04,990 --> 00:23:07,780 But to do so it's got to poach an economics professor away 468 00:23:07,780 --> 00:23:09,740 from another university. 469 00:23:09,740 --> 00:23:11,390 Well, it poaches another professor away from another 470 00:23:11,390 --> 00:23:13,190 university. 471 00:23:13,190 --> 00:23:17,590 And let's say that at MIT pays all its professors the same. 472 00:23:17,590 --> 00:23:18,880 If they're going to poach a professor from another 473 00:23:18,880 --> 00:23:21,030 university they're going to have to pay 474 00:23:21,030 --> 00:23:23,680 the rest of us more. 475 00:23:23,680 --> 00:23:25,160 And that's going to cost them a ton of money. 476 00:23:25,160 --> 00:23:26,900 So they think think we'd rather have a little bit more 477 00:23:26,900 --> 00:23:28,630 crowded undergrad class, we don't really see it here 478 00:23:28,630 --> 00:23:32,750 today, but maybe in general, more crowded undergrad class 479 00:23:32,750 --> 00:23:34,540 and not get that extra professor to avoid having to 480 00:23:34,540 --> 00:23:38,220 pay a higher wage to all our existing professors. 481 00:23:38,220 --> 00:23:44,270 So as a result MIT will under hire professors and they'll 482 00:23:44,270 --> 00:23:49,020 under hire professors at too low a wage. 483 00:23:49,020 --> 00:23:54,220 And once you can determine how big monopsony power is, what 484 00:23:54,220 --> 00:23:57,090 determined how big monopoly power was? 485 00:23:57,090 --> 00:24:00,768 What was the key thing I don't want to say what it is because 486 00:24:00,768 --> 00:24:02,460 it will give it away, what's the key thing that determined 487 00:24:02,460 --> 00:24:04,600 the size of monopoly power. 488 00:24:04,600 --> 00:24:04,800 Yeah. 489 00:24:04,800 --> 00:24:05,420 AUDIENCE: Elasticity demand. 490 00:24:05,420 --> 00:24:06,880 PROFESSOR: Elasticity of demand. 491 00:24:06,880 --> 00:24:10,490 So just like that, the key factors going to determine the 492 00:24:10,490 --> 00:24:12,970 market power of monopsonist is going to be the elasticity of 493 00:24:12,970 --> 00:24:15,140 supply of labor. 494 00:24:15,140 --> 00:24:18,660 The elasticity of demand for a good is what determined the 495 00:24:18,660 --> 00:24:21,236 market power of monopolist because as goods were more 496 00:24:21,236 --> 00:24:23,110 elasticity demanded, they had less ability 497 00:24:23,110 --> 00:24:25,240 to jack up the price. 498 00:24:25,240 --> 00:24:27,600 The elasticity of supply of labor is what's going to 499 00:24:27,600 --> 00:24:29,500 determine the market power of monopsonists. 500 00:24:29,500 --> 00:24:31,690 Because if I have more options. 501 00:24:31,690 --> 00:24:34,220 they can't underpay me. 502 00:24:34,220 --> 00:24:38,580 So if I'm very willing to move to another university. 503 00:24:38,580 --> 00:24:42,040 That is as my labor supply curve gets flatter, then 504 00:24:42,040 --> 00:24:45,750 there's less market power that they have. In particular, in a 505 00:24:45,750 --> 00:24:47,460 perfectly competitive labor market there's no monopsony 506 00:24:47,460 --> 00:24:49,180 power at all. 507 00:24:49,180 --> 00:24:52,250 So monopsony power is a function of the options facing 508 00:24:52,250 --> 00:24:53,500 their workers. 509 00:24:56,340 --> 00:24:57,590 Questions about that? 510 00:25:00,440 --> 00:25:03,970 Now the key question this all raises, at least when I first 511 00:25:03,970 --> 00:25:08,130 learned about it and think about it, is it maybe was 512 00:25:08,130 --> 00:25:10,080 plausible to think that monopolists can only charge 513 00:25:10,080 --> 00:25:11,710 one price for their good. 514 00:25:11,710 --> 00:25:15,210 That the iPod is what the iPod costs. 515 00:25:15,210 --> 00:25:17,250 And you couldn't start charging different amounts for 516 00:25:17,250 --> 00:25:18,380 iPods to different people. 517 00:25:18,380 --> 00:25:22,200 That would get bad press and stuff. 518 00:25:22,200 --> 00:25:24,120 But it's seems a little bit stranger to think that 519 00:25:24,120 --> 00:25:27,450 employers have to pay one wage to all their workers. 520 00:25:27,450 --> 00:25:29,604 As a matter of fact we know that MIT doesn't pay the same 521 00:25:29,604 --> 00:25:32,370 to all its professors. 522 00:25:32,370 --> 00:25:35,470 There is some wage discrimination. 523 00:25:35,470 --> 00:25:38,450 In particular, it's a well known fact that the way to get 524 00:25:38,450 --> 00:25:40,870 a raise as a professor is to get an offer from another 525 00:25:40,870 --> 00:25:42,130 university. 526 00:25:42,130 --> 00:25:45,740 Because MIT, the pay structure professors at competitive 527 00:25:45,740 --> 00:25:49,030 departments like economics is typically they will underpay 528 00:25:49,030 --> 00:25:51,470 you until the university comes and says you're worth more, 529 00:25:51,470 --> 00:25:54,900 and then they'll ratchet up to try to match them. 530 00:25:54,900 --> 00:25:57,120 So there is wage discrimination in practice at 531 00:25:57,120 --> 00:25:58,880 universities as there is in most workplaces. 532 00:25:58,880 --> 00:26:00,420 There's very few workplaces where all 533 00:26:00,420 --> 00:26:01,300 workers make the same. 534 00:26:01,300 --> 00:26:03,200 There's wage discrimination. 535 00:26:03,200 --> 00:26:06,160 So does that mean this model is irrelevant? 536 00:26:06,160 --> 00:26:07,550 And the answer is, no, it doesn't. 537 00:26:07,550 --> 00:26:11,750 Because there are still major barriers to perfect wage 538 00:26:11,750 --> 00:26:12,330 discrimination. 539 00:26:12,330 --> 00:26:14,420 There's some wage discrimination, but there's a 540 00:26:14,420 --> 00:26:17,750 lot of barriers to perfect wage discrimination. 541 00:26:17,750 --> 00:26:22,410 The most important one is workplace norms or fairness. 542 00:26:22,410 --> 00:26:26,310 So what MIT should do, here's the MIT optimal strategy. 543 00:26:26,310 --> 00:26:29,100 The older the professor, the less they should pay them. 544 00:26:29,100 --> 00:26:30,460 Not because they're less productive. 545 00:26:30,460 --> 00:26:32,430 Marginal productivity is constant, it's not, we get 546 00:26:32,430 --> 00:26:35,400 less productive as we get older, but put that aside. 547 00:26:35,400 --> 00:26:38,770 It's because the older you are, the less likely you are 548 00:26:38,770 --> 00:26:40,820 to get up and move. 549 00:26:40,820 --> 00:26:42,640 And the less likely, quite frankly, other universities 550 00:26:42,640 --> 00:26:44,120 are going to want to hire you and take you away. 551 00:26:44,120 --> 00:26:45,030 Because no one gets that excited about 552 00:26:45,030 --> 00:26:47,270 hiring a 60 year old. 553 00:26:47,270 --> 00:26:49,607 So what you should do is take all the 60 over professors and 554 00:26:49,607 --> 00:26:53,220 say we're cutting your wage in half or by a third. 555 00:26:53,220 --> 00:26:57,910 Because the truth, we've written our lectures already, 556 00:26:57,910 --> 00:27:01,450 the wage is already well above our marginal product. 557 00:27:01,450 --> 00:27:02,950 We're all doing pretty well anyway. 558 00:27:02,950 --> 00:27:04,980 And the truth is people wouldn't leave. 559 00:27:04,980 --> 00:27:07,100 So why doesn't MIT do that? 560 00:27:07,100 --> 00:27:09,790 MIT doesn't do that because I'm going to someday be one of 561 00:27:09,790 --> 00:27:12,200 those old guys. 562 00:27:12,200 --> 00:27:13,710 I'm getting there rapidly. 563 00:27:13,710 --> 00:27:15,910 I say, wait a second, if they're going to do to me when 564 00:27:15,910 --> 00:27:19,790 I'm 60, I'm going to get out of here while I'm 45 because I 565 00:27:19,790 --> 00:27:20,950 don't want to be in that situation. 566 00:27:20,950 --> 00:27:22,740 Because that's unfair. 567 00:27:22,740 --> 00:27:25,610 Workplace norms matter. 568 00:27:25,610 --> 00:27:28,210 Employers really do not like to discriminate within the 569 00:27:28,210 --> 00:27:31,830 workplace because it breeds bad blood and ultimately can 570 00:27:31,830 --> 00:27:34,120 lower productivity. 571 00:27:34,120 --> 00:27:36,370 And this is something that we miss in our basic models. 572 00:27:36,370 --> 00:27:39,760 We don't have fairness and workplace norms in our models. 573 00:27:39,760 --> 00:27:42,220 So wage is just about setting the wage that maximizes the 574 00:27:42,220 --> 00:27:44,290 profit, which means screwing the 60 year olds. 575 00:27:44,290 --> 00:27:47,195 But in fact, in reality, that's not the 576 00:27:47,195 --> 00:27:48,040 way workplaces work. 577 00:27:48,040 --> 00:27:49,830 And that's what the point of labor economics is. 578 00:27:49,830 --> 00:27:52,640 If you're interested in this we have an excellent course in 579 00:27:52,640 --> 00:27:56,080 labor economics that follows up on these issues. 580 00:27:56,080 --> 00:27:58,400 But a key issue is how much wage discrimination can be 581 00:27:58,400 --> 00:28:01,600 done given workplace norms, given the notions of fairness 582 00:28:01,600 --> 00:28:04,710 we have. And the answer is it might be kind of tough. 583 00:28:04,710 --> 00:28:10,100 Because basically MIT doesn't want to worry about upsetting 584 00:28:10,100 --> 00:28:14,420 all its younger faculty by mistreating its older faculty. 585 00:28:14,420 --> 00:28:16,220 And part of that could be solidarity. 586 00:28:16,220 --> 00:28:17,560 Some of those guys are my friends and I 587 00:28:17,560 --> 00:28:18,930 feel bad for them. 588 00:28:18,930 --> 00:28:22,090 But partly it could be just more selfish which is, I don't 589 00:28:22,090 --> 00:28:25,670 want to be at a place that's going to discriminate in that 590 00:28:25,670 --> 00:28:28,450 way against me when I get older. 591 00:28:28,450 --> 00:28:30,770 And that's just something that's missed by the basic 592 00:28:30,770 --> 00:28:32,870 14.01 models. 593 00:28:32,870 --> 00:28:34,280 Questions about that? 594 00:28:34,280 --> 00:28:34,565 Yeah. 595 00:28:34,565 --> 00:28:36,678 AUDIENCE: Couldn't you model the person's 596 00:28:36,678 --> 00:28:38,506 life wage or something? 597 00:28:38,506 --> 00:28:40,450 PROFESSOR: So yeah. 598 00:28:40,450 --> 00:28:46,260 So what you can do is you could say to people, look, 599 00:28:46,260 --> 00:28:49,640 when we're hiring you we're going to overpay you relative 600 00:28:49,640 --> 00:28:52,080 to other universities when you're young and we'll 601 00:28:52,080 --> 00:28:54,970 underpay you when you're older. 602 00:28:54,970 --> 00:28:57,960 And so on a lifetime basis you'll be fine. 603 00:28:57,960 --> 00:29:00,760 What would the problem with that be? 604 00:29:00,760 --> 00:29:01,880 So let's say the say-- yeah. 605 00:29:01,880 --> 00:29:02,680 AUDIENCE: You'd leave. 606 00:29:02,680 --> 00:29:05,900 PROFESSOR: I'd leave as soon as I reached that point where 607 00:29:05,900 --> 00:29:08,380 I was being paid more elsewhere that didn't pay this 608 00:29:08,380 --> 00:29:09,420 downward slope. 609 00:29:09,420 --> 00:29:11,530 And, in fact, there's a lot of interesting labor economics 610 00:29:11,530 --> 00:29:13,570 theory which says the optimal formal labor contract is 611 00:29:13,570 --> 00:29:15,010 actually the opposite. 612 00:29:15,010 --> 00:29:16,720 It's to overpay when you're old and 613 00:29:16,720 --> 00:29:17,800 underpay when you're young. 614 00:29:17,800 --> 00:29:19,070 And the notion is to get people to 615 00:29:19,070 --> 00:29:20,990 want to stick around. 616 00:29:20,990 --> 00:29:23,240 And so in some sense, common labor theory says exactly the 617 00:29:23,240 --> 00:29:24,450 opposite of what you suggested. 618 00:29:24,450 --> 00:29:25,960 You want to overpay older people to get 619 00:29:25,960 --> 00:29:27,010 them to stick around. 620 00:29:27,010 --> 00:29:28,850 And for many years in America that's often the way labor 621 00:29:28,850 --> 00:29:29,390 markets worked. 622 00:29:29,390 --> 00:29:31,440 We had very generous pensions and health benefits and high 623 00:29:31,440 --> 00:29:32,650 wages for older workers. 624 00:29:32,650 --> 00:29:35,510 That equilibrium is now breaking down because in this 625 00:29:35,510 --> 00:29:37,620 more competitive labor market you can't afford to overpay 626 00:29:37,620 --> 00:29:40,060 those older workers because then you can't attract the 627 00:29:40,060 --> 00:29:41,130 younger workers in the first place. 628 00:29:41,130 --> 00:29:43,650 And we're moving towards a flatter profile by age. 629 00:29:43,650 --> 00:29:45,750 But that's exactly the set of interesting issues we have to 630 00:29:45,750 --> 00:29:48,920 deal with in labor economics in setting pay that we don't 631 00:29:48,920 --> 00:29:50,240 really get into here. 632 00:29:50,240 --> 00:29:53,250 Other questions or comments on that? 633 00:29:53,250 --> 00:29:55,530 Of course there's another every reason why MIT couldn't 634 00:29:55,530 --> 00:29:58,600 do this, which is it's against the law. 635 00:29:58,600 --> 00:30:01,890 We have age discrimination laws in our country which say 636 00:30:01,890 --> 00:30:03,740 you cannot discriminate against people based 637 00:30:03,740 --> 00:30:05,340 purely on their age. 638 00:30:05,340 --> 00:30:07,920 MIT could say, well look, I could demonstrate a 639 00:30:07,920 --> 00:30:08,930 productivity difference. 640 00:30:08,930 --> 00:30:10,800 This guy is publishing fewer articles than he did 20 years 641 00:30:10,800 --> 00:30:14,690 ago et cetera, but they do have a legal hurdle to 642 00:30:14,690 --> 00:30:16,550 overcome as well as an administrative hurdle. 643 00:30:16,550 --> 00:30:18,540 It would be a pain in the ass for MIT to have to figure out 644 00:30:18,540 --> 00:30:22,070 exactly how to shift their wage schedule to do all this. 645 00:30:22,070 --> 00:30:24,240 And that causes administrative costs and extra Deans and 646 00:30:24,240 --> 00:30:27,440 extra things and they just don't want to deal with it. 647 00:30:27,440 --> 00:30:30,460 So there are other barriers as well which is administrative 648 00:30:30,460 --> 00:30:31,610 costs and legal costs. 649 00:30:31,610 --> 00:30:34,160 But I think probably the main barrier is just the difficult 650 00:30:34,160 --> 00:30:38,930 issue of workplace norms and how it affects the 651 00:30:38,930 --> 00:30:41,556 productivity of the workers who are behind while you get 652 00:30:41,556 --> 00:30:43,360 rid of these older workers or underpay these older workers 653 00:30:43,360 --> 00:30:44,610 who aren't as productive. 654 00:30:47,120 --> 00:30:50,040 Questions or thoughts on that? 655 00:30:50,040 --> 00:30:53,840 So now with this monopsony model in mind I want to go 656 00:30:53,840 --> 00:31:00,020 back and revisit a major topic that we talked about early in 657 00:31:00,020 --> 00:31:01,350 the course. 658 00:31:01,350 --> 00:31:03,460 And a couple times in this course we talked about as an 659 00:31:03,460 --> 00:31:06,820 example of how governments can screw up markets we talked 660 00:31:06,820 --> 00:31:08,880 about the minimum wage. 661 00:31:08,880 --> 00:31:12,360 We talked about if you take a competitive labor market and 662 00:31:12,360 --> 00:31:17,350 impose a minimum wage above the competitive level, that 663 00:31:17,350 --> 00:31:19,610 could lead to deadweight loss. 664 00:31:19,610 --> 00:31:22,270 Because what will happen is at that higher wage firms will 665 00:31:22,270 --> 00:31:24,080 want fewer workers. 666 00:31:24,080 --> 00:31:26,340 Workers who would be happy to work at the competitive wage 667 00:31:26,340 --> 00:31:28,130 will not be able to work. 668 00:31:28,130 --> 00:31:31,050 Trades which would make social welfare higher won't be made. 669 00:31:31,050 --> 00:31:33,800 And there will be deadweight loss. 670 00:31:33,800 --> 00:31:37,850 The monopsony model says that may not be the case. 671 00:31:37,850 --> 00:31:41,860 Because in the monopsony model, a minimum wage can play 672 00:31:41,860 --> 00:31:44,770 the same role that optimal price regulation paid with 673 00:31:44,770 --> 00:31:45,960 monopolists. 674 00:31:45,960 --> 00:31:49,705 Remember with monopolists we said if you regulated a 675 00:31:49,705 --> 00:31:52,460 monopolist and forced them to charge a competitive price, 676 00:31:52,460 --> 00:31:54,130 that you could actually force them into 677 00:31:54,130 --> 00:31:56,090 the competitive outcome. 678 00:31:56,090 --> 00:32:02,260 Well if a minimum wage is set above the prevailing wage but 679 00:32:02,260 --> 00:32:05,140 that's because a monopsony prevailing wage is too low, 680 00:32:05,140 --> 00:32:07,560 and the minimum wage is set at the competitive level, then 681 00:32:07,560 --> 00:32:09,610 you could actually increase employment and improve 682 00:32:09,610 --> 00:32:11,710 outcomes with a minimum wage. 683 00:32:11,710 --> 00:32:12,560 Sort of counter intuitive. 684 00:32:12,560 --> 00:32:14,180 So let's look at it, pretty confusing. 685 00:32:14,180 --> 00:32:16,010 Let's look at figure 18-3. 686 00:32:16,010 --> 00:32:20,660 Figure 18-3 once again parallels a figure you saw on 687 00:32:20,660 --> 00:32:24,320 the entire flip side for price regulation of a monopolist, 688 00:32:24,320 --> 00:32:27,380 this is the parallel which is wage regulation of a 689 00:32:27,380 --> 00:32:29,020 monopsonist. Let's walk through this. 690 00:32:29,020 --> 00:32:32,460 It's pretty confusing so let's walk through this slowly. 691 00:32:32,460 --> 00:32:37,610 Initially you have a monopsonist who is hiring at 692 00:32:37,610 --> 00:32:42,210 the point where their marginal expenditure curve, which is 693 00:32:42,210 --> 00:32:43,880 the dashed line and then the solid line. 694 00:32:43,880 --> 00:32:49,190 So the line me1 is original marginal expenditure curve. 695 00:32:49,190 --> 00:32:52,990 It's the me1 plus the me2, it's that segment. 696 00:32:52,990 --> 00:32:55,080 That line which is, once again, more elastic than the 697 00:32:55,080 --> 00:32:56,480 supply curve. 698 00:32:56,480 --> 00:33:01,560 That intersects the demand curve at a labor supply l1. 699 00:33:01,560 --> 00:33:06,770 So they hire l1 workers and they pay a wage w1. 700 00:33:06,770 --> 00:33:10,150 That's the initial monopsony equilibrium. 701 00:33:10,150 --> 00:33:13,680 The competitive equilibrium is where supply equals demand. 702 00:33:13,680 --> 00:33:16,180 That would be hiring l2 workers and paying 703 00:33:16,180 --> 00:33:18,930 a higher wage w2. 704 00:33:18,930 --> 00:33:25,320 So the monopsonist is under hiring relative to the 705 00:33:25,320 --> 00:33:27,030 competitive firm. 706 00:33:27,030 --> 00:33:29,280 Now let's say the government rolls in and says we're going 707 00:33:29,280 --> 00:33:32,210 to set a minimum wage and we're going to happen to get 708 00:33:32,210 --> 00:33:34,530 it right and set it at the competitive wage level, w2. 709 00:33:37,080 --> 00:33:39,460 Well now let's think about the monopsonist calculus. 710 00:33:39,460 --> 00:33:42,970 The monopsonist new marginal expenditure curve is the old 711 00:33:42,970 --> 00:33:44,140 one for the solid segment. 712 00:33:44,140 --> 00:33:47,220 So where it says me2, that solid segment is still the 713 00:33:47,220 --> 00:33:48,260 marginal expenditure curve. 714 00:33:48,260 --> 00:33:50,780 So as they think about hiring additional workers, they're 715 00:33:50,780 --> 00:33:52,170 working down that curve. 716 00:33:52,170 --> 00:33:56,420 But once they get to l2 workers they can't lower the 717 00:33:56,420 --> 00:33:57,900 wage anymore. 718 00:33:57,900 --> 00:34:01,560 So that marginal expenditure curve, they can no longer 719 00:34:01,560 --> 00:34:03,720 lower the wage below w2. 720 00:34:03,720 --> 00:34:05,990 So their new marginal expenditure curve hops down 721 00:34:05,990 --> 00:34:08,139 and becomes the minimum wage. 722 00:34:08,139 --> 00:34:09,790 So the new marginal expenditure curve is the two 723 00:34:09,790 --> 00:34:10,860 segments labeled me2. 724 00:34:10,860 --> 00:34:14,530 It's the horizontal segment from the y-axis to e2. 725 00:34:14,530 --> 00:34:18,600 And then it jumps up to that upward sloping segment to the 726 00:34:18,600 --> 00:34:20,199 right of l2. 727 00:34:20,199 --> 00:34:23,750 So the new marginal expenditure curve is basically 728 00:34:23,750 --> 00:34:26,040 at a wage that's above minimum wage they continue to behave 729 00:34:26,040 --> 00:34:29,040 like a monopsonist. But once you hit the minimum wage and 730 00:34:29,040 --> 00:34:32,400 they can't lower the wage anymore, what happens? 731 00:34:32,400 --> 00:34:35,350 The poisoning effect goes away, just like we talked 732 00:34:35,350 --> 00:34:41,570 about with the monopolist. Essentially what this has done 733 00:34:41,570 --> 00:34:43,190 has killed the poisoning effect. 734 00:34:43,190 --> 00:34:45,659 Because it said as you're thinking about hiring that 735 00:34:45,659 --> 00:34:52,790 next worker to the right of l1, typically say I want to 736 00:34:52,790 --> 00:34:55,460 hire them because I'm going to have to raise my wage to 737 00:34:55,460 --> 00:34:56,170 everybody else. 738 00:34:56,170 --> 00:34:58,250 But you're already paying everybody else a higher wage. 739 00:34:58,250 --> 00:34:59,100 You're already paying everybody 740 00:34:59,100 --> 00:35:00,320 else the minimum wage. 741 00:35:00,320 --> 00:35:01,290 So there's no poisoning effect. 742 00:35:01,290 --> 00:35:02,770 You're not going to have to pay them a higher wage to hire 743 00:35:02,770 --> 00:35:04,060 that next worker because you're already paying them 744 00:35:04,060 --> 00:35:05,550 that higher wage. 745 00:35:05,550 --> 00:35:08,720 So just as optimal price regulation undoes the 746 00:35:08,720 --> 00:35:12,890 poisoning effect on the demand side, optimal wage regulation 747 00:35:12,890 --> 00:35:15,610 undoes that poisoning effect on the supply side and can 748 00:35:15,610 --> 00:35:17,100 lead you to the optimal outcome. 749 00:35:17,100 --> 00:35:20,520 So minimum wage can actually increase employment. 750 00:35:20,520 --> 00:35:21,500 Pretty bizarre. 751 00:35:21,500 --> 00:35:24,095 Minimum wage is our whipping boy for this course about how 752 00:35:24,095 --> 00:35:28,560 it causes dead weight loss and leads to lower employment. 753 00:35:28,560 --> 00:35:31,390 Here we're saying, actually, if we start a monopsony 754 00:35:31,390 --> 00:35:34,980 equilibrium, a minimum wage could increase employment. 755 00:35:34,980 --> 00:35:38,440 Of course, as you should know, the minimum wage could reduce 756 00:35:38,440 --> 00:35:40,455 employment even in a monopsony setting if it 757 00:35:40,455 --> 00:35:42,080 gets set too high. 758 00:35:42,080 --> 00:35:45,900 So if the minimum wage got set very high-- 759 00:35:45,900 --> 00:35:47,010 Jessica maybe this is something we should actually 760 00:35:47,010 --> 00:35:50,020 add for next year-- so if you can imagine a minimum wage 761 00:35:50,020 --> 00:35:56,050 that's set very high, that could lead to a level of labor 762 00:35:56,050 --> 00:36:00,550 supply that's actually below the monopsony level. 763 00:36:00,550 --> 00:36:10,020 So just as with optimal price regulation, we talked about 764 00:36:10,020 --> 00:36:12,470 how setting a price too high can make things worse, setting 765 00:36:12,470 --> 00:36:14,380 a minimum wage too high can make things worse. 766 00:36:14,380 --> 00:36:17,290 So it's ultimately an empirical question of does the 767 00:36:17,290 --> 00:36:20,320 minimum wage raise employment, which would require two 768 00:36:20,320 --> 00:36:23,540 conditions, a monopsony market and a well-set minimum wage. 769 00:36:23,540 --> 00:36:25,120 Or does it lower employment? 770 00:36:25,120 --> 00:36:27,850 Which can happen either with a competitive labor market or it 771 00:36:27,850 --> 00:36:31,220 could happen with a poorly-set minimum wage. 772 00:36:31,220 --> 00:36:33,130 This pretty confusing so you'll probably have to go 773 00:36:33,130 --> 00:36:33,470 home and think more about this. 774 00:36:33,470 --> 00:36:35,240 But are there questions now about anything that's not 775 00:36:35,240 --> 00:36:36,490 apparent from the diagram? 776 00:36:38,980 --> 00:36:46,210 So now this is why we have empirical economics. 777 00:36:46,210 --> 00:36:47,710 We have empirical economics, well 778 00:36:47,710 --> 00:36:48,740 really we have two reasons. 779 00:36:48,740 --> 00:36:50,550 One, is sometimes we know the direction of what we're 780 00:36:50,550 --> 00:36:52,780 looking for, we want measure its magnitude. 781 00:36:52,780 --> 00:36:54,700 Sometimes we don't even know the direction, not to mention 782 00:36:54,700 --> 00:36:55,650 the magnitude. 783 00:36:55,650 --> 00:36:57,420 Here's a case we don't even know the direction. 784 00:36:57,420 --> 00:36:59,490 Will increasing the minimum wage raise or lower employment 785 00:36:59,490 --> 00:37:01,870 and by how much? 786 00:37:01,870 --> 00:37:03,630 Well how do we test this? 787 00:37:03,630 --> 00:37:06,050 Well the traditional way to look at it to say, OK, the 788 00:37:06,050 --> 00:37:08,430 minimum wage changes over time, let's look at what 789 00:37:08,430 --> 00:37:14,020 happens to employment when the minimum wage goes up. 790 00:37:14,020 --> 00:37:17,700 And what people found was an increase in minimum wage 791 00:37:17,700 --> 00:37:20,690 tended to be associated with lower employment. 792 00:37:20,690 --> 00:37:23,510 When the minimum wage went up, employment fell. 793 00:37:23,510 --> 00:37:28,160 So people took that to mean that there was a situation 794 00:37:28,160 --> 00:37:30,750 where we're either in a competitive market or we're 795 00:37:30,750 --> 00:37:33,000 screwing up the monopsony market by setting too high a 796 00:37:33,000 --> 00:37:33,650 minimum wage. 797 00:37:33,650 --> 00:37:36,860 Because we raised the minimum wage, employment fell. 798 00:37:36,860 --> 00:37:39,400 And what is wrong with drawing that 799 00:37:39,400 --> 00:37:40,420 conclusion from that evidence? 800 00:37:40,420 --> 00:37:42,280 Or could someone tell me a story about why that might not 801 00:37:42,280 --> 00:37:44,500 be a convincing piece of evidence? 802 00:37:44,500 --> 00:37:47,180 Why the fact that when we raise the minimum wage 803 00:37:47,180 --> 00:37:50,190 employment falls, why that may not be by itself be 804 00:37:50,190 --> 00:37:51,010 compelling. 805 00:37:51,010 --> 00:37:53,110 What problem you might have with that piece of evidence. 806 00:37:53,110 --> 00:37:57,360 If you read that in the New York Times tomorrow, look at 807 00:37:57,360 --> 00:37:59,820 this graph, we raised the wage and employment falls. 808 00:37:59,820 --> 00:38:01,630 Clearly minimum wage is bad. 809 00:38:01,630 --> 00:38:04,211 What should your first thought be upon reading that article? 810 00:38:09,400 --> 00:38:10,660 Well what do we care about? 811 00:38:10,660 --> 00:38:13,680 We care about causation not correlation. 812 00:38:13,680 --> 00:38:16,960 So what could be causing this to be correlation but not a 813 00:38:16,960 --> 00:38:18,210 causation effect? 814 00:38:25,490 --> 00:38:26,020 Someone want to try? 815 00:38:26,020 --> 00:38:29,613 AUDIENCE: It would depend on when you 816 00:38:29,613 --> 00:38:30,920 raise the minimum wage. 817 00:38:30,920 --> 00:38:33,245 PROFESSOR: Right, in particular what story might 818 00:38:33,245 --> 00:38:34,474 cause this effect? 819 00:38:34,474 --> 00:38:38,538 AUDIENCE: If they're in a depression and they decide to 820 00:38:38,538 --> 00:38:39,090 raise the minimum wage. 821 00:38:39,090 --> 00:38:42,050 PROFESSOR: Right, what if governments, worried about 822 00:38:42,050 --> 00:38:44,790 workers in bad economies, that's exactly when they raise 823 00:38:44,790 --> 00:38:45,450 the minimum wage. 824 00:38:45,450 --> 00:38:46,950 What if the government raised the minimum wage in bad 825 00:38:46,950 --> 00:38:48,780 economy, because that's exactly when they're worried 826 00:38:48,780 --> 00:38:50,380 about workers suffering. 827 00:38:50,380 --> 00:38:53,010 Then you would see that a higher minimum wage is 828 00:38:53,010 --> 00:38:53,800 associated with lower employment. 829 00:38:53,800 --> 00:38:55,830 But it's got nothing to do with the higher minimum wage. 830 00:38:55,830 --> 00:38:57,320 It's got to do with the fact that you raised the minimum 831 00:38:57,320 --> 00:38:59,490 wage when unemployment is falling anyway. 832 00:38:59,490 --> 00:39:02,090 It's causation versus correlation. 833 00:39:02,090 --> 00:39:05,160 You have to be critical reader of evidence like this. 834 00:39:05,160 --> 00:39:08,460 The minimum wage is not handed down by God. 835 00:39:08,460 --> 00:39:11,960 It's determined by legislators who are subject to political 836 00:39:11,960 --> 00:39:14,340 pressures which may depend the state of the economy. 837 00:39:14,340 --> 00:39:19,030 If the minimum wage increases when employment happens to be 838 00:39:19,030 --> 00:39:22,610 falling, then it will look like the minimum wage has 839 00:39:22,610 --> 00:39:25,810 harmed employment when it really hasn't. 840 00:39:25,810 --> 00:39:27,910 So what we do about this? 841 00:39:30,430 --> 00:39:36,190 What we do about this is to try to think about a way we 842 00:39:36,190 --> 00:39:41,030 can find a causal relationship between the minimum wage and 843 00:39:41,030 --> 00:39:42,350 employment. 844 00:39:42,350 --> 00:39:48,830 And one way to do that is to try to find cases where a 845 00:39:48,830 --> 00:39:52,720 minimum wage increased and yet we know there was no 846 00:39:52,720 --> 00:39:55,960 independent change in economic activity. 847 00:39:55,960 --> 00:39:58,900 And the way economists have done that is by looking at 848 00:39:58,900 --> 00:40:00,570 state minimum wages. 849 00:40:00,570 --> 00:40:03,140 Turns out a lot of states actually set minimum wages 850 00:40:03,140 --> 00:40:06,040 higher than the national minimum wage. 851 00:40:06,040 --> 00:40:08,220 Not really much anymore because the national minimum 852 00:40:08,220 --> 00:40:10,140 wage has gone up a lot the last decade. 853 00:40:10,140 --> 00:40:12,765 But about a decade ago the national minimum wage, or 854 00:40:12,765 --> 00:40:14,570 about 15 years ago, the national minimum wage was at a 855 00:40:14,570 --> 00:40:17,840 real historical minimum in real terms. And a lot of 856 00:40:17,840 --> 00:40:20,820 states exceeded that in setting their minimum wage. 857 00:40:20,820 --> 00:40:22,870 So take two states, for example New Jersey and 858 00:40:22,870 --> 00:40:24,120 Pennsylvania. 859 00:40:25,760 --> 00:40:30,480 New Jersey raised its minimum wage, Pennsylvania doesn't. 860 00:40:30,480 --> 00:40:32,730 But any economic shock is going to hit New Jersey and 861 00:40:32,730 --> 00:40:33,880 Pennsylvania pretty similarly. 862 00:40:33,880 --> 00:40:35,570 They're both right next to each other on the East coast. 863 00:40:35,570 --> 00:40:38,570 Any recession's going to hit them pretty similarly. 864 00:40:38,570 --> 00:40:40,850 So what you could do is you could ask what happens to 865 00:40:40,850 --> 00:40:45,720 employment in New Jersey when they raise their minimum wage 866 00:40:45,720 --> 00:40:48,060 relative to Pennsylvania, which suffers the same 867 00:40:48,060 --> 00:40:52,210 economic shocks but doesn't raise its minimum wage. 868 00:40:52,210 --> 00:40:53,960 We try to achieve the gold standard. 869 00:40:53,960 --> 00:40:54,910 What's the gold standard? 870 00:40:54,910 --> 00:40:56,500 The gold standard is a randomized trial. 871 00:40:56,500 --> 00:41:00,465 What we'd like is literally a trial where we change the 872 00:41:00,465 --> 00:41:01,750 minimum wage randomly at different places 873 00:41:01,750 --> 00:41:02,880 and different times. 874 00:41:02,880 --> 00:41:04,980 That's ever going to happen. 875 00:41:04,980 --> 00:41:07,430 So we try to approximate in what we call a natural 876 00:41:07,430 --> 00:41:10,770 experiment or quasi experiment which say, are there 877 00:41:10,770 --> 00:41:14,680 experimental interventions that nature gives us, even if 878 00:41:14,680 --> 00:41:16,420 they're not perfectly randomized trials. 879 00:41:16,420 --> 00:41:17,180 And this is one. 880 00:41:17,180 --> 00:41:20,920 Here's a situation where we have two states, very similar, 881 00:41:20,920 --> 00:41:26,710 one raises the minimum wage and one doesn't. 882 00:41:26,710 --> 00:41:28,160 And they're set by economic shocks. 883 00:41:28,160 --> 00:41:29,410 You can look at that. 884 00:41:32,290 --> 00:41:35,090 Another way people have taken this approach is say, well 885 00:41:35,090 --> 00:41:38,030 when the minimum wage increases it's going to have 886 00:41:38,030 --> 00:41:40,390 different effects in different places. 887 00:41:40,390 --> 00:41:41,450 And why is that? 888 00:41:41,450 --> 00:41:44,320 That's because the minimum wage is going to be higher 889 00:41:44,320 --> 00:41:47,670 relative to the market wage in some areas than in others. 890 00:41:47,670 --> 00:41:49,210 So, for example, when they raised the minimum wage a 891 00:41:49,210 --> 00:41:54,190 dollar nationally, most people in Massachusetts already make 892 00:41:54,190 --> 00:41:55,730 more than they raised it to. 893 00:41:55,730 --> 00:41:57,000 So it's not going to affect Massachusetts much. 894 00:41:57,000 --> 00:42:01,570 Whereas in Mississippi that's a big hit. 895 00:42:01,570 --> 00:42:07,100 So given a national raise we can compare states that were 896 00:42:07,100 --> 00:42:09,660 hit harder by that raise to states that were hit less 897 00:42:09,660 --> 00:42:12,480 hard, another way to try to do this. 898 00:42:12,480 --> 00:42:15,990 A number of studies have done this and they've come up with 899 00:42:15,990 --> 00:42:19,180 the striking conclusion that the minimum wage, if anything, 900 00:42:19,180 --> 00:42:23,570 raises employment, at least at the levels that we've seen 901 00:42:23,570 --> 00:42:25,450 over the last 15,20 years. 902 00:42:25,450 --> 00:42:27,990 Changes in the minimum wage are actually associated with 903 00:42:27,990 --> 00:42:30,450 modest, but increases in employment. 904 00:42:30,450 --> 00:42:33,820 And certainly no decreases. 905 00:42:33,820 --> 00:42:37,270 They've been associated with modest increases in employment 906 00:42:37,270 --> 00:42:38,680 and not decreases. 907 00:42:38,680 --> 00:42:43,530 And this is really, really striking because this is 908 00:42:43,530 --> 00:42:45,880 something that economists just never 909 00:42:45,880 --> 00:42:47,940 even really took seriously. 910 00:42:47,940 --> 00:42:49,750 We always taught that minimum wage was the bad boy of 911 00:42:49,750 --> 00:42:53,470 economics, and this is saying, no, in fact, if you take it 912 00:42:53,470 --> 00:42:59,060 seriously and look at the evidence carefully you can 913 00:42:59,060 --> 00:43:02,380 actually see that a minimum wage can actually increase 914 00:43:02,380 --> 00:43:06,080 employment as this model shows. 915 00:43:06,080 --> 00:43:09,190 Now, this is still the subject of some controversy, there's 916 00:43:09,190 --> 00:43:11,640 still a lot of work on it. 917 00:43:11,640 --> 00:43:14,825 But it then raises the question of, well how 918 00:43:14,825 --> 00:43:16,450 can this really be? 919 00:43:16,450 --> 00:43:18,780 Don't we have a pretty competitive labor market? 920 00:43:18,780 --> 00:43:22,280 How do we really have a monopsony labor market? 921 00:43:22,280 --> 00:43:24,640 And the answer is that if you look at who's getting the 922 00:43:24,640 --> 00:43:27,840 minimum wage it's largely younger and low-skilled 923 00:43:27,840 --> 00:43:31,790 workers who don't have a lot of employment options. 924 00:43:31,790 --> 00:43:37,730 So basically McDonald's in a given area in a city could 925 00:43:37,730 --> 00:43:39,880 have some monopsony power. 926 00:43:39,880 --> 00:43:41,670 Because people don't have cars. 927 00:43:41,670 --> 00:43:43,620 These low-income urban youths don't have cars. 928 00:43:43,620 --> 00:43:45,390 They can't go somewhere else to work. 929 00:43:45,390 --> 00:43:48,090 They don't have skills so they can even work retail because 930 00:43:48,090 --> 00:43:50,260 they don't have good enough skills to work retail. 931 00:43:50,260 --> 00:43:52,290 So McDonald's has them. 932 00:43:52,290 --> 00:43:54,550 McDonald's has some monopsony power over them because 933 00:43:54,550 --> 00:43:56,250 McDonald's is a job they can get. 934 00:43:56,250 --> 00:43:58,730 Or McDonald's and Burger King together maybe are the jobs 935 00:43:58,730 --> 00:43:59,690 they can get. 936 00:43:59,690 --> 00:44:01,620 That gives them some monopsony power. 937 00:44:01,620 --> 00:44:03,500 So given that's where the minimum wage is going to bite 938 00:44:03,500 --> 00:44:06,110 the most it's maybe not implausible that the minimum 939 00:44:06,110 --> 00:44:09,590 wage could actually increase employment which is what we 940 00:44:09,590 --> 00:44:12,130 see in the studies. 941 00:44:12,130 --> 00:44:13,160 Questions about that? 942 00:44:13,160 --> 00:44:13,360 Yeah. 943 00:44:13,360 --> 00:44:20,108 AUDIENCE: [INAUDIBLE] anti-trust would it be 944 00:44:20,108 --> 00:44:22,036 possible [INAUDIBLE] 945 00:44:22,036 --> 00:44:24,260 PROFESSOR: Yeah exactly. 946 00:44:24,260 --> 00:44:25,730 So let's take my inner city example. 947 00:44:25,730 --> 00:44:26,860 McDonald's isn't the only employer. 948 00:44:26,860 --> 00:44:28,820 There's Burger King and Wendy's and lots of other 949 00:44:28,820 --> 00:44:30,400 low-skilled employers. 950 00:44:30,400 --> 00:44:33,800 The notion is if there's a few of them that should be enough 951 00:44:33,800 --> 00:44:37,530 to break any monopsony power unless they collude. 952 00:44:37,530 --> 00:44:39,770 So likewise just as there's not supposed to be collusion 953 00:44:39,770 --> 00:44:41,880 on the output side, there are laws against collusion on the 954 00:44:41,880 --> 00:44:44,360 input side in the same way. 955 00:44:44,360 --> 00:44:46,154 But once again, just as those laws are hard to enforce on 956 00:44:46,154 --> 00:44:48,050 the output side they're hard to enforce. 957 00:44:48,050 --> 00:44:52,135 Because what you can do is you can get together in the back 958 00:44:52,135 --> 00:44:55,120 room, or they can just say, Wendy's and Burger King can 959 00:44:55,120 --> 00:44:56,910 wait and see what McDonald's does and just 960 00:44:56,910 --> 00:44:58,360 follow in lock step. 961 00:44:58,360 --> 00:45:01,290 So there's lots of ways to get around those rules. 962 00:45:01,290 --> 00:45:05,390 But yes, just as there's antitrust laws on the output 963 00:45:05,390 --> 00:45:09,710 side, there are the labor market laws on the input side 964 00:45:09,710 --> 00:45:11,610 which get in the way of collusion. 965 00:45:11,610 --> 00:45:13,870 The difference is those are more on a 966 00:45:13,870 --> 00:45:16,100 sector by sector basis. 967 00:45:16,100 --> 00:45:24,470 So, for example, the unionization of the workers 968 00:45:24,470 --> 00:45:27,735 affects the collusion ability of the employers. 969 00:45:27,735 --> 00:45:31,350 So if the workers are unionized it's more lax in 970 00:45:31,350 --> 00:45:33,470 terms of allowing employers to collude as well because the 971 00:45:33,470 --> 00:45:34,710 workers are colluding. 972 00:45:34,710 --> 00:45:36,190 If workers aren't unionized it's less lax. 973 00:45:36,190 --> 00:45:39,110 And there's a complicated body of labor law about that. 974 00:45:39,110 --> 00:45:40,940 Other questions? 975 00:45:40,940 --> 00:45:41,245 Yeah. 976 00:45:41,245 --> 00:45:45,640 AUDIENCE: So it would be bad for unions to try and get an 977 00:45:45,640 --> 00:45:49,000 industry-wide standard wage or-- 978 00:45:49,000 --> 00:45:51,630 PROFESSOR: Well that's about efficiency versus equity. 979 00:45:51,630 --> 00:45:53,380 If a union got an industry-wide standardized 980 00:45:53,380 --> 00:45:56,200 wage then that's going to penalize the talented workers 981 00:45:56,200 --> 00:45:59,530 who would want to go work elsewhere and help the less 982 00:45:59,530 --> 00:46:00,710 talented workers. 983 00:46:00,710 --> 00:46:03,180 And basically a lot of the complaints employers have 984 00:46:03,180 --> 00:46:05,710 about unions is that they lose their talented workers because 985 00:46:05,710 --> 00:46:08,700 the union doesn't allow them to pay those differentials. 986 00:46:08,700 --> 00:46:11,080 Teachers is a great example that's very controversial 987 00:46:11,080 --> 00:46:12,150 right now which is, should there be 988 00:46:12,150 --> 00:46:13,710 merit pay for teachers. 989 00:46:13,710 --> 00:46:16,240 A lot of teachers say, no, there shouldn't be merit pay 990 00:46:16,240 --> 00:46:19,360 because that's going to violate workplace norms and 991 00:46:19,360 --> 00:46:20,380 it's unfair. 992 00:46:20,380 --> 00:46:22,870 But we might not be getting the most talented people into 993 00:46:22,870 --> 00:46:24,150 teaching as a result. 994 00:46:27,060 --> 00:46:30,510 So we'll come back next time and we'll start our topics 995 00:46:30,510 --> 00:46:32,790 part of the course by talking about international trade and 996 00:46:32,790 --> 00:46:34,640 whether it's good or bad. 997 00:46:34,640 --> 00:46:35,550 Answer, it's good. 998 00:46:35,550 --> 00:46:36,800 But we'll talk about why.