Living Wage Redux

Living Wage Redux
May 7, 2007 -- By Greg Mankiw, Greg Mankiw's Blog

A group of ec 10 students asked me today about the hunger strike that some students have recently begun to protest the wages of Harvard security guards. A similar issue arose in 2001. Here is what I wrote back then in Harvard Magazine.

The Case against the Living Wage

When a group of students took over an administration building last spring to protest Harvard's wage policy, many people found it easy to sympathize with them. Without doubt, life is hard for workers getting by on $8 or $9 an hour. Moreover, the protest was a welcome relief from the relentless careerism that infects too many students today. The protesters were admirable in their desire to reach beyond their own fortunate cocoons and help those who are less lucky.

Despite the students' good intentions, I cannot support their cause. If any institution should think with its head as well as its heart, it is a university. In my view, there are compelling reasons to reject the students' pleas.

Like most of the prices in our economy, wages move to balance supply and demand. A high minimum wage set by fiat, either through legislation or student pressure, prevents this natural adjustment and hurts some of the people it is designed to help. It is a timeless economic lesson that when the price of something goes up, buyers usually buy less of it. If Harvard has to pay its unskilled workers a higher wage, it will hire fewer of them. Some workers earn more, but others end up unemployed.

Living-wage advocates say that Harvard with its huge endowment can afford to pay higher wages. That's true, but it misses the point. Like all employers, Harvard faces trade-offs. Should extra money be spent hiring more professors to reduce class sizes, or should it be spent hiring more janitors to vacuum classrooms more often? It's a judgment call. If the cost of unskilled labor rises, Harvard faces a new set of trade-offs. Over time, it will respond by hiring fewer of those workers.

A higher wage would also change the composition of Harvard's work force, for wages play a role in supply as well as demand. If the University posts a job opening at $10 an hour, it gets a larger and better mix of applicants than if it posts the same opening at $8 an hour. The person who would have gotten the job at the lower wage is now displaced by a more skilled worker. In the short run, a living wage might benefit those at the bottom of the economic ladder. In the long run, they would be replaced by those who are already a rung or two higher.

Finally, the living-wage protest raises the issue of Harvard's mission in society. The benefactors who give to the University do so to support education, not income redistribution. (And if Harvard were to take up the cause of income redistribution, it would have to acknowledge that even the poorest workers in Cambridge are rich by world standards.) Harvard needs to pay its workers--janitors and professors alike--enough to attract and motivate them. But it shouldn't pay more than it needs to, given the competitive labor markets in which it hires. To do so would compromise the University's commitment to the creation and dissemination of knowledge.

Minimum Wage Rage

On June 22nd 2006, The Economist wrote an article entitled 'Wage Rage' discussing the current minimum wage debate in Washington D.C. "Both politics and economics lie behind Democrats' calls for a higher minimum wage". Here is the article:

With unemployment as low as 4.6%, America’s labour market might be expected to be painfully tight. In fact there seems to be some slack in it. Labour force participation is relatively low, by the standard of recent years. Real hourly earnings have barely budged since 2001. Perhaps that is why many Americans tell pollsters that they are not happy with the state of the economy.

Naturally, Democrats hope to profit from this in November’s congressional elections. This week Republicans in Congress fought Democratic efforts—led by Edward Kennedy—to put through a hefty hike in the Federal minimum wage to $7.25, up from $5.15 where it was fixed in 1997. The measure was defeated in the Senate on procedural grounds, even though 52 senators voted for it (including eight Republicans). The House has it locked up in committee. An alternative bill that paired a more moderate increase to $6.25 with some changes in work regulations also died after drawing Democratic opposition.

Mr Kennedy and other Democrats are not ready to give up. Although they have little chance of getting a bill passed this year, and despite the fact that some 20 states have increased their own minimum wages in the past few years, Democrats are hoping to make the issue prominent before the November poll. The goal is to attract disgruntled voters who feel they have missed out in the current economic boom.

To this end, Democrats are busy painting a stark picture of life on the minimum wage. At $5.15 an hour, a full-time worker earns less than $10,300 a year, barely above the poverty line for a single person and well under it if the wage-earner supports a child. The real value of the wage is down to its lowest level since 1955. In the late 1960s, the wage was more than half of average hourly earnings for a (low level) production worker. Now it is less than a third.

However, the number of people earning the minimum wage has also declined. In 1980, over 15% of workers received it (or even a lower wage—there are broad exemptions for various classes of workers). That figure is now just 2.5%. The Centre for Economic and Policy Research, a left-leaning think-tank, estimates that lifting the wage to $7.25 would affect only 4.4% of workers, giving them an average increase of $0.79 an hour.

This would yield an extra $1,580 a year for full-time workers, enough to get a mother and child within shouting distance of the poverty line. But most such workers aren’t in a full-time job. Of the roughly 1.6m low-wage workers who do regular hours, nearly 1m are part-timers, most of them doing fewer than 25 hours a week. This is ammunition for opponents of an increase, who also point out that few such workers support families, or even themselves. They are mostly young (more than half of them are under 25), and according to testimony before Congress from the conservative Heritage Foundation in 2004, only 15% of workers making less than $6.65 an hour live in poverty. Many of them have family incomes well above the poverty line.

Given all this, a minimum wage increase seems like a blunt instrument for attacking poverty. The Earned Income Tax Credit, which already gives a annual bonus to the working poor, targets poverty more directly and effectively. Nor will fiddling with the minimum wage do much to placate the anxious middle class. Raising the wage, say critics, may even hurt the people who are supposed to be helped. Businesses say that higher wages could force them to reduce staff (though economic studies appear to show that is unlikely). More worrying is that unskilled workers may be kept out of the labour market if they are unable to claim jobs with higher minimum wages.

But for Mr Kennedy and his fellow, all this may be beside the point. Minimum wage workers are sympathetic figures, working boring jobs for paltry pay. Most Americans say they support an increase. While that may not get the wage up, it could help put Republicans on the defensive.