Greg Mankiw Argues for Paying Harvard Workers Badly

By way of background, Greg Mankiw was Chairman of Bush’s Council of Economic Advisers, is the author of a very popular economics textbook, teaches at Harvard, and is a advisor to Mitt Romney. Not surprisingly, that makes him a card carrying member of the economics orthodoxy.

So when some Harvard students went on a hunger strike to object to the wages paid security guards, Mankiw posts an article he wrote for Harvard Magazine in 2001:

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.

This piece consists entirely of assertions derived economic theory, with no empirical analysis.

Let’s start with his closing argument, that paying menial workers above market would compromise Harvard’s educational objectives. If that isn’t bunk, I don’t know what is. For that view to have any validity, we’d need to look at exactly how much in absolute dollars is involved in increasing these workers’ wages and ascertain what impact it would have on the University’s budget.

The reason I am not impressed is that since I went to Harvard (undergraduate and grad school) many many years ago, the cost of advanced education has risen twice as fast as inflation (in fact, it has gone up at crudely the same rate as medical costs, another “let’s charge what the buyer will bear” market). In real terms, a Harvard education costs about twice as much as it did in my day. I will assure you it is not two times better. I suspect the only axis on which the school’s outcomes are clearly better than before is that average starting salaries for new graduates are higher, but that simply reflects a more mercenary mindset among the young, and more highly paid opportunities for new graduates (in other words, a cultural shift). Who knows, even the causality for that one might run the other way: students have to take higher paying jobs to pay off bigger school debts.

So the argument that there is a linear relationship between educational spending and educational outcomes doesn’t seem to have much empirical support, hence the idea that paying workers more would somehow undermine education is bogus.

Second, the idea that there is a radical difference in the quality of labor at $8 an hour versus $10 an hour is absurd. Yes, you will get more applicants at $10 an hour. But the effect of paying $10 isn’t that the University will suddenly have more skilled laborers and will somehow be hurting the lesser skilled. It is more likely that within that pool it will be able to be choosier on things like manner and reliability (as well as it can judge for those factors in a screening process). That likely means a better work environment for all, and less turnover (and turnover is more costly than most imagine).

Third, in switching from the Harvard setting to the more general “living wage” case, Mankiw implies its a zero sum game: pay people more, you’ll have fewer jobs. That would lead one to believe that higher minimum wages leave the lower strata net no better off.

That ain’t true. Demand for low level labor is not that elastic. If you raise minimum wages, the job losses are more than offset by income increases. Specifically, every 10% increase in minimum wage results in only a 2-3% fall in employment.

And there are other, less easily measured benefits of having a high minimum wage. Not that long ago, I lived in Australia, where the minimum wage was recently increased to $A12.80. In local purchasing power terms, the Aussis dollar roughly is 1:1 with the US dollar, so think of them as having a nearly $13.00 minimum wage (and in contrast to the US, their latest minimum wage increase was higher than the rate of inflation). Australia has had a high and consistent level of GDP growth over the last decade, so its high minimum wages haven’t hurt its competitiveness.

What are the intangible benefits? Workers are happy to have their jobs. You don’t see store workers resentfully doing the bare minimum, as too often occurs in the US (I can name names at several local grocery stores). So the employees may actually be more productive (and this isn’t per Mankiw, because they are better skilled, but because they are more willing. There isn’t such a big pay gap between the workers and their bosses, or their customers. Class envy is a slow acting poison). And frankly, its more pleasant patronizing establishments with satisfied, or at least not unhappy, workers.