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Ways and Means: Harvard’s Wage Debate

In partial response to the “living-wage” sit-in at Massachusetts Hall last spring and demands for a $10.25 hourly minimum wage for the University’s lowest-paid employees,then president Neil L. Ru- denstine appointed a Harvard Committee on Employment and Contracting Policies (see “Wage Wrangling,” July-August, page 64, and “Weighing In on Wages,” September-October, page 70). As the committee—faculty members, members of Harvard employee unions, students, and adminis- trators—gathers information, deliberates, and prepares to deliver its final report to President Lawrence H. Summers by December 19, alumni and others can keep abreast of its work at www.hcecp.harvard.edu. A committee-sponsored Dining Services workers prepare tens of thousands of campus meals weekly. conversation on wages was held at the Kennedy School’s ARCO Forum on October 22; for details, clear that the student sit-in struck a chord Declining real wages at the bottom of the consult the website. on the campus and nationwide. In some skill distribution and a growing earnings In the interest of informing readers and involv- fashion or other, the University will pay disparity are flaws in U.S. economic perfor- ing them in the debate, Harvard Magazine more to its lowest-paid sta≠ members and mance. Paying Harvard’s lowest-paid sta≠ invited three economists and a political theorist to find a way to include those working for members more will not remedy this nation- comment briefly on the cases for and against a subcontractors in the higher wage—even al problem. Harvard is not the lowest-pay- “living wage,” and on ways of thinking about the though market forces allow for lower pay. ing employer in Boston. Some of the work- issues at stake for the University and for society Moral progress in addressing an eco- ers whose wages will rise may live in fami- at large. the editors nomic problem, or moral turpitude in cav- lies above the poverty line. Some of the ing in to irresponsible economic demands? benefits to the least skilled will dissipate If Harvard were a business near bank- over time, as Harvard or its subcontractors Why Not a Living Wage at Harvard? ruptcy, one would worry about paying high- reduce employment in these groups and as by richard b. freeman er wages. If living wages required massive Harvard attracts and hires better qualified pay increases or covered the bulk of employ- applicants. Still, the preponderance of evi- In december 1929, Massachusetts or- ees, one might dismiss the demands as irra- dence on “living wages” and minimum dered Harvard to pay its female building tional posturing. But wages suggests that cleaners the state minimum wage of 37 with its huge endow- the primary e≠ect of cents an hour, two cents above the Uni- ment and successful any moderate pay in- versity’s pay rate. Having ignored the law fund-raising cam- creases for the low- for eight years, Harvard responded by firing paign, Harvard has est paid (improving some cleaning women and replacing them what economists call their economic well- with men, whose wages were not covered “economic rent” or being) dominates the by the law, and shifting other women to surplus that it can adverse secondary ef- dormitory chambermaid jobs, also not cov- spend on raising pay fects that trouble ered by the law. Students and alumni at the bottom of the economists: loss of protested and raised enough money to wage scale if it so employment or the cover the back pay owed to the women.* desires. Paying the liv- substitution of more The University’s spring 2001 response to ing-wage campaign skilled workers in student living-wage demands for wage demands will simply their place. increases to Harvard’s lowest-paid workers move Harvard’s low- The virtue of liv- was more positive, at least once it became est-paid employees ing-wage campaigns *As reported in Irving Bernstein, The Lean Years: higher in the Boston- is that they direct A History of the American Worker, 1920-1933, pages area wage scale, not local attention to 232-234. o≠ the scale. An extensive crew tends Harvard’s grounds. the national low-

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wage problem at places where local deci- more, but others end up unemployed. bridge are rich by world standards.) sion-makers can address it, albeit in small Living-wage advocates say that Harvard Harvard needs to pay its workers—jani- steps. Harvard faculty and administrators with its huge endowment can a≠ord to tors and professors alike—enough to have been in the forefront of public debate pay higher wages. That’s true, but it miss- attract and motivate them. But it should- on wage disparity in the United States. A es the point. Like all employers, Harvard n’t pay more than it needs to, given the positive response by the University to the faces trade-o≠s. Should extra money be competitive labor markets in which it student action o≠ers an opportunity for spent hiring more professors to reduce hires. To do so would compromise the Harvard to lead in walking the walk, as class sizes, or should it be spent hiring University’s commitment to the creation well as in talking the talk, in improving more janitors to vacuum classrooms more and dissemination of knowledge. conditions at the bottom of the income often? It’s a judgment call. If the cost of distribution. unskilled labor rises, Harvard faces a new N. Gregory Mankiw is a professor of economics set of trade-o≠s. Over time, it will respond and author of Principles of Economics, the Richard B. Freeman is Ascherman professor of eco- by hiring fewer of those workers. textbook used in Social Analysis 10, Harvard’s nomics. A higher wage would also change the introductory economics course. composition of Harvard’s work force, for wages play a role in supply as well as The Case against the Living Wage demand. If the University posts a job How Wages Are Set by n. gregory mankiw opening at $10 an hour, it gets a larger and by alan b. krueger better mix of applicants than if it posts When a group of students took over the same opening at $8 an hour. The per- What determines wages? Wages vary an administration building last spring to son who would have gotten the job at the with the education and skills needed to protest Harvard’s wage policy, many peo- lower wage is now displaced by a more perform a job, the agreeableness or dis- ple found it easy to sympathize with skilled worker. In the short run, a living agreeableness of the work, the constancy them. Without doubt, life is hard for wage might benefit those at the bottom of or inconstancy of employment, and the workers getting by on $8 or $9 an hour. the economic ladder. In the long run, they probability of success in the field—just as Moreover, the protest was a welcome would be replaced by those who are Adam Smith said. relief from the relentless careerism that already a rung or two higher. Statistical studies suggest, however, infects too many students today. The pro- Finally, the living-wage protest raises that these “competitive” factors account testers were admirable in for less than half, and prob- their desire to reach be- ably only around one- yond their own fortunate third, of the variability in cocoons and help those wages across the full spec- who are less lucky. trum of workers in Despite the students’ di≠erent occupations. good intentions, I cannot Noncompetitive factors support their cause. If any also play a role—again, just institution should think as Adam Smith said. with its head as well as its Indeed, Smith warned that heart, it is a university. In employers are “always and my view, there are com- everywhere in a sort of pelling reasons to reject tacit, but constant and uni- the students’ pleas. form combination, not to Like most of the prices in raise the wages of labour our economy, wages move above their actual rate.” to balance supply and Employer bargaining and demand. A high minimum monopsony power play a wage set by fiat, either role in determining wages. through legislation or stu- Dining-hall workers have much at stake in the committee’s recommendations. Labor unions play a role. dent pressure, prevents Prejudice and discrimina- this natural adjustment and hurts some of the issue of Harvard’s mission in society. tion play a role, though thankfully less the people it is designed to help. It is a The benefactors who give to the Uni- than they used to. Considerations of timeless economic lesson that when the versity do so to support education, not whether higher pay induces workers to price of something goes up, buyers usually income redistribution. (And if Harvard provide more e≠ort, especially in relation buy less of it. If Harvard has to pay its were to take up the cause of income redis- to norms of fairness, play a role. Gov- unskilled workers a higher wage, it will tribution, it would have to acknowledge ernment regulation plays a role. And plain hire fewer of them. Some workers earn that even the poorest workers in Cam- old luck plays a role.

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It is a gross oversimplification to say covers less than half of that “wages are set by the competitive the University’s true forces of supply and demand,” or that costs of education, there is a unique market-determined even for non-scholar- wage. The labor market sets bounds on ship students. By sub- pay, but employers still have a great deal sidizing tuition, uni- of latitude in choosing wage levels. For versities redistribute example, Harvard’s late Lamont Uni- income to students versity Professor Sumner Slichter, a noted who overwhelmingly labor economist, documented large dis- come from, and will parities in pay for unskilled workers in return to, middle- and di≠erent industries, which he attributed upper-income classes. to “managerial policy.” There is a wide What then should range of indeterminacy in pay. Harvard do? Harvard Historically, universities have chosen to should do what is best set pay in the bottom half of the range for Harvard. In the because they were struggling to build process, Harvard will endowments and educate large waves of implicitly define its students in the aftermath of the GI Bill mission. Is it to nar- Transportation Services staff members handle parking, passenger and the baby boom. rowly educate stu- shuttles, and mail delivery. In the private sector, more profitable dents in academic dis- companies routinely pay higher wages ciplines? Is it also to educate students in spect but ultimately reject, comes in the than less profitable ones. Workers fre- the values of modern society? Is it to serve “Dissenting View” o≠ered by a minority of quently evaluate the adequacy of their pay, as a model employer for society as a the Mills committee, which was charged and adjust their work e≠ort, in relation to whole? by President Neil L. Rudenstine in 1999- their employers’ ability to pay. As univer- I would humbly recommend that the 2000 to recommend policies for low-wage sity endowments have grown, it is natur- Harvard administration adopt Adam workers at Harvard [for the report, see al to expect their workers to demand Smith’s outlook: “No society can surely be www.provost.harvard.edu/adhoc/]. higher pay as well. Indeed, more protests flourishing and happy, of which the far While the majority rejected a living wage over worker pay have arisen at better- greater part of the members are poor and in favor of benefits such as healthcare for endowed colleges than at less well- miserable. It is but equity, besides, that part-time workers and subsidized lan- endowed colleges. they who feed, clothe and lodge the whole guage lessons for non-native speakers, the Can universities now a≠ord to pay body of the people, should have such a minority o≠ered a more restricted view: higher wages to low-level sta≠ workers? share of the produce of their own labour that “the University has an obligation to Most can. Harvard will not go out of as to be themselves tolerably well fed, society to support its core teaching business or relocate if it pays higher clothed and lodged.” resources and research mission in the salaries. In the long run, the higher pay most e∞cient way possible.” will probably come from lower student Alan B. Krueger, Ph.D. ’87, is Bendheim professor of Given the scarcity and utility of these subsidies, faculty compensation, and economics and public a≠airs at Princeton core missions in the larger society, the growth in the endowment—and employ- University; he specializes in labor economics and University, on the minority’s argument, ee performance may improve, partially or the economics of education. He is also an “Economic has a moral obligation to do everything even fully o≠setting the higher costs. I Scene” columnist for the New York Times. within the bounds of the law in order to doubt that Harvard’s sta∞ng levels maximize those activities. Thus it is not would be drastically cut if pay increased, merely permissible, but also morally com- although there may be some adjustment. The Work That Makes mendable, for the University to refrain But workers’ opinions on this issue Harvard Possible from paying any premium above the mar- should matter more than economists’: by russell muirhead ket wage. To do otherwise is to misdirect workers might prefer higher pay and feelings of “guilt and remorse.” shorter hours, even with the risk of lower The living-wage controversy points One might extend this argument employment. Broad representation on the to the core of what Harvard is about. On one (although the authors of a “Dissenting University’s current Committee on Em- side is the view that teaching and research View” did not) to say that those who ployment and Contracting Policies thus are the exclusive purposes of the University. teach and do research, along with those makes sense. In contrast, I would like to endorse a more who study and learn, are the University. Like it or not, elite universities are expansive view, which a∞rms the Uni- On this argument, the others who make engaged in the business of redistribution. versity as an inclusive community. possible teaching and research—admin- Harvard’s undergraduate tuition probably The narrow conception, which I re- istrators, police, cleaners, cooks, o∞ce

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sta≠—occupy a lesser part of the place. all it can get while giving as little as it These people represent only overhead, in legally can. Teaching and research them- this view; they are to be seen as market selves are served by a University commu- workers and paid as little as the market nity that exemplifies decency and gen- permits. erosity. The lecture hall and the lab are Rudenstine, the living-wage protesters, not places of exchange, where students and the Mills committee majority had one might pick up a valuable credential while fundamental point in common: they professors butter their bread. They are, rejected this narrow conception of the rather, sites where individuals relate to University community. Further, the moti- each other in a common mission. The vation they share—to o≠er Harvard transformative potential of liberal learn- workers more than the market mini- ing requires suspending, if only in mum—is based in something more A mechanic maintains office equipment. moments, the strategic orientation so respectable than misplaced guilt. necessary in other parts of life. It is founded rather in the understand- and some symbolic. The little things mat- For these reasons, the University as a ing that the central goals of teaching and ter: language lessons, library cards, athlet- whole stands to gain when attitudes, research can include all who serve them, ic passes. But so do the big things, like practices, and pay recognize a central fact: however indirectly. The rarity and useful- healthcare and wages. the work that makes Harvard possible ness—even the nobility—of these goals Inclusion of this sort involves a more makes workers part of Harvard. lend a certain kind of dignity and purpose demanding concept of reciprocity than to the many activities that make them free markets normally embody. The Russell Muirhead is assistant professor of govern- possible. This understanding can be rep- University should not pretend to be an ment; his book Just Work is forthcoming from resented in di≠erent ways, some material essentially strategic institution, taking Harvard University Press. The Law of Gravity What goes up indeed comes down. Following the breath- new endowment gifts. Fiscal year 2001 concludes a decade of taking 32.2 percent return on investments for the fiscal year HMC operations in their current form. During that time, annual- ended June 30, 2000, Harvard Management Company (HMC) re- ized investment return has averaged 16.5 percent—3.5 percent- ported this September that endowment performance for the age points better than benchmark returns, and 4.6 percentage succeeding 12 months, after all expenses, was -2.7 percent. Per- points above the median return for comparable large institu- haps a second law, about history repeating itself, is at work as tional investment funds.That performance, Meyer observed, pro- well: the only prior year in which investment return was nega- duced an endowment $7.4 billion larger than if HMC had tive was 1984—following HMC’s record performance in 1983. earned only median returns. The change in direction could hardly surprise anyone who Although he characterized the negative investment return as paid attention to an environment that HMC president Jack R. “disappointing,” Meyer said he was “very pleased that we man- Meyer, M.B.A. ’69, characterized as “harsh” during the fiscal year, aged to outperform our benchmarks by a large margin—other- with “sharply negative” returns for “all the major equity markets, wise, this would have been a pretty serious down year.” including private equity.” The latter category includes venture As noted, benchmark returns were negative for all categories capital, which propelled the outsized gains in the prior year (see of equity investments, but HMC’s large domestic and foreign eq- “Rocketing Returns,” November-December 2000, page 78). uity portfolios—accounting, in total, for more than one-third of What may be surprising—and reassuring—is how well HMC’s assets—avoided the worst damage, returning, respectively, -4.6 fund managers did under adverse conditions. The -2.7 percent percent (versus a market return of -10.9 percent) and -16.9 per- endowment return exceeded the aggregate performance of cent (-23.3 percent for the market). Emerging-market assets ac- HMC’s “policy portfolio” (the weighted mix of different kinds of tually had a positive return of 3 percent, 17.2 percentage points assets used to guide its investment decisions) by 7.1 percentage better than the market, as a strategy involving discounted points, the second-largest margin in HMC’s history. Had the en- closed-end funds proved highly successful. dowment declined in line with the -9.8 percent return of its Private equities, where Harvard’s 155.2 percent return in fis- market benchmarks, Harvard would be $1.4 billion poorer. cal 2000 exceeded the market by more than 100 percentage In fact, the endowment’s value declined to approximately points, this year underperformed a sharply declining market by a $18.3 billion at the end of June from $19.1 billion a year earlier. small margin. Over the course of an astonishing three-year ven- The negative investment return accounted for about $500 mil- ture-capital cycle, Meyer said, HMC’s private-equity investments lion of the decline in value. A larger factor was the roughly $615 paid off enormously; even with the recent losses, he noted, million in endowment income disbursed to support the Univer- HMC’s inability to invest as much as it wanted to in this asset sity’s operations in fiscal 2001, offset in part by $300 million of class early in the cycle reduced returns by a significant amount.

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