June 24, 2001

Making the case for higher numbers

By JAMES K. GALBRAITH, in The Boston Globe

The recent student occupation of the administration building at Harvard University was but one of many controversies over wages:

Should universities boycott sweat-shop-made sporting goods?
Should the federal minimum wage go up?
Should the proposed Free Trade Area for the Americas feature a strong labor code?
Should Europeans give up their welfare states for ''flexible labor markets?''
Should cities (as well as private employers) enforce a ''living wage?''

On all of these questions, the sobering voices of economists warn that to pay above ''free market levels'' can only lead to lost jobs. Thus the young idealists who march, petition, and demonstrate find their message undercut by professors. Professor N. Gregory Mankiw, for instance, writes that to establish a living wage for University workers would force Harvard to lay off some of the very employees whose low salary students were protesting.

This stance, with its slight suggestion that workers do not understand their own interests, is not new. Mankiw is in direct descent from Thomas R. Malthus, who warned two centuries ago that wages could never rise above bare subsistence without provoking rampant overbreeding of the laboring masses.

The Iron Law of Wages - so it was called - prompted Thomas Carlyle to dub economics the ''dismal science.'' And the prospective ''immiseration of the proletariat'' led Karl Marx, decades later, to predict a crisis of capitalism and ensuing revolution.

But neither Malthus's steady-state nor Marx's apocalypse came to pass. Demographic transition and technological change happened instead, and for a century, trade unions and progressive governments have combined to establish egalitarian wage standards throughout the developed world.

Despite many dire warnings, these did not produce disaster. Rather, they proved a spur to efficiency, to rising real living standards, to poverty reduction, and to social stability. Today in Europe, countries with less inequality (think Denmark) have higher incomes and also less unemployment, as a rule, than those with more inequality.

Some economists still insist that the laws of supply and demand prove that raising wages must generate unemployment. But a simple free-market model, showing the trade-off, relies on doubtful assumptions about competitive market structure, flexible wages, and more.

Change the assumptions and the reverse is possible. In certain more realistic models, higher wages may increase employment and also promote efficiency by reducing turnover and training costs.

When it comes to the evidence, economists are again divided. Some argue that increases in the American minimum wage did increase unemployment. Others say not. A few find that rising minimums increased employment, mainly because turnover falls when wages rise.

In the end, therefore, economics tells us that there is no compelling reason to fear a reasonable wage standard. Whether society should impose such a standard - a living wage for full-time employees - is primarily a political and ethical question. It is a choice mainly between the interests of employers and those of workers and the broader citizenry.

This is not a new problem. Bans on slavery and child labor, enforced school attendance, standards for hours and overtime, for occupational health and safety, the rules surrounding collective bargaining, pay rates appropriate for government contractors, and the federal minimum wage are common examples of economic standards set by democratic government and common consent.

Why should a living wage standard be considered exceptional? If we can ban child labor, we can also set reasonable minimum pay for full-time adult work. Indeed, in a growing movement about 50 American cities now do this.

To be sure, standards work best when they are general. A higher federal minimum wage, a more generous earned income tax credit, relief from excessive payroll taxes - all of these would be better than pressuring individual employers to act on their own.

Likewise, students opposed to sportswear purchases from foreign sweatshops would do better if they could author a strong anti-child labor, occupational safety, trade-union rights code into the World Trade Organization. And while we're at it, let's have the International Monetary Fund negotiate debt relief and lower interest rates for democratic countries in the Third World.

There is a world out there, badly in need of reform. But you have to start somewhere. And there is something to be said for starting at Harvard. It is a school whose faculty and administration have global influence.

The university could, if it chose, deflect some of the pressure from its own precinct by placing that influence behind the larger reforms just mentioned. As, indeed, some do - and have done in notable, honorable cases throughout history. James K. Galbraith, professor at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin, is author of ''Created Unequal: The Crisis in American Pay'' and ''Inequality and Industrial Change: A Global View.''