Tuesday, July 31, 2007

Colleges and the Minimum Wage

By Richard Vedder

Colleges face one moderately significant cost increase this coming academic year because of federal labor law. In particular, the minimum wage rose by over 13 percent to $5.85 an hour on July 24, and is scheduled to rise to $7.25 (an increase of over 40 percent from the original wage) in two years.

Universities use a lot of student labor, appropriately in my judgment. Those workers are relatively unskilled and often paid at or very close to the minimum wage. When the minimum wage undergoes a big hike, universities must do one of several things:

1) If the budget for student wages remains relatively fixed (often the case), then some employees must be let go, or hours reduced.

2) Alternatively, if wages are increased with no employment effects, the school needs more money to finance the higher labor costs; this often results in larger tuition increases than otherwise occur.

3) Sometimes, schools compromise and do a bit of both --a little cutting back in student employment, along with a little larger tuition increase than otherwise would be the case.

In any case, the increase in the minimum wage poses burdens on universities that aggravate the problems of soaring university costs. The higher minimum wages to college students do little to alleviate poverty (most college students come from moderately affluent families), and, like most economists, I prefer that we deal with social problems like poverty through means other than fiddling with markets. The 2008 and 2009 minimum wage hikes will add to the financial woes that American universities face.

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