Monday, November 17, 2008

The Deflationary Spiral and Higher Ed

I use iGoogle as my homepage and I’ve got so much junk on it that I often don’t look at the stuff I’ve got to scroll down for.  One of those things is a Stock Market gadget, with the up-to-date (15 minute lag) listings of various leading indices. Today’s another one where at the close all the indices are red; the Dow was off more than 200 points.  I didn’t look till day’s end but keeping that gadget out of view is not enough.  Sure as shooting, the news is going to be bad. 

“You don’t need a weather man
To know which way the wind blows.”
Bob Dylan,
Subterranean Homesick Blues

As the house of cards that is the global economy continues to tumble down, I can take some solace in wearing my professional hat – the Dismal Science is living up to its name.  Just look at this story from Friday about massive layoffs in the IT industry because sales have declined precipitously, or this piece today about another round of layoffs at Citigroup, or even this attempt at humor by Michael Kinsley, the usually pointed and witty writer who seems to have his spirits down because that’s what lack of consumer confidence does to people.  Personally, I’ve got the feeling of walking on a sponge, one that may or may not have a floor under it.  We seem to be reading about massive layoffs at one company after another, as if there is no end in sight. 

But the economist in me takes this misery as an intellectual playpen, and with that I want to bring up a bit of a puzzle that to my knowledge hasn’t been raised by other commentators and pundits.  We don’t seem to be reading about how retained employees are getting wage cuts.  Those getting the pink slips are losers, clearly.  But why not share the pain more broadly by also dinging the people who get to keep their jobs?  That doesn’t seem to be happening.  Why not?

Standard economic theory suggests that reductions in demand for final products and services (the prime cause of the deflation) will cause a reduction in the derived demand for labor.  In turn, that reduced labor demand will lessen employment and lower the wage, as the new equilibrium is found by moving down the labor supply curve.  We’re getting the first effect, but so far not the second.    (More sophisticated models of labor supply that suggest much of the wage is a rent for incentive purposes or a gift to encourage in kind gifts to be offered back by the employees, would also not predict wages to stay steady in this instance, because clearly there is now a possibility of further layoffs in the future so the same size incentive or gift can be had at a lower wage.)

In this piece I want to argue that we in Higher Ed should act differently from the commercial sector of the economy, and try to manage at least some of the labor demand reduction via lower wages to faculty and staff (the rest being accommodated by not filling job vacancies when they are created or through layoffs if absolutely necessary).  This likely will be an unpopular position with friends and colleagues, who are apt to feel that they are among the more productive parts of the their Campus and before the Campus goes about trimming away some serious muscle and cutting into bone, it should make sure it trims all the fat first.  I’ll argue why I think that is the wrong way to go about doing this. 

But first I want to note the following – obvious to an economist but perhaps not to everyone else.  All this would be much easier to do if the weakening economy were accompanied by a moderate to high rate of inflation.  Labor demand is said to depend on the real wage, which goes down under inflation if the nominal wage remains unchanged.  So a manager can get the necessary accommodation to the demand reduction in inflationary times by keeping nominal wages entirely flat or having nominal wages rise but at a slower rate than the rate of inflation.  But look what is happening to the price of gas, where prices are less than than 50% of their peak achieved early in the summer.   Focusing on gasoline prices may overstate the extent of the deflation broadly conceived, but here I care less about measuring the rate precisely than simply about making the point that as long as the there is some deflation, real wages rise as long as nominal wages remain unchanged.  So labor supply should be that much more, which makes it strange and punitive to only utilize layoffs as the way to bring costs in line with (shrunken) revenues.

Nominal wage reductions are not a trivial matter and it may be that the situation is somewhat different for faculty than for staff.  I’ve heard some argue (we discussed this sort of thing on Campus during the recession under Reagan in the early 1980’s) that an implication of tenure is downward nominal wage rigidity – meaning the university can’t cut the salary for a tenured faculty member.  And on an individual basis, I believe that is correct.  But across the board, I don’t see how it could be considered an assault on tenure, especially inasmuch as the aim of doing so would be to preserve employment, not the reverse.  Unionized employees (at my campus there is no faculty union but there are unions that represent a sizeable number of employees) would obviously need to have their representatives negotiate wage reductions on their behalf, but they might very well be willing to do so as a fair way to address the underlying problem. 

The other point, institutionally, is that faculty and academic professional staff operate under a Notification of Appointment that is a yearly contract stipulating terms and salary.  The Academic year goes from mid August to mid August.  It is probably not possible contractually to change salary within the Academic year.  So if salary reductions were to occur by contract, there would be some time lag of necessity, until the new Academic year begins. 

Armed with those caveats, let me make the argument for wage reduction and then follow that with some discussion of steps to take to achieve the outcome.  My main assumption for supporting my point of view is that the slump will be both deep and long.  If, in contrast, it is of relatively brief duration, a year to 18 months at max, then it would be right for any individual to resist salary cuts, to preserve his/her personal standard of living.   But if the recession is long and hard – 3 years or more of a significantly worse economy with high unemployment rates and economic pessimism the norm – then the process of adjusting to this new environment will be ongoing.  We’ll get there in stages taking one step at a time.  In this case it will be much easier to take additional steps past the first one if people cooperate with one another.   If they’re kicking and screaming we’ll simply be out of place and never attain a suitable adjustment.   Across the board wage reductions early on is a way to secure that cooperative attitude, because it’ll show we’re in it together. 

Such wage reductions obviously come at a cost, especially if peer institutions don’t do likewise.  Some faculty and staff will find better opportunities elsewhere.  The wage reductions will encourage turnover, both among those who find employment elsewhere and among those who opt to retire.  There is certainly that.  My argument is that if one does the full cost benefit analysis, at least under my assumptions, this is still the better alternative to having more layoffs because nominal wages haven’t been reduced.  The latter fails on the fairness dimension. 

A first step, to signify the importance of the approach, would be for higher ups in the Campus Administration (Chancellor, Provost, Deans, Director of the Athletic Association, Football and Basketball coaches, etc.) to voluntarily reduce their own salaries.  I don’t know if there is a formal way to take less than one’s fully salary, but one could give unrestricted gifts back to the Campus or the Campus could create a special fund for such give backs the proceeds from which would be used to address operational shortfalls.   Indeed, maybe an across the board voluntary give back of this sort might suffice.  But I’m inclined to think it wouldn’t work, people would give if they thought it fair and that, in turn, would depend on what other people are giving.  Making the give backs mandatory is a way to solve this chicken and egg problem. 

Immediately after a voluntary give back program among highly visible campus leaders has been instituted, the body where faculty governance occurs (on my Campus that is Academic Senate) would have to take up the issue of whether faculty salary reductions are possible and, if so, under what circumstance.  I really couldn’t predict how such a debate would go, but it seems to me that in the current climate resisting a salary give back plan would be politically unpopular with people outside the University.  Further, it is quite conceivable that there will be arguments for tuition reduction for new students on the grounds that our mission is to provide access and we’re closer to our mission in reducing tuition than we’d be in keeping tuition where it is but lowering admission standards as the way to keep enrollments up.  (This piece delineates the issues well.)   If tuition reductions are in the cards, then doesn’t it seem that faculty and staff salary give backs would become part of the equation?

Such a debate might rage for some time; faculty governance is a deliberative process.  If during that time the economy starts to rebound, then we may have voluntary give backs and nothing more.  If the economy remains in a slump, the mandatory form of give back is more likely. 

We need to see in all this pain a path to a better tomorrow.  The age structure of faculty on campus is out of wack, heavily skewed toward the more senior end.  It’s both that the older faculty are holding on rather than retiring and that when they do retire they’re teaching load is apt to be filled by adjuncts rather than by tenure track faculty.   We’ve not addressed this problem well at all.  A good alternative model (tenure track teaching faculty instead of adjuncts???) needs to be thought through.  There is the related issue of the hyperinflation in college tuition (increases at a greater rate than the general rate of inflation) over the last 30 or 40 years.  The adjustments I’m suggesting would give at least a temporary respite on both of these fronts.  The rat race might continue anew thereafter.  But maybe, particularly if a sense of shared sacrifice really does emerge, that better path will be found.  In the mean time, while we’re worrying about just how bad the economy will get, let’s close on the hopeful note that if we try seriously to address the current problems, they won’t seem so bad and we’ll have the satisfaction of noting we’re doing something to help ourselves.

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