When Raymond Burse became interim University President of Kentucky State, he inquired about how many employees were making minimum wage. Then he did some math and figured they could be paid $10.25 an hour if his own annual compensation was reduced from $349,869 to $259,745.
On the face of it, this is a great act of charity. But it is also a teachable moment. There are a few complications in this story that it would be profitable (no pun intended) to contemplate.
Production v. Consumption
First, let’s talk about the economics of the transaction. Are the employees earning $10.25 an hour or are they being paid minimum wage with a $3 gift added for each hour they work. Legally, they are getting paid. For example, no part of that wage counts as a tax-deductible gift. But, economically, the University has not, according to the story, made a decision to pay people more for business reasons. They haven’t decided that it will help the university to pay them more. (I’m not saying they can’t imagine benefits in paying them more; only that there is nothing in the story about calculating if it is worth the extra pay).
This situation is much like a business owner hiring his sister’s unemployed husband because his two young nephews and infant niece need food on the table. On paper he has “made a job” for him, but the decision was not a decision about efficient production. It was a form of consumption. He is hiring the man for the satisfaction of helping people for whom he cares. (This example is based on something I remember reading in Ludwig von Mises’ Human Action.) On paper, and for tax purposes, etc, the man is employed. In economic reality he is receiving charity. If the business is entirely owned by the decision-maker, there is nothing wrong with this. If the company is publicly held, or if it is a partnership and the partners don’t learn of the hire that one of them makes for such reasons, then the ethics are questionable.
How Often Could a CEO Pay Cut Even Make a Difference?
What I like most about this story is that the pay received by one “corporation” President is directly compared to the wages of all the minimum wage workers. In bigger corporations, a much larger pay cut for the CEO could easily mean a much paltrier raise for the lowest employees. So while this is a great story, I’m not sure it would prove useful in many other situations.
This University President is Better Off than Most
Another point here is that Burse is not just any University President. According to Kentucky.com,
“My whole thing is I don’t need to work,” Burse said. […]
He had been KSU’s president from 1982 to 1989 and later became an executive at General Electric Co. for 17 years, including 10 as a senior executive. He retired in 2012 with good benefits, he said.
So from 1982 to 1989, and then at General Electric, Burse took his full salary and didn’t offer to share it with anyone. He may have been very generous with his money. I don’t know. But when he was young and climbing and striving for the best life he could give to his future self and his family, he didn’t give up legal control over any portion of his income. We worked, negotiated, and saved while the minimum-wage workers. Because he successfully did all that, he is in a position to help others, having both the resources and the confidence toward the end of his life.
So how much can we make this man’s example a demand to all others? It seems to me that we would be like a snake trying to stay alive by eating its tail.
His Salary Is Temporary, but the New Pay Scale is Not
The raise in pay for those employees will stay in place even after a new president is selected, he said. It will be the rate for all new hires as well. The change is immediate.
While I appreciate Burse’s gift, it seems to be something of a teaser rate to induce change in the college. Burse will go on to other things and the growing amount will have to be borne through public funds, private grants, tuition rates, and other income that University generates. I hope they thought all this through.
What about the People Last Year who Earned a Raise to $9 an Hour?
One of the issues I would like to see addressed is this: What about the people who had, through effort or self improvement, managed to make a little more than minimum wage? In every business, the pay scale is not only used to attract new employees or retain them. It is also used to reward productivity and to compensate for entrusting those who earn it with new responsibilities. If $10.25 is the new minimum wage, what about those who had finally reached $10.50 before this new level was set? It would seem to me that there should be many employees who are all going to have to be given raises far above the minimum wage workers. Maybe I’m wrong, but it is an obvious complication that I have not seen addressed.
I appreciate Burse’s efforts, but I think people need to think carefully about how this all works. I don’t see much evidence in our current media and political environment that anyone wants to do that.