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June 2012
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TRAP Skills, education costs drive state's low wages

Ordinarily one would think a report that Kentucky added 3,500 jobs in April and its unemployment rate declined would be good news.

Not quite so, according to a U of L economist and the Kentucky Chamber of Commerce. The numbers take on different form when placed in context.

At 7.7 percent, Kentucky's unemployment rate remains alarmingly high when compared to the national rate, which fell .4 percent in April to 6.3 percent.

More disturbing, however, is the assessment by the Chamber and economist Paul Coomes that most of the job gains in April represented low-paying jobs replacing higher-paying ones. Coomes notes that Kentucky's average annual pay is $46,000 compared to the national average of $55,600. Kentucky is at the bottom in average pay per job when compared with the seven states that border it. The state lost 104,000 jobs during the Great Recession and has replaced only 65,000 since.

Summed up, the numbers present a worrisome picture of stagnation.

Curiously (or perhaps not, depending on your view of the Associated Press) the AP in reporting on this issue referenced the U.S. Senate race between Sen. Mitch McConnell and Democratic challenger Alison Lundergan Grimes. The AP story says Grimes proposes to "fix" this problem by raising the minimum wage from the current $7.25 an hour to $10.10 an hour.

If raising the minimum wage could actually create more jobs at better pay, we would be for it. So would every politician in the country. We could raise the minimum wage every year, ad infinitum and all live happily ever after.

This of course is not reality. It sounds too good to be true because it is.

The reason Kentucky lags in pay is because its workforce lags in skills and education. Meanwhile, the Great Recession forced many companies to use technology to replace low-skilled workers. The result is a scarcity of jobs for people with low skills. In Kentucky, the supply of low-skilled workers far exceeds demand and the result is depressed wages.

If Kentucky raised its minimum wage, the result would be that low-skill jobs would move to other states that retain minimum wage at current levels. If the $10.10 minimum wage was adopted at the national level (something that won't happen with Republicans controlling the House and likely to control the Senate after November) the result would be a further acceleration nationally of replacing low-skill jobs with technology. The average wage might rise, but unemployment would rise even faster, creating a net negative.

The only way out of this trap is for Kentucky to significantly improve the average education and skill levels of its workforce. But that will become increasingly difficult as state health and pension obligations and the cost of the Obamashear Medicaid expansion consume an ever-greater share of the state budget. Education, particularly higher education, already is suffering cuts as these two Democratic golden calves are fed, forcing state universities to raise tuition and fees to cover the difference. That in turn makes it tougher for residents of this comparatively poor state to improve their education, skills and ability to secure better-paying jobs.

It is in the end, a policy problem. It will take not only a leadership change, but courageous new leadership if Kentucky is to make the hard, politically volatile changes necessary to truly break this cycle.

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