Courtesy College of Business

The state of the State of the Union

By Simon Isham–

At his State of the Union address on Feb. 13, President Barack Obama announced a plan to increase the federal minimum wage to $9 per hour from $7.25 per hour.

“Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour.” Obama said. “This single step would raise the incomes of millions of working families. It could mean the difference between groceries or the food bank; rent or eviction; scraping by or finally getting ahead. For businesses across the country, it would mean customers with more money in their pockets. And a whole lot of folks out there would probably need less help from the government.”

The last time the federal government increased the minimum wage was in 2007, with an increase of $5.15 per hour to the current rate of $7.25 per hour. Speaker of the House John Boehner spoke in support of that bill, but said that he is not in favor of current efforts to amend the age.

Last July, a bill was introduced to federal congress which sought to raide the minimum wage to $9.80 per hour by 2015. This is the same deadline that Obama has given his proposal. The 2012 bill featured a built-in method of increasing the minimum wage automatically to compensate for inflation.

Minimum wage is not only legislated by the federal government; individual states may impose their own minimum wage as well. Kentucky’s is the federal baseline of $7.25 per hour.

 

Dr. Stephan Gohmann, College of Business

Courtesy College of Business

Q: What do you think of the plan that the president mentioned to increase the minumum wage to $9 per hour?

A: “The labor market is just like any other market. What would you predict would happen if the price of beer went from $3 to $4 a pint? The amount of beer (drunk) would fall. When firms are forced to pay a higher minimum wage, they have to cut back on employment. Most studies indicate that every 10 percent increase in minimum wages results in a 3 percent decrease in employment of unskilled workers. So the (p)resident’s proposal would increase the minimum wages by 24 percent. As a result, employment of unskilled workers will fall around 7 percent.

“Back to the beer example. If the government mandated that all beers must have a minimum price of $4 per bottle, many students will substitute other products—gin, whiskey, wine. If they did drink beer, they would likely quit drinking the lower-quality, mass-produced beers and instead choose the higher-quality, micro-brewed beers. Firms will do the same. They might subsitute self-checkout for cashiers. They might have patrons at restaurants use self-service for soft drinks instead of having a worker provide this service. Also, they will choose to higher the higher-quality unskilled workers. That is, they will hire college students and high school students. A high school dropout will have (a much worse) chance of getting a job. This will make this dropout worse-off, since (he or she) will never gain the skills that many of us learned in our first jobs.”

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