How US Wage Laws Helped Sink Puerto Rico’s Economy

By Charles Lane at the New York Post

Greece is dominating the headlines, but between that financial catastrophe and the one facing Puerto Rico, the latter probably deserves more attention in the United States — at least more attention than it’s getting.

The Puerto Rican predicament results in large part from policy mistakes by the federal government — with directly relevant lessons for the economic debate on the mainland.

Take the minimum wage. Progressives around the country are campaigning to raise it to $15 an hour — more than double the current $7.25 minimum and even higher than the $10.10 supported by President Obama.

Advocates confidently assert that this huge increase in the price of labor could be imposed with no significant job-killing impact, or at least that any such consequences would be outweighed by reductions in income inequality.

Puerto Rico’s economic ruin, however, is partly a story of the damage an ill-considered minimum-wage hike can do.

Prior to 1974, Congress held Puerto Rico’s minimum wage below that of the mainland, a sensible policy given the commonwealth’s lower level of economic development and labor productivity.

Then, with the best of intentions, lawmakers ordered Puerto Rico to equalize its rate with the federal figure; this was phased in by 1983, and the Puerto Rican minimum wage has moved in lock-step with the federal minimum ever since.

The results were sharply disruptive, according to a 1992 National Bureau of Economic Research analysis. They included “substantially reduced employment on the island” and mass migration of suddenly unemployable lower-skilled workers to the US mainland.

Puerto Rico did post a short-term increase in real earnings, but the causal factor was the out-migration, which shrank the labor supply. Without the exodus, the authors noted, “it would have been virtually impossible to impose the US-level minimum on the island.”

Today, a full-time job at the minimum wage of $7.25 pays 77 percent of Puerto Rico’s per capita income, compared with 28 percent in the United States.

High prices for low-skilled labor kill employers’ incentive to invest and create jobs, especially in the labor-intensive tourism sector, which faces stiff competition from the hotels and resorts of lower-wage Caribbean islands.

A 2012 World Bank study found that the minimum wage, relative to the value added per worker, is nearly twice as high in Puerto Rico as it is in the Bahamas and Jamaica.

In short, the minimum wage is a major reason for what a newly published report by two former and one current International Monetary Fund economists calls “the single most telling statistic in Puerto Rico”:

Only 40 percent of the adult population on the island is employed or looking for a job — versus a US labor force participation rate of 63 percent.

Of course, many Puerto Ricans work for less than the minimum — in the black-market economy, which is untaxed. In other words, the minimum wage also helps explain Puerto Rico’s lack of revenue with which to service its debt.

Puerto Rico’s dysfunctional labor market is not only due to the relatively high minimum wage.

Also killing the demand for, and supply of, labor are the island’s onerous overtime, paid-vacation and job-security regulations.

And even at the minimum wage, full-time work in Puerto Rico pays less than the combined package of welfare, Medicaid and food stamp benefits for which a family of three might qualify.

Taken together, these factors result in “massive underutilization of labor, foregone output and waning competitiveness,” the IMF economists’ report concludes.

If progressives have their way, however, US rules on overtime, sick leave and the rest would become more like Puerto Rico’s.

A $15 per hour minimum wage, if adopted nationwide, would mean that full-time work at the minimum wage would pay roughly 65 percent of 2014 US annual per capita income — more than double the current ratio and only 12 percentage points lower than in Puerto Rico.

The point is not that the minimum wage should be abolished or the labor market immune to incremental regulation. Indeed, the US economy is much more productive than Puerto Rico’s, so it could probably absorb modest, gradual minimum wage increases.

Still, the island’s experience with the minimum wage and other labor-market regulations is an instructive tale, the clear moral of which is to proceed with caution.

Source: How US wage laws helped sink Puerto Rico’s economy | New York Post