Dire economic times have opened the political window for radical economic ideas: Puerto Rico could lower its minimum wage for younger workers.
“The provision, part of a larger bill to save the island from its $72 billion in debt, would give Puerto Rico’s governor and regulators the authority to reduce the minimum wage from the federal level of $7.25 an hour to $4.25 for newly hired workers under age 25,” according to The Washington Post.
The plan aims to ease Puerto Rico out of its months-long economic decline. Emigration, economic depression, debt, and federal laws that have exacerbated its problems have brought the American territory to an unenviable position.
The minimum wage decrease is seen as a way to spur employment because Puerto Rico’s cost of living is lower than mainland America.
“The federal minimum of $7.25 is worth substantially more in Puerto Rico than it is in other parts of the country relative to the cost of goods and services there. Some economists argue that that makes it less attractive for companies to hire and expand their business there,” Max Ehrenfreund wrote.
If labor cost is a prohibitive barrier for new business investment, the decrease could spur more investment. As the Post noted, the minimum wage is 42 percent of the national median. In Puerto Rico, it’s 75 percent. The stagnation that Puerto Rico has experienced could be repeated by cities such as Cleveland, where unions have pushed for a $15 minimum wage regardless of the median wage in the city.
Even if the minimum wage gets reduced, the effects could be small. About 3 percent of American hourly workers earn the minimum wage, so a decrease wouldn’t lead the island’s economic revival. Targeting the lower wage at young workers would have a smaller short-term effect, but it could go a long way for future growth. A 2012 report from the New York Federal Reserve bank noted that “Puerto Rico’s labor force participation rate is among the lowest in the world.” It proposed a “subminimum wage” to expand opportunity for young workers and avoid the “danger of becoming disconnected from the labor market.”
“To the extent that young workers are priced out of the labor market, they will miss out on the opportunity to acquire on-the-job training early in their working lives. This lack of skill development can have a considerable impact on lifetime earnings,” the report noted.
Were Puerto Rico to reduce its minimum wage, it would cut against the general trend in the country. California and New York, among other states and cities, have pushed for a $15 minimum wage and claimed it will have no negative effects on employment. Economists have shown skepticism toward those claims, but a majority of Americans support an increase regardless of economic concerns.
It’s unclear if the proposal will pass, or whether Puerto Rico’s leaders would use the new power to lower the minimum wage. It might spur some economic growth, but Gov. Alejandro García Padilla hasn’t spoken publicly about it.
