Puerto Rico has been in economic crisis for months, facing problems with debt, economic growth, and emigration.
One policy that’s popular in the mainland United States, however, pulled down the island. The federally mandated minimum wage exacerbated the U.S. territory’s struggles and crippled employment levels, according to the Foundation for Economic Education.
“The results of imposing this standardized federal minimum wage have been ‘substantially reduced employment on the island,’ as well as swathes of unemployable low-skilled workers who decided to immigrate to the US mainland to seek work,” Jack Salmon wrote.
The ratio of the average wage to the minimum wage in Puerto Rico is almost twice as high as it is in the states. That makes it difficult for businesses to hire low-skilled workers. The high mandated wage didn’t restrict the economy on its own. The government “frittered away funds on unproductive investments and bloated payrolls,” economic output dramatically declined, and a federal manufacturing tax break expired. Now the island is $72 billion in debt, almost its total annual economic output.
No wonder, then, that the population has been declining at 1 percent per year as Puerto Ricans move to the American mainland for work and opportunity. “The poverty rate is 45 percent, only about 40 percent of adults are in the labor force, and unemployment is more than 11 percent,” Peter Orszag noted.
A 2015 report led by economist Anne Krueger recommended drastic changes in structural reforms, fiscal reform and public debt, and institutional credibility to improve the situation.
“Key here is local and federal action to lower labor costs gradually and encourage employment (minimum wage, labor laws, and welfare reform …. Local laws that raise input costs should be liberalized and obstacles to the ease of doing business removed,” Krueger wrote.
Puerto Rico provides a stark lesson in mandated labor costs. Businesses can only handle non-market costs so much. When a recession hits, policy that sounded wise in isolation can cause unemployment when many “wise policies in isolation” hit.
“The effects of a harmonized and ever increasing minimum wage will continue to be felt most noticeably in the lower-income states and territories and in low-skilled industries,” Salmon wrote. The minimum wage doesn’t affect areas equally, which is good when its painful effects are reduced. Outside of that, however, the pain hits hard. Puerto Rico is a lesson in the dangers of a catchy political campaign. A $15 hourly minimum wage sounds like a plan for equality and the working class. Its effects, unfortunately, are anything but.
