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Could a Lower Minimum Wage Help Puerto Rico?

Among the suggestions for helping Puerto Rico work its way out of its current financial quandary is a proposal to exempt Puerto Rico from national minimum wage laws.

States and territories can have different minimum wage requirements from the federal rate, which is now set at $7.25 as it has been since July of 2009. Where federal and state/territorial law have different minimum wage rates, the higher standard applies.

According to a report from the Pew Research Center in the fall of 2014, just 4.3% of U.S. hourly workers earn the federal minimum wage or less, and only 2.6% of salaried workers do so. These numbers include tipped workers, whose minimum wage is two dollars and change in most states, but who often earn much more in tips.

The Pew report also included 14% working in retail. Since the report was published, the nation’s largest retailer increased its entry-level positions to a minimum hourly rate of $9.00 an hour (increasing to $10.00 an hour next year), and other retailers have followed suit. This new policy affects at least half a million workers.

Even with these caveats, it’s clear that few Americans actually earn as little as the federal minimum wage. Economists are divided on the effect that an increased minimum wage would have.

Some observers have suggested that Puerto Rico would be better off with a lower minimum wage, or even claimed that the minimum wage in Puerto Rico has caused its financial difficulties. The Washington Post’s Wonkblog made this claim in an article called “Puerto Rico shows the danger of a high minimum wage,” saying simply that “Economists trying to understand what a higher minimum wage would mean for the United States have examined Puerto Rico’s history, and some have recommended a lower wage for the island.”

The historical research mentioned is described more fully in an earlier post at the Wonkblog, in which the author harks back to the 1970s, when Puerto Rico’s minimum wage was $2.03 and that of the U.S. as a whole was $2.30. In 1974, according to a paper presented at a conference in 1990, the federal and territorial governments agreed to make Puerto Rico subject to the federal minimum wage. By 1987, that minimum had risen to $3.35 and, according to the economists quoted in the post, Puerto Rico did not see the job loss some anticipated.

Did a hike in Puerto Rico’s minimum wage in 1983 cause the 21st century economic meltdown of Puerto Rico? That is not what the Castillo-Freeman and Freeman paper suggested. Instead, they concluded that the imposition of the higher minimum wage in Puerto Rico increased migration to the mainland, where the same minimum wage was in place but the capital/labor relationship (roughly, the number of employers) was better able to absorb displaced workers.

Further analysis of the data in Myth and Measurement: The New Economics of the Minimum Wage, by David Edward Card and Alan B. Krueger, found that the connection between the minimum wage and job loss was not even as clear as the original paper suggested.

How does this history apply to Puerto Rico’s fiscal problems today?  The Krueger report released Monday  states that workers  in Puerto Rico “are disinclined to take up jobs because the welfare system provides generous benefits that often exceed what minimum wage employment yields.”  A lowered minimum wage would seem to exacerbate this situation.

The doctors who are leaving Puerto Rico in droves because of the disparity in Medicare payments, the decrease in manufacturing, the unique triple tax exempt status of Puerto Rican bonds that encouraged excessive borrowing, and the continuing effect of the territorial status on Puerto Rico’s economy generally  — none of these elements would be addressed by a return to early 20th century ideas about Puerto Rico’s minimum wage.

Added on July 2nd:  Princeton University Bendheim Professor Economics and Public Affairs Alan Krueger, as interviewed on Bloomberg – “I’m skeptical that the minimum wage has had an adverse effect in Puerto Rico, to be honest….When I wrote [a previous research] paper, I thought I would find that it did have an adverse effect. When Puerto Rico was linked to the US minimum wage, they ha[d] their strongest growth that we’ve seen. They were growing as strong as the Asia tigers.

And in fact, Puerto Rico’s problems have occurred while the minimum wage has been eroded, $7.25 is actually a fairly low minimum wage for the US. And as long as we’re on the subject of Greece, one of the steps Greece has implemented was to drastically cut their minimum wage. That obviously hasn’t solved their problems…..

[Minimum wage] affects spending; it has relatively little effect on employment. And in Puerto Rico’s case, if you lower the minimum wage you’re going to see a lot more people exiting the island. Or going onto disability benefits and other benefits. So I think it’s a much more complicated issue. And frankly my mind was changed when I worked on that [previous research]….

I think Puerto Rico has many other problems that I would address before I started to consider the minimum wage….[T]he number one issue is that their debt is too high. They have far too much non-compliance with taxes. They need, I think, more of a strategy for investment….

[T]hey have quite a bit of independence in implementing their own laws. And their problems have been building for some time. I think there’s been a long period of financial mis-management. Their government sector is too large. They do have many advantages. They have a well-educated workforce.”



2 thoughts on “Could a Lower Minimum Wage Help Puerto Rico?”

  1. A repeal of the federal minimum wage will result in millions leaving for the mainland!
    THEY ARE AMERICANS. US CITIZENS who will flee if wages go down while the PPD party’s 83 tax hikes and 12% sales tax kill off the economy.

  2. I don’t think that paying the least wealthy people less money can ever possibly help anyone. Money paid to people earning the least amount all goes back into the economy, because they are too poor to save anything. Paying them less removes money directly from the economy, and that’s the wrong direction. If you want to boost the economy, raise the minimum wage. It will still get spent, and that extra money will be flowing through the economy, increasing demand, adding jobs.

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