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Myths and Realities of Manufacturing in Puerto Rico

Manufacturing jobs in Puerto Rico have been on the decline since the beginning of the 21st century. The chart below, from Federal Reserve Economic Data, shows the slide from 1994 to 2018.

The nadir was in 2017, after Hurricane Maria’s devastation of the Island. You can see a bit of an uptick as 2019 begins.

A newer chart from the U.S. Bureau of Labor Statistics shows that this small improvement is still taking place.

Zoom in on 2018 to 2020 and we can see that, apart from a dip last spring, when pandemic restrictions were at their most extreme, the gains since 1980 are enough to encourage optimism.

Manufacturing now provides about 75,600 jobs in Puerto Rico, or about 8% of total employment.

The good old days of manufacturing?

There is a myth that manufacturing used to be much better in Puerto Rico. One writer bemoaning the possibility of a higher minimum wage in Puerto Rico wrote, “The island was once home to a thriving needlework industry until the federal minimum wage destroyed its competitive advantage.”

Let’s look at some facts on the needlework industry in Puerto Rico. It provided more than half of the manufacturing jobs in Puerto Rico in the 1940s. But it was never like the textile industry in South Carolina. Rather, 98% of the jobs were held by women working from their homes at 1 to 2 cents per hour.

In 1950, at the best time for Puerto Rican needlework, those women earned 15 cents an hour. The minimum wage in the United States was $1.00 an hour at that time.

The needlework industry was hand embroidery at home. Fabric or finished garments were shipped to Puerto Rico for embroidery and shipped back to the United States. Of all the steps from growing the fibers to milling the yarn and thread to weaving the fabric to designing the fashions to cutting and sewing the clothing to selling the goods at retail, embroidery was probably the least profitable step.

Paying women by the piece for the work they could accomplish while caring for their families was probably the least expensive way to get the work done.

There is no reason to romanticize that era of Puerto Rico’s manufacturing.

Industrialization in Puerto Rico

In the 1950s and 1960s, as the needlework industry declined from 51,000 workers to 10,000 and Operation Bootstrap shifted the economy overall from agriculture to industry, Puerto Rico began to offer tax deals to off-Island manufacturers. The idea was to encourage investors. The first law of this kind was passed in 1947, and the number of factories increased. Consumer goods, including apparel, were produced in Puerto Rico in increasing quantities.

By the end of the 1960s, however, Puerto Rico made a shift from labor-intensive industries like clothing to capital-intensive ones like chemical and electronics production. In 1940, the GNP per worker was $932. In 1960, it was $2,733. The average income increased to $500 per year for the first time in 1960. Things looked good.

However, the increase in personal income over those 20 years was 60%. That’s not bad, but it is clear that productivity increased much faster than jobs or income.

“If the increases in income are not distributed through proportionally higher wages and more and better employment opportunities,” wrote Michael Jacks Canon in his Master’s Thesis in 1972, “then the success of a program lies subject to question.”

The tax benefits were set up so that mainland manufacturers could wash their profits through Puerto Rico. For example, Microsoft copied software onto discs in Puerto Rico and claimed all the profits for that software were produced in Puerto Rico — but actually had fewer than 200 workers on the Island.

Pharmaceuticals in Puerto Rico

Pharmaceutical companies averaged $2.65 in tax savings for every dollar they spent on wages in Puerto Rico. But the tax tricks known as Section 936 began to be phased out in 1996. The Senate Finance Committee prepared a report after the end of 936 which concluded simply: “Section 936 of the Internal Revenue Code was not an effective means to promote economic growth in Puerto Rico, and the emergence of the current and long-continuing recession cannot be attributed to the termination of 936.”

Some manufacturers left Puerto Rico once their sleight of hand no longer produced unreasonable surpluses. However, many stayed and more have invested in the Island since then.

Puerto Rico has good reason to be proud of its pharmaceuticals industry. Puerto Rico is the largest exporter of medical supplies in the United States. The next in line are California and Indiana, but Puerto Rico produces more than the two states combined.

According to the Food and Drug Administration, Puerto Rico produces 40 billion dollars’ worth of pharmaceuticals for the United States each year.

This covers 30% of Puerto Rico’s total manufacturing output and employs 90,000 people. These workers average 60% higher wages than the average manufacturing job on the Island.

In a letter to President Biden, Resident Commissioner Jenniffer Gonzalez-Colon wrote, “This public health emergency has shown us that securing the supply of pharmaceuticals, biologicals and medical devices and supplies on American soil is in the interest of our national security and health security. Puerto Rico is well positioned to help the U.S. close this gap immediately. Accordingly, to aid in the fight against COVID-19, we must make sure that any economic stimulus package includes provisions that will increase manufacturing of pharmaceutical and medical supply production; but we must make sure that these provisions will have a positive impact in local economies by tying any incentives to increased employment and capital investment. The Island has the capacity, workforce, and infrastructure to immediately ramp up domestic pharmaceutical and medical device manufacturing in order address this COVID-19 epidemic.”

Read the full letter.

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