Last week, the White House accepted a rare, bipartisan bill that addresses Puerto Rico’s dire fiscal condition. The territory is currently $70 billion in debt and has another $30 billion in unfunded pension liabilities. The bill would create a board to help restructure the territory’s debt obligations.
One of the bill’s provisions lowers the territory’s minimum wage to $4.25 for employees 25 years of age and younger. Another provision exempts it from the new overtime rule that doubles the salary exemption for overtime pay to $47,500 from $23,665.
These provisions to spare Puerto Rico from labor regulations are tacit admissions that unreasonable labor mandates have consequences. For Puerto Rico, its minimum wage, which is only slightly less than its $9.61 median wage, has contributed to – in the words of International Monetary Fund economists – “massive underutilization of labor, foregone output and waning competitiveness.” Translation: there is no free lunch.
The territory currently has an 11.7 percent overall unemployment rate and 23 percent youth unemployment rate. Its Labor Force Participation Rate hovers around 40 percent versus 63 percent on the mainland. In this environment, every labor regulation that creates additional barriers to employment needs to be reconsidered.
Democrats are now on the record speaking out of both sides of their mouth on the minimum wage. Led by President Obama and congressional leadership, they have spent the last few years arguing for dramatic federal minimum wage increases while playing down or completely ignoring their consequences. (Just imagine the pain Puerto Rico would feel if its minimum wage were even higher.)
It shouldn’t take blood in the streets of San Juan for them to finally acknowledge the consequences of high minimum wages. The best economic evidence continues to prove that even in more robust economic environments, minimum wage increases still have negative consequences.
Puerto Rico is a microeconomy that illustrates this as well. According to a widely cited 1992 National Bureau of Economic Research study, after Puerto Rico was forced in 1974 to adopt the federal minimum wage, total island employment dropped by 10 percent.
The story of fellow territory American Samoa is even more instructive. According to a report by the Government Accountability Office, the last round of federal minimum wage increases significantly damaged the island’s tuna industry, its biggest private employer. Increased labor costs associated with the wage hike caused one of its tuna canneries to close and other employers to implement labor-saving strategies, such as reducing operations and employees. Between 2007, when the wage hike was passed, and 2013, the number of hourly tuna canning employees fell by more than half, devastating the economy. Minimum wage proponents argue that that you can’t compare the effects of the minimum wage on poor Puerto Rico or American Samoa with those on the much wealthier mainland. But in reality, some parts of the country share very similar economic characteristics with Puerto Rico, suggesting that broad state and federal mandates will do similar harm.
Take California, which recently increased its minimum wage by 50 percent to $15. “In the wealthiest state in the wealthiest nation on earth, no one who works full-time should have to live in poverty,” said California Senate President Kevin de Leon, celebrating the wage hike. However, this justification overlooks the fact that the state also has numerous poor counties, whose economies have more in common with Puerto Rico than with wealthy parts of the state. Imperial County has a per capita income of $16,409, which is closer to Puerto Rico’s $11,331 than it is to the $42,666 in Silicon Valley’s Santa Clara County. Several other counties in California, including Yuba, Del Norte, Kings, Merced, Tulare and Madera have gross domestic product per capita below $20,000. Yet they are all subject to the same broad $15 mandate that treats them the same as San Francisco.
White House Press Secretary Josh Earnest said the White House supports the Puerto Rico bill despite the fact the minimum wage provision is “mean spirited.” Really? What is more than mean are fairytale public policies that choke off job creation and price the low-skilled and inexperienced out of the job market, making them unable to get a start in the economy. It’s said the road to Hell is paved with good intentions. Puerto Rico may be Exhibit A. Courtesy – The Washington Times