Massive Minimum Wage Hike Would Make US More Like Puerto Rico

Supporters of a $15 per hour minimum wage continue to insist that it won’t impact employment. But the economic problems underlying the Puerto Rican debt crisis tell a different story and provide a possible glimpse into America’s future if the country continues down that path.

Last month, Puerto Rico Governor Alejandro García Padilla announced that the island cannot possibly pay its roughly $72 billion in debts. With more municipal bond debt per capita than any US state, a Puerto Rico default would have a much greater impact on Americans than the situation in Greece. As Peter Schiff recently noted, “Most Americans don’t own any Greek government bonds. But they probably own some Puerto Rican government bonds. Whether they know it or not, they’re in their muni bond portfolio.”

Many policies combined to drive Puerto Rico into this situation, but a recent report reveals labor and wage policies were a big part of the problem.

Congress kept Puerto Rico’s minimum wage below that of the mainland up until 1974, when lawmakers decided to equalize it. Congress implemented a gradual increase until it locked in with the US rate in 1983. The impact on the Puerto Rican labor market proved a disaster, as Schiff points out.

In Puerto Rico, the effective minimum wage is $15 an hour when you take into account their lower income. They’ve got 20% unemployment. The labor force participation rate in Puerto Rico is only 42%, because of the minimum wage. You’ve destroyed employment in Puerto Rico with a high minimum wage. The same thing would happen on the mainland if we’re dumb enough to raise minimum wage to fifteen bucks here.”

Empirical evidence backs up Schiff’s assertion. Washington Post columnist Charles Lane cites a 1992 National Bureau of Economic Research analysis , writing “the results were sharply disruptive. They included ‘substantially reduced employment on the island’ and mass migration of suddenly unemployable lower-skilled workers to the U.S. mainland.”

International Monetary Fund economists recently released a report that uses in-depth statistical analysis to demonstrate the impact on the minimum wage on Puerto Rican employment.

Employers are disinclined to hire workers because (a) the US federal minimum wage is very high relative to the local average and a more binding constraint on employment; and (b) local regulations pertaining to overtime, paid vacation, and dismissal are costly and more onerous than on the US mainland.”

The report calls the unemployment figures “the single most telling statistic in Puerto Rico.”

Only 40% of the adult population – versus 63% on the US mainland – is employed or looking for work; the rest are idle or working in the grey economy.”

The report also found that the generous Puerto Rican welfare system creates a disincentive to work because the benefits often exceed wages a worker can earn in a minimum wage job. The low workforce participation means a lower tax base, exacerbating Puerto Rico’s debt problem. If the US  follows a similar path and raises the minimum wage, it would likely lead to a similar situation. Lane nicely summarizes the likely end-result of a hefty minimum wage hike on the US economy, noting it would look a lot like Puerto Rico.

If mainland progressives have their way, however, U.S. rules on overtime, sick leave and the rest would become more like Puerto Rico’s. A $15 per hour minimum wage, if adopted nationwide, would mean that full-time work at the minimum wage would pay roughly $30,000 per year, or 65 percent of 2014 U.S. annual per capita income — that is, more than double the current ratio and only 12 percentage points lower than in Puerto Rico.”

It goes to show that the most well-meaning policies can wreak economic chaos. Sadly, central planners seemed determined to take the US down this same path.

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