Could reducing the minimum wage help solve this economic crisis?
A controversial proposal to rescue Puerto Rico from an economic crisis would allow the territory’s leaders to slash the minimum wage for young workers, but economists are debating whether the rare move would be a boon for the cash-strapped island or intensify residents’ financial woes.
The provision, part of a larger bill to save the island from its $72 billion in debt, would give Puerto Rico’s governor and regulators the authority to reduce the minimum wage from the federal level of $7.25 an hour to $4.25 for newly hired workers under age 25.
The goal is to attract more businesses to the island and incentivize employers to create jobs in a territory roiling from a 12 percent unemployment rate, much higher than any U.S. state. But detractors say that although a reduced minimum wage could boost tourism, it also could constrict spending for residents of Puerto Rico.
The bill -- which has received tentative support from the Obama administration and House leaders of both parties -- is scheduled for a hearing in the House on Tuesday. Puerto Rico Gov. Alejandro García Padilla, who has said he will not seek reelection this fall, has not commented on whether he would use the authority to cut the minimum wage if the bill is approved.
For decades, Puerto Rico’s minimum wages — set by industry — were well below the federal minimum. In 1974, Congress ordered a series of gradual increases to bring the island’s minimum wages up to that of the mainland. Puerto Rico’s minimums roughly doubled, from $1.68 an hour in 1974 to the federal minimum of $3.35 in most industries in 1983.
Today, the federal minimum of $7.25 is worth substantially more in Puerto Rico than it is in other parts of the country relative to the cost of goods and services there. Some economists argue that that makes it less attractive for companies to hire and expand their business there.
Justin Vélez-Hagan, a doctoral candidate in economic policy at the University of Maryland Baltimore County, noted that lowering the minimum wage could entice manufacturers to the territory — a difficult place to produce goods because of the high cost of energy.
Vélez-Hagan also argued that reduced labor costs would make the territory more attractive to tourists.
“One of the biggest concerns is that the minimum wage is making Puerto Rico less competitive with surrounding islands,” said Vélez-Hagan, who also is founder of the National Puerto Rican Chamber of Commerce.
Still, he noted, there is no consensus about the likely consequences of reducing the minimum wage, even though economists have been studying the issue for decades.
“It’s pretty theoretical,” he said. “No one really knows.”
One way to think about the real value of the minimum wage in different parts of the country is to compare it to typical wages there. Nationally, the median hourly wage is $17.40, according to the Bureau of Labor Statistics . The federal minimum of $7.25 is 42 percent of that median.
In Puerto Rico, by contrast, the federal minimum is 75 percent of the median wage, which is now $9.61. For that reason, economists at the Federal Reserve Bank of New York (which includes Puerto Rico in its district) recommended that the minimum be reduced for younger workers in 2012.
“The minimum wage affects a large share of workers in Puerto Rico and may be an important contributor to unemployment, especially for the young and less educated,” they wrote. “The negative consequences of Puerto Rico’s high minimum wage may be particularly costly to younger workers.”
On the other hand, the minimum is only one aspect of a complex and troubled Puerto Rican economy, said Richard Freeman, an economist at Harvard University who has studied wages on the island.
“It’s not going to help much,” he said of reducing the minimum. But he added, “I doubt that it’s going to hurt much.”
Freeman’s research shows that increasing Puerto Rico’s minimum wage in the 1970s and 1980s reduced employment there by between 8 percent and 10 percent. Many residents who could not find any work at all emigrated to the mainland.
Still, reducing the minimum wage might do little to address the territorial government’s immediate problems. To come up with the money to pay its creditors, the government needs to collect taxes. Young workers will pay little no matter what the minimum is, given their small incomes, Freeman said.
Meanwhile, a reduction in some minimum-wage earners’ wages could lead those workers to spend less, further reducing demand for goods and services on the island and further hampering the economy, warned Desmond Lachman, an economist at the conservative American Enterprise Institute.
Lachman said that, over the long term, a reduced minimum could make industries such as tourism more profitable, but those industries won’t develop overnight.
“I really just don’t see the minimum wage reduction as being the silver bullet,” he said.
The debate over the minimum wage is just a small part of the larger controversy over what to do about the territory’s finances. The main provisions of the bill would establish an oversight board with the authority to impose balanced budgets, selling public assets and terminating governmental employees if necessary. In return, Puerto Rico would be able to restructure its debts.
The minimum wage provision received reluctant support from the White House. Spokesman Josh Earnest called the provision “mean-spirited” in a press conference Thursday , when the deal was announced, but said the administration was willing to compromise with the House Republicans in order to restructure Puerto Rico’s debt. The island’s government is deep in the red, and must come up with $2 billion by July 1.
“It would be pretty hard for anybody to explain how exactly a 19-year-old Puerto Rican who’s making minimum wage is somehow responsible for the situation or should be punished as a result of this situation,” Earnest said. “But the president has made assisting Puerto Rico and addressing their challenging economic situation a top priority, and sometimes getting bipartisan progress in Congress requires supporting legislation that’s not perfect.”
The proposal comes as minimum wages are increasing in jurisdictions around the country .
The White House supports increasing the federal minimum wage to $12 an hour. Local policymakers have gone farther. Laws passed earlier this year in California and New York , for example, will raise the minimum wage in those states to $15 an hour.
Harvard's Freeman argued that what's most important for Puerto Rico is finding a way to relieve the government of its debt. That is the main focus of the negotiations in Congress -- so that Puerto Rico isn't forced to sacrifice needed public services or impose onerous new taxes in order to pay what it owes.
"An austerity driven policy fails, period." Freeman said. "What I would want to see is that there’s some serious relief for the debt."
SOURCE: World Economic Forum