Improving Puerto Rico’s Precarious Finances
Puerto Rico’s newly elected governor, Ricardo Rosselló, has promised to work closely with the bipartisan Financial Oversight and Management Board for Puerto Rico and the Congressional Task Force on Puerto Rico Growth to improve economic conditions. If Governor Rosselló wishes to deliver on his promise, he should consider revising its minimum wage, which relative to the island’s average wage, is amongst the highest in the world.
Like elsewhere in the United States, the island’s current minimum wage is $7.25. However, whereas $7.25 amounts to 41.7 percent of the median wage when compared to the 50 states, it accounts for 75.4 percent of the median wage earned in Puerto Rico. Nowhere else in the developed world, apart from the American Samoa, is the minimum wage, as a percentage of the median wage, so high.
The average Puerto Rican has paid dearly for such a high federally mandated minimum wage, which effectively prices many of its lower income and younger workers out of the labor force. Puerto Rico has an unemployment rate of 11.9 percent. In comparison, Alabama and Mississippi, two of the worst-performing U.S. states, have an unemployment rate of only 5.9 percent and 5.7 percent, respectively. Puerto Rican millennials fare the worst of all. The World Bank reports that Puerto Rico’s youth unemployment rate is 27.8 percent, a figure that is closer to that of France (23.9 percent) than to that of the United States (14.0 percent).
Consequently, as Puerto Ricans, particularly young people, find it difficult to find work locally, they leave Puerto Rico in droves. Between 2010 and 2015, 6.8% of Puerto Ricans left for the continental United States, with 40 percent of them citing job-related reasons. Many of the migrants were young individuals who could not find work at the wage they are required by lawmakers in Washington to be paid.
In contrast, the elderly, who tend to be net recipients of pensions and government assistance, are far more likely to remain in Puerto Rico. This creates an imbalance in Puerto Rico’s labor market by increasing the proportion of people who depend on government assistance relative to those who work and pay taxes, which further strains the island’s already precarious finances.
Recognizing this problem, when Congress enacted the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) last summer, it established a youth minimum wage of $4.25 for workers under 20, and set up an oversight board for Puerto Rico—providing the island with a stay on creditor suits. While welcomed, the minimum wage adjustment falls considerably short of what might be needed to generate sustainable economic growth and employment.
One of the main problems with the new $4.25 youth minimum wage is that it is valid only for the first 90 days of a new job. After that, it increases back to the previous minimum wage of $7.25. As a result, the law fails to make it cheaper to hire more workers in the long run. In order to incentivize employers to create more jobs, the youth minimum wage needs to be extended to at least a few years. Fortunately, Congress has given Puerto Rico’s governor, Mr. Rosselló, the power to extend the minimum wage up to a period of four years, subject to the approval of the Territory Financial Oversight and Management Board. To maximize the effect of this new minimum wage, Governor Rosselló should consider making the $4.25 minimum wage applicable to all Puerto Ricans.
The $4.25 minimum wage would still be higher than comparable wages in the Dominican Republic and Mexico, but it would at least make the Puerto Rican tourism and manufacturing industries more attractive relative to their rivals than they are today.
Given Puerto Rico’s generous unemployment benefits and labor market regulations, a lower minimum wage will surely not be a panacea for its dysfunctional labor market. In order to increase its labor force participation rate and create more jobs, Puerto Rico must also introduce other labor market reforms, notably cutting its generous unemployment benefits and reducing legal hurdles to hire and lay off workers. However, along with these key reforms, reducing the minimum wage will go a long way in fixing Puerto Rico’s dysfunctional labor market and ensuring its long-term economic growth.