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Federal Minimum Wage: The Case of Puerto Rico

Puerto Rico is in crisis and drowning in debt. Now it looks like the island’s Development Bank, set up to raise living standards in the territory, will collapse. Congress is rushing to provide some help, but it needs to consider the effects of regulatory impositions on the island. Foremost among these is the federal minimum wage.

The heavily indebted nation demonstrates the ill-considered consequences of forced minimum wage raises out of sync with the market price for labor. Between 1974 and 1983, Puerto Rico was forced to increase its minimum wage in line with the federal figure, where it has remained since 1983. The results of imposing this standardized federal minimum wage have been “substantially reduced employment on the island,” according to the National Bureau of Economic Research, as well as swathes of unemployable low-skilled workers who decided to immigrate to the U.S. mainland to seek work.

The Puerto Rican economy is heavily dependent on its manufacturing and tourism sectors. Therefore, low-skilled workers tend to form the backbone of the island’s economy. The average hourly wage in Puerto Rico is $11.13, meaning that the current $7.25 minimum wage constitutes two-thirds of the average wage.

A report by three International Monetary Fund economists explains how only 40 percent of the adult population in Puerto Rico is employed or seeking-work compared to 63 percent in the mainland U.S. The other 60 percent of the adult population is either unemployed or working in the vast grey economy. Clearly, there are hundreds of thousands of Puerto Ricans working for less than the federal minimum, employed in the black market. For a nation seriously struggling to service its debt, policies that encourage untaxed, black-market employment are not a good idea.

The minimum wage is a significant factor in the island’s woes. Relatively high prices for Puerto Rico’s low-skilled industries mean that the employer’s incentive to invest and create jobs is stifled.

Puerto Rico’s woes as a result of the minimum wage should be a warning for the mainland, and island residents should worry about what the current momentum over here means for it in the future. Last week California Governor Jerry Brown announced plans to raise the states minimum wage rate by 50 percent to $15 an hour by 2022. The arbitrary $15 minimum wage figure is being promoted more widely than ever before by presidential candidates and progressive politicians around the country.

If a federal $15 minimum wage were to be imposed on Puerto Rico, it would be the equivalent of more than $35 an hour in California. That illustrates how devastating a further rise would be for the island’s economy, and should illustrate that even in rich California; $15 is probably going too far.

The upshot: There is no one-size-fits-all minimum wage rate for all of the states of the union, as arbitrary figures, such as the popular $15 target, are well out of sync with the market price for labor in different states. The effects of a harmonized and ever increasing minimum wage will continue to be felt most noticeably in the lower-income states and in low-skilled industries.