How US Wage Laws Helped Sink Puerto Rico’s Economy

By Charles Lane at the New York Post

Greece is dominating the headlines, but between that financial catastrophe and the one facing Puerto Rico, the latter probably deserves more attention in the United States — at least more attention than it’s getting.

The Puerto Rican predicament results in large part from policy mistakes by the federal government — with directly relevant lessons for the economic debate on the mainland.

Take the minimum wage. Progressives around the country are campaigning to raise it to $15 an hour — more than double the current $7.25 minimum and even higher than the $10.10 supported by President Obama.

Advocates confidently assert that this huge increase in the price of labor could be imposed with no significant job-killing impact, or at least that any such consequences would be outweighed by reductions in income inequality.

Puerto Rico’s economic ruin, however, is partly a story of the damage an ill-considered minimum-wage hike can do.

Prior to 1974, Congress held Puerto Rico’s minimum wage below that of the mainland, a sensible policy given the commonwealth’s lower level of economic development and labor productivity.

Then, with the best of intentions, lawmakers ordered Puerto Rico to equalize its rate with the federal figure; this was phased in by 1983, and the Puerto Rican minimum wage has moved in lock-step with the federal minimum ever since.

The results were sharply disruptive, according to a 1992 National Bureau of Economic Research analysis. They included “substantially reduced employment on the island” and mass migration of suddenly unemployable lower-skilled workers to the US mainland.

Puerto Rico did post a short-term increase in real earnings, but the causal factor was the out-migration, which shrank the labor supply. Without the exodus, the authors noted, “it would have been virtually impossible to impose the US-level minimum on the island.”

Today, a full-time job at the minimum wage

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