The FINANCIAL — Puerto Rico’s long-simmering debt crisis owes much to an economy that has been shedding jobs for years. And blame for that, economists say, stems in part from how the island operates under the same wage rules as the more prosperous 50 states, according to Nasdaq.
The commonwealth is subject to the federal minimum wage of $7.25 an hour, even though local income and productivity are significantly lower than in Mississippi, the poorest American state. The minimum wage in Puerto Rico is equal to 77% of per capita income, compared with 28% in the U.S. overall.
Roughly one-third of workers earned the minimum wage on the island in 2010, compared with just 16% for the U.S. mainland, according to a 2012 report by the New York Federal Reserve Bank. That report concluded the minimum wage contributed to a lack of jobs for lower-skilled workers, in part because businesses can relocate to lower-wage nearby countries.
These problems are laid bare in a report Puerto Rico’s government released Monday by Anne Krueger, a former top official at the International Monetary Fund. Puerto Rico’s economy, which has been in recession for nine years, has struggled to create jobs and has compensated by offering generous tax breaks to companies and income support to residents.
The upshot is Puerto Rico, with a debt load of more than $72 billion, is running short of cash to repay lenders and keep basic services operating.
The island’s lack of competitiveness can be seen in the scant growth of its low-skill and low-wage industries, such as tourism. The number of hotel beds on the island has changed little from the 1970s, and tourist arrivals are down over the past decade, according to the Krueger report.
“They have all the traits of a welfare state gone wrong,” said Arturo Porzecanski, professor of international economics at American University in Washington, D.C.
The minimum wage is also high relative to average worker productivity. A 2012 World Bank study judged that the ratio of Puerto Rico’s minimum wage to the value added per worker was nearly twice that for the Bahamas and Jamaica, and three times that of the U.S. mainland.
The Krueger report recommends that Congress allow Puerto Rico to set its wage below the federal minimum, which is now allowed for a handful of employers. The New York Fed, in its report, separately advised creating a separate “sub- minimum” wage for workers under the age of 25 that gradually increases to match the federal minimum after several years.
With the Puerto Rican economy in decline, Luis Acevedo, a 31-year-old chemist, decided to get a degree in chemical engineering to give him a better chance at boosting his earnings. Even with the degree, he has had no luck finding a job after five months, and he said competition is fierce given a high unemployment rate, about 12%. “The way things are going I’m starting to apply abroad,” Mr. Acevedo said.
Weak job prospects have prompted Puerto Ricans, who are U.S. citizens, to seek employment in places like Florida, New York and New Jersey. Since 2000, total employment is down 11% in Puerto Rico, while it is 7% higher in the U.S. The island was projected to post one of the largest population declines in the world last year, according to U.S. government figures.
More than 27% of Puerto Ricans between 15 and 24 years old who were in the labor force were unemployed in 2013, compared to nearly 16% in the U.S.
Labor unions on the mainland pushed for the federal minimum wage to cover Puerto Rico in the 1970s amid concerns that the island would create low-wage competition for mainland jobs. The move eliminated a comparative economic advantage for the island, while tax breaks designed to lure multinationals did little to establish permanent job growth, said Barry Bosworth, an economist at the Brookings Institution in Washington.
Congress mandated two U.S. territories in the Pacific, American Samoa and the Commonwealth of the Northern Mariana Islands, to increase their minimum wages in 2007 by 50 cents annually until meeting the federal level this year, but it delayed those increases in 2010 amid concerns about economic growth.
“They are begging the government to stop the onwards march of raising the minimum wage,” said Mr. Porzecanski. ” It’s better to be hired at $5 than not to be hired at $7.25.” Minimum wages in American Samoa, which range from $4.18 to $4.76 an hour, are set to rise by 50 cents at the end of September.
Labor dynamics are only part of the problem with Puerto Rico’s economy, which also faces poor business investment, high tax evasion, and unusually expensive electricity and other costs of living.
The Jones Act, a law that requires most shipping between U.S. ports to rely on a small and specific fleet of U.S.- flagged vessels, means that just a handful of ships serve Puerto Rico, limiting competition and increasing costs of basic goods. The Krueger Report recommends that Congress exempt Puerto Rico from the Jones Act, following similar exemptions for the U.S. Virgin Islands.
In Puerto Rico, broad use of government benefit programs have further damped workforce participation. Transfer payments, such as food stamps and disability benefits, account for roughly 40% of personal income in Puerto Rico, double the share on the U.S. mainland, according to the New York Fed.
Those payments tend to be generous relative to local incomes because payments are indexed to conditions on the mainland. Moreover, because they decline as wages rise, they can create a disincentive to work. The Krueger report recommends providing lower benefit payments to a larger number of people, which would maintain the social safety net while encouraging more labor-force participation.
At the same time, economists say other local labor laws, including more generous overtime pay and vacation rules, plus laws that make it harder to fire workers, have made employers reluctant to hire.
While it would make sense to exempt Puerto Rico from future increases in the federal minimum wage, cutting wages ” will just accelerate the exit from the island,” Mr. Bosworth said. “The fundamental problem in Puerto Rico is the lack of jobs.”
Mr. Acevedo says nobody in the island is surprised by its financial woes. But he said it is going to be nearly impossible for politicians to implement measures like lowering the pay floor. “That would be political suicide,” he sa
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