The Actual Puerto Rico Wage Improvement Act (vs. the phony one)

February 29th, 2016 at 5:51 pm

If I told you about a new bill allegedly designed to “improve” the minimum wage, you’d probably envision it raising the wage floor, or maybe expanding coverage so that the minimum reaches more low-wage workers, right?

You probably wouldn’t jump to “…amend the Fair Labor Standards Act of 1938 to permit the Government of Puerto Rico to opt out of the applicable Federal minimum wage.” Yet that’s precisely what the Puerto Rico Minimum Wage Improvement Act proposes to do.

Putting aside the misleading title, the idea is that $7.25 an hour is too much for businesses to pay on the island. The evidence, however, does not support this idea.

Because average wages are low in Puerto Rico, it’s true that the minimum wage bites higher into the wage scale there than on the mainland. But as Arin Dube and Ben Zipperer pointed out back in August, it is not responsible for the island’s economic woes. Puerto Rico’s minimum wage has mirrored the federal minimum wage for over 30 years. When it was first introduced, and was particularly high relative to the average wage, the Puerto Rican economy grew quickly.

Since then, inflation has eroded its value and the share of workers affected by the minimum has fallen from around 44 percent in the early 1980s to around a third in 2010. But the Puerto Rican economy did not speed up in response to the eroding minimum wage. Opportunities for low-wage workers did not begin to flourish as their relative cost fell.

Puerto Rico’s economic woes are very real, but as Harvard economist Richard Freeman put it: “The timing of their problems does not have to do with the minimum wage.” It’s the wrong diagnosis, and thus the opt-out is the wrong prescription.

If you think about the labor market problems they’ve faced on the island—very low labor force participation driven by an exodus of working-age persons seeking opportunity on the mainland—we’d want to make work pay more, not less. Moreover, as Rep. Pierluisi points out, the cost of living in Puerto Rico is higher than many cities here in the states, in part because of the 11.5 percent sales tax.

Raising the minimum wage might not work for the economically strained island right now, but there’s another way to help low-wage workers, to incent great labor supply, and possibly to stimulate broader growth on the island: extend the Earned Income Tax Credit to Puerto Rico.

Low income workers there have never benefitted from this highly effective pro-work, anti-poverty wage subsidy. True, workers in Puerto Rico do not pay federal income taxes, but they pay Social Security taxes, and, as tax expert Chuck Marr writes, “a key rationale for the EITC” is to help offset payroll taxes for low-income working families. Marr also points out that all it takes for an otherwise eligible Puerto Rican worker to quality for the EITC is to move to the US, creating a strong migration incentive. Unless our policy goal is to further depopulate the island, how does that make sense?

If members of Congress want to take action to help the struggling island, I urge them to write that bill. I’ve even got a name: the Actual Puerto Rico Wage Improvement Act.

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One comment in reply to "The Actual Puerto Rico Wage Improvement Act (vs. the phony one)"

  1. Tom in MN says:

    Other than the fact that I always cross out the word actual in anything my students write, as it’s always redundant, you have a good point.


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