Puerto Rico and the Case against One-Size-Fits-All Minimum-Wage Hikes

by Reihan Salam

Last week, I wrote a column for NRO on Facebook’s decision to set a new hourly minimum wage for its contractors and vendors of $15, and I offered a few reasons for why a minimum wage that works for Facebook wouldn’t work as a national public policy. My main point was that a wage floor matters only when it is binding: for example, a wage floor of 15 cents an hour in the United States isn’t likely to have huge disemployment effects, but a wage floor of $50 per hour almost certainly would. I briefly discussed the case of Puerto Rico:

One of the most powerful illustrations of the effect of a truly binding minimum wage is Puerto Rico’s labor market in the years after 1983, when Puerto Rico adopted the federal minimum wage then prevailing on the mainland. In the early 1990s, the labor economists Alida J. Castillo-Freeman and Richard B. Freeman found that the “U.S.-level minimum altered the distribution of earnings in Puerto Rico to an extraordinary extent,” and that “imposing a U.S.-level minimum reduced total island employment by 8–10 percent compared to the level that would have prevailed had the minimum been the same proportion of average wages as in the United States.” The result of this massive shock to employment levels was, according to Castillo-Freeman and Freeman, a massive wave of migration from Puerto Rico to the mainland that drew largely on “persons jobless on the island, with characteristics that make them liable to have been disemployed by the minimum wage.”

So I was surprised to see Lydia DePillis in Wonkblog describe the case of Puerto Rico as an indication that a substantial increase in the federal minimum wage “might not be as bad as one might expect.” This is a curious claim, as much depends on what exactly one might expect — my understanding is that many Americans believe that an increase to, say, a $15 per hour federal minimum would have no negative effect. (Suffice it to say, I disagree.)

DePillis interviewed Richard B. Freeman, one of the study’s co-authors, who observes that the disemployment effect wasn’t as big as he had initially anticipated. He also makes the case that perhaps the job losses were inevitable: “If you’re so unproductive that you can’t pay a little bit more, than maybe you don’t belong in a modern economy.” But of course this is a bizarre claim, as there are many labor-intensive business models that capitalize on the fact that (for example) the U.S. is home a large number of less-skilled immigrants. Between 1990 and 2013, the share of adult men without a high-school diploma who are immigrants increased from 25 percent to 50 percent. Over the same period, the employment rate for immigrant men increased from 80 to 87 percent, and the share working full-time and year-round increased from 57 to 66 percent. Immigrants without a high-school diploma work at far higher rates than native-born Americans, presumably because many immigrants are ineligible for safety-net benefits that are available to more established Americans, whether native-born or naturalized, and because immigrants, particularly from very poor countries, are more willing to work for low wages and under unattractive labor conditions. (See the recent discussion of labor abuses at nail salons in New York City.) Freeman may well believe that firms that employ less-skilled immigrants “don’t belong in a modern economy,” and I’m inclined to agree, but that won’t change the fact that there are large numbers of U.S. adults without a high-school diploma who command low wages.

Puerto Rico had an escape valve when it increased its minimum wage to align with the minimum wage prevailing on the mainland, as DePillis makes clear: “In Puerto Rico’s case, an unemployment crisis was averted as thousands of lower-skilled people emigrated to cities with greater opportunities, such as Miami and New York.” Miami and New York are both cities that have experienced dramatic increases in inequality over this period, which has been a source of concern for at least some progressives. Moreover, labor-market opportunities for less-skilled workers — the workers who were forced to leave Puerto Rico — have not improved over this intervening period. One suspects that the children of some less-skilled Puerto Ricans who settled on the mainland fared better in their new environment, yet others might have suffered from being more disconnected from their extended families and from living in neighborhoods defined by high levels of concentrated poverty. It’s not at all obvious to me that we should consider the migration of less-skilled Puerto Ricans to high-cost cities with highly polarized labor markets to be an unambiguously good thing, particularly since many of these individuals would not have migrated had employment opportunities in their native island not dried up. It’s one thing to say that we shouldn’t prop up declining economies. It’s quite another to say that we ought to impose regulations that drive local economies into decline.

When asked about the effects of a $12 federal minimum wage (not $15, which is the goal of a growing number of labor activists), Freeman gives Wonkblog a few thoughts:

Based on that experience, Freeman thinks a few things might happen if the federal minimum goes up to $12. First, some companies might find ways to work around it, either by having their employees work off the clock or by turning them into independent contractors. That’s not ideal, but it at least allows people to keep collecting some paycheck.

“There are many ways that firms and workers will make sure that people don’t lose their jobs,” Freeman says. “If you say that 90 percent of the people get higher wages, and that’s what you want to have happen, and then 10 percent find ways to wiggle around so they keep their jobs, that’s a pretty good outcome.”

To be clear, Freeman is anticipating violations of labor standards on a mass scale (“having their employees work off the clock”) and a shift to 1099 employment, which I don’t consider a bad thing, necessarily, but which presumably does not mean that business models that “don’t belong in a modern economy” will shut their doors — rather, innovative energies will shift from perfecting a business model to getting around labor regulations. This is a fascinating way to have your cake and eat it too, and it raises interesting questions: Is Freeman suggesting that the 90 percent of the people who get higher wages (an imprecise figure — it’s not clear who he’s referring to) wouldn’t have commanded higher wages over time as they gained experience? And then he tells us that it doesn’t really matter that some others will be adversely affected, because their employers will simply violate the law or embrace a more contingent model of employment.

[I]f jobs do disappear, Freeman figures that people will move to areas of greater opportunity. “Minimum-wage workers tend to be young people, so they’re reasonably mobile,” he says. “Mississippi is the lowest-wage state in the country. If it tips you to move to Georgia, which has higher wages, that’s a reasonable response.”

Mass migration of less-skilled workers might strike Freeman as a painless process, but many low-income families living in Mississippi have been living there for generations, even as friends and relatives have migrated to other regions in search of opportunity. Those who remain often have a very good reason for doing so, and treating the fact that they will no longer be able to find employment in their hometowns as a trivial fact strikes me as unfortunate. Moreover, we know that high-productivity regions in the U.S. tend to also have higher costs. If less-skilled Mississippi workers move in large numbers to Atlanta, some of them will find low-wage work and affordable housing. Others might find it much harder to make their way in a new environment. (And this is not to mention that settling in New York City or the Bay Area would be substantially more difficult for Mississippi workers, given stringent housing regulations in both regions. Indeed, high costs have led many low- and middle-income households to leave these regions and settle in lower-wage, lower-productivity southern metropolitan areas.) For example, some of these workers might have children, and moving away from relatives might disrupt their child-care arrangements. I assume that the solution for this is publicly financed daycare. What other taxpayer-financed benefits will we need to smooth the transition? Think about it: We are going to raise the minimum wage to a level that will cause large-scale disemployment and outmigration from some regions, and then we will spend more money to ameliorate the negative consequences that will result. Wasn’t a higher minimum wage supposed to be a “free” policy that would make poor people better off?

Freeman then offers Wonkblog the following parting thought:

[O]verall, Freeman argues, the evidence from minimum wage hikes in other places — such as Britain and Australia — shows only moderate effects on employment, if any, because governments tend to give businesses time to adjust.

“Put a zero after your wage and mine, and we know that the employer’s going to get rid of us,” Freeman says. “But they never seem to push the minimum really into that dangerous territory. Twelve dollars in three years is not going to incredibly shake up Mississippi.”

It’s worth noting that Australia’s national minimum wage has numerous carve-outs for junior employees, trainee employees, apprentices, and other categories of worker, which are tailored by sector and sub-sector. Australia’s minimum-wage regulations are dizzying in their complexity precisely because the Australian government is wary of disemployment effects. Furthermore, Australia’s relatively high minimum wage is reflected in its substantially higher cost of living and the country takes a more restrictive approach to less-skilled immigration than the U.S. If Australia had more immigrants with less than a high-school diploma, its minimum wage laws might prove more binding. Britain’s minimum wage is similarly not as binding as a $12 minimum wage would be in low-cost regions like Mississippi.

In a recent Slate column, I explain why some economists who favor minimum-wage increases, like Arindrajit Dube of the University of Massachusetts, Amherst, favor a minimum-wage strategy that is sensitive to local wages and prices:

Consider the contrast between Massachusetts, a high-cost, high-wage jurisdiction, and Mississippi, a low-cost, low-wage one. In Massachusetts, very few workers would be affected by an increase in the federal minimum wage to $10.10, as the Bay State already has a $9 minimum wage that is set to increase to $11 by 2017. But in Mississippi, as many as 28 percent of workers would be affected. In Massachusetts, wages are higher, and so are prices. Relatively few employers will have to spend substantially more on their workforce under a higher federal minimum wage, and relatively few will have to raise their prices to account for it. In Mississippi, by contrast, many employers will have to raise their wages, and it’s a safe bet that virtually all of the cost of this minimum wage hike will be passed on to consumers in the form of higher prices. You might think that, well, this isn’t a huge deal if it’s rich people who are paying these higher prices. But of course it will often be poor people who pay them, particularly in a poor state like Mississippi. This makes poor consumers worse off in a direct sense, in that they can purchase less with their earnings. And if consumers are at all sensitive to prices, at least some of them will choose to spend less on labor-intensive goods and services now that they are more expensive. That could reduce the number of minimum wage jobs available.

That is why Dube recommends that state and local governments set minimum wages that take into account local wages and local price levels. Specifically, he advocates setting a minimum wage at half of the median full-time wage in a given jurisdiction, a standard that would have yielded minimum wages ranging from $12.45 in Massachusetts to $7.97 in Mississippi. Suffice it to say, there is a great deal of distance between $7.97 and $15.

I’d suggest that Dube’s approach is far superior to imposing a $12 (or $15) national minimum wage, and that the “Oh well, they’ll just move” or “Oh well, employers will just wiggle around the law” approach isn’t actually that great.

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