Economy & Business

Minimum-Wage Activists Should Look to Puerto Rico for Clues to the Future

(Czuber/Dreamstime)

When signing the bill raising California’s minimum wage, Governor Jerry Brown called the new $15 minimum wage “good politics” but “questionable policy.” He may be more prescient than many realize. There was a time in recent American history when a minimum wage of nearly equal magnitude to California’s was imposed, and “good politics” turned out to be disastrous policy. It is worth remembering this previous minimum-wage experiment as voters assess whether the progressive push for substantially higher minimum wages will deliver prosperity for the working class.

President Obama has long supported the so-called Raise the Wage Act, which, if passed, will increase the federal minimum wage to $12 by 2020. The $12 national minimum wage is a cornerstone of Hillary Clinton’s campaign platform. Bernie Sanders is campaigning on a $15 national minimum wage, more than double the current federal minimum wage of $7.25.

Progressives in favor of a high minimum wages dismiss the common-sense notion that such a law could make it too expensive to hire some workers. The progressives believe that fat profit margins allow businesses to absorb additional labor costs without layoffs. In their worldview, higher minimum wages are merely a way to transfer high business profits to struggling working-class Americans.

But contrary to progressive rhetoric, many U.S. businesses operate with only the slimmest of margins. If the increase in labor costs cannot be passed on to consumers in the form of higher prices, some businesses will close, and those that remain will innovate to lower their use of expensive labor. The least productive workers will be laid off, while those without jobs, little experience, and no special skills will face more difficulty finding work. Unemployment will rise, but the increase will be partially offset as low-skilled workers are forced to migrate to places where the minimum wage is less binding.

Currently set at $10, California and Massachusetts have the highest statewide minimum wages in the country.

Currently set at $10, California and Massachusetts have the highest statewide minimum wages in the country. But beginning in 2017, California will gradually increase the statewide minimum wage until it reaches $15 in 2022. Not to be outdone, New York State will join California — raising its current minimum wage of $9 to $15 by 2022.

In 2015, California and New York’s median wages — the wage where half the state workers earn more, and half earn less — were $19.15 and $20 respectively. If average wages continue to increase at an annual rate of 2 percent, by 2022, a $15 minimum wage will correspond to 69 percent of the median-wage rate in California, up from 52 percent today. In New York, the ratio will increase from 45 percent to 67 percent. By contrast, Texas and Arizona, states comparable in size to California and New York, currently have ratios below 50 percent. Even Connecticut, a progressive state with a minimum wage of $9.60, has a ratio considerably below 50 percent. In Mexico, California’s nearby NAFTA trade competitor, the ratio is 38 percent. When politicians raise a state’s minimum wage as high as the median wage, businesses in that state must raise the salaries of half of those employed, or else take measures to trim the number of employees on the payroll.

Source: Bureau of Labor Statistics and OECD

The only historical examples close to the California and New York minimum-wage experiments are the unfortunate experiences of Puerto Rico, American Samoa, and the Northern Mariana Islands following the passage of the Fair Minimum Wage Act in 2007. To cut to the chase, large federally mandatory minimum-wage hikes left these economies in shambles.

The Fair Minimum Wage Act mandated an increase in the federal minimum wage from $5.15 in 2006 to $7.25 by 2009. The federal minimum wage applies to all 50 U.S. states and, since 1983, to Puerto Rico. The 2007 law also required local minimum wages in the U.S. territories of American Samoa and the Commonwealth of the Northern Mariana Islands to increase annually until they equaled the federal minimum wage. Minimum wages were required to rise by 50 cents a year beginning in 2007 until they reached parity, even if in the interim period federal minimum wages were increased beyond $7.25.

The impact on the economies of American Samoa and the Northern Mariana Islands was devastating.

The impact on the economies of American Samoa and the Northern Mariana Islands was devastating. In American Samoa, by 2009, after only three of the ten scheduled minimum-wage increases, overall employment dropped 30 percent — 58 percent in the critically important tuna-canning industry. Real per capita GDP in American Samoa fell nearly 10 percent from 2006 levels. In the Northern Mariana Islands, by the end of 2009, employment was down by 35 percent, and real per capita GDP off by 23 percent.

Appearing before the U.S. Congress in September 2011, Togiola Tulafona, the governor of American Samoa, testified that the mandatory minimum-wage increases created “the real possibility that American Samoa could be left substantially without a private-sector economic base except for some limited visitor industry and fisheries activities. American Samoa’s economic base would then essentially be based solely on federal-government expenditures in the territory.”

The law had a similar effect in Puerto Rico where the mandatory increases resulted in a minimum wage that was greater than 75 percent of the Puerto Rican median wage. And the results were predictably catastrophic for the economy.

Economic activity declined and Puerto Rican unemployment surged. Between 2007 and 2013, Puerto Rico’s GDP per capita declined by nearly 7 percent, while over the same period it was unchanged nationwide. As a result, many Puerto Ricans left for the U.S. mainland. The migration of young, mobile, working-age Puerto Ricans created an imbalance as the aged and less ambitious remained behind.

Foreign investors were deterred by the high cost of hiring Puerto Rican workers. Labor costs in the Bahamas and Jamaica, two direct competitors for foreign investment, were half of those in Puerto Rico.

Tourists were reluctant to absorb the 30 percent premium for a Puerto Rican hotel room relative to other Caribbean destinations. Tourist arrivals in 2012 were identical to arrivals in 1992, while tourist visits over the same period doubled in the Dominican Republic and tripled in Cuba. Today, tourism contributes only 6 percent to Puerto Rico’s GDP compared with 27 percent in Jamaica and 16 percent in the Dominican Republic.

Some may dismiss the experiences of American Samoa, the Northern Mariana Islands, and Puerto Rico as irrelevant for predicting the impact of high minimum wages in California and New York. Yet consider that the new $15 minimum wage is not only the highest in the nation, but the highest in the world — and by a lot.

The country with the next-highest minimum wage is Luxembourg, where it is under $12. Even France, the bastion of socialism, workers’ rights, and high labor costs, has a minimum wage of only $10.90, equal to 61 percent of the median French wage. Bernie Sanders’s Scandinavian utopias — Norway, Sweden, and Denmark — do not even have minimum-wage laws.

The only instances in world history when minimum wages have been set at the economic levels that will prevail in California and New York have been Puerto Rico, the Northern Mariana Islands, and American Samoa. In these cases, “good politics” turned out to be disastrous policy. Should voters side with progressives and bet against history repeating itself?

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