Labor “reform” keeps wages low and reduces competitiveness

Wages in the market are governed by competitiveness and value creation. For a business to survive in a competitive market, it must pay its employees competitive wages. If the business doesn't need to be competitive to stay in business, then wages don't need to be either; this phenomenon occurs when markets are not free.

Puerto Rico House of Representatives. (Xavier J. Araújo Berríos)

Markets are not competitive when the government imposes overregulation that removes the most valuable attribute of free markets, their self-regulation. Excess regulation is reflected in permits and requirements to do business, pricing for in-land freight, high taxes, employment laws, corporate subsidy laws, market protection laws, and labor laws. This limits the development of the market and causes low appropriability, leading to low returns on economic activity, low competitiveness, and low levels of investment and entrepreneurship.

In a free market, due to high competitiveness, participants are continually fighting to stay relevant. To do this, they have to be innovative. This causes investment, the creation of new and better jobs and better compensation. In a free and competitive market, the employer and the employee establish what the compensation will be and under what conditions; the employer by freely and voluntarily evaluating what is best to keep his business competitive; and the employee by freely and voluntarily determining if his performance is being valued as expected.

In the United States, employment is at will. Employment contracts state that employment is for an indefinite period and can be terminated by either the employer or the employee at any time. Multiple studies have shown that labor markets with employment-at-will rules have higher investment, innovation, competitiveness, and higher wages. Puerto Rico is the only US jurisdiction that does not have at-will employment. This type of public policy discourages entrepreneurship and innovation.

A free labor market creates the conditions for better wages and benefits; otherwise, better opportunities, jobs and salaries for employees will not be listed on the market. Labor law in Puerto Rico prevents employers from making managerial decisions they deem pertinent to be competitive and limits the opportunities for workers to access a greater number of opportunities (and better bidders) based on their talents, merits and professional performance.

It is possible that, due to the temporary injection of federal funds (not of productive economic activity), we will continue to keep the market deceived for a few more years and that the market function of self-regulation and efficiency will not be necessary to be able to evaluate the result of our current labor public policy. But whenever we need innovation and effort to create value and, with it, better jobs, the labor law will impose significant restrictions and limitations on companies and their employees. When that happens, it should be the politicians and not the market whom we hold accountable.

This piece was originally published in Spanish in El Nuevo Dia

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