Economic theory tells us that minimum wage increases eliminate jobs, and this theory is supported by empirical findings, writes Marc Joffe.
Minimum wage hike could lead to more business closures in Puerto Rico, says Marc Joffe (The Associated Press)
On July 31, the Court of Appeals rejected an effort by business interests to reverse the recent increase in Puerto Rico’s minimum wage to $10.50 per hour. Now that the new, higher minimum is firmly in place, it remains to be seen how it will impact the job market and whether the Minimum Wage Review Commission will seek further increases. But while the details of Puerto Rico’s minimum wage experience are still to be determined, the economic critique of minimum wage laws is well established.
Economic theory tells us that minimum wage increases eliminate jobs, and this theory is supported by empirical findings. A meta-analysis of several dozen studies published by the National Bureau of Economic Research reported that 79.2 percent of studies produced negative estimates of the minimum wage’s impact on employment.
The Minimum Wage Review Commission may have felt comfortable imposing the latest minimum wage hike because Puerto Rico unemployment is relatively low by recent historical standards. But this is not uniformly the case throughout the Commonwealth. While June 2024 unemployment rate in San Juan area municipos were mostly around 4 percent or less, several municipios in the south had rates above 10 percent. Because the minimum wage is set at a single rate throughout the Commonwealth, it cannot be fine-tuned to the needs of different communities.
Economic theory tells us that minimum wage increases eliminate jobs, and this theory is supported by empirical findings, writes Marc Joffe (The Associated Press).
Further, employers can adjust to higher minimum wages in other ways besides eliminating jobs or not creating them. They can increase prices to customers. They can also make up the extra cost of higher wages by offering less on-the-job training and health-care coverage, providing inferior working conditions, and replacing full-time jobs with part-time jobs. These effects are harder to measure.
Perhaps legislators were aware of some of these potential impacts, because the Puerto Rico Minimum Wage Act (2021-47) only applies to private employers: the commonwealth and municipios can continue to pay employees the federal minimum wage of $7.25. This makes sense because many municipios are financially distressed and the Commonwealth government is still recovering from its 2017 bankruptcy.
But governments are not the only employers facing financial distress: many private companies are also struggling. Over Puerto Rico 200 companies file for bankruptcy each year and more than 4,000 businesses closed in early 2022 after the first minimum wage hike. Just as some governments may be unable to afford an enhanced minimum wage, many businesses may be faced with the options of limiting compensation or shutting down. And for the employee who loses his or her job due to a business closure, the higher minimum wage offers little comfort.
The Minimum Wage Act’s Statement of Motives included a survey of US state minimum wage laws concluding that most states require employers to pay more than the federal minimum. But this is a flawed comparison because, unfortunately, Puerto Rico is far poorer than states on the US mainland. Indeed, Puerto Rico’s per capita gross domestic product is well below that of the poorest state, Mississippi. And that state has retained the $7.25 federal minimum wage.
Understandably, legislators and commission members feel good about giving low-paid workers a raise and feel even better when most of those affected do not immediately lose their jobs. While the negative impacts of high and rising minimum wages may be harder to detect, they are nonetheless damaging to a Puerto Rican economy struggling to recover from years of depopulation and fiscal mismanagement.
This article was originally published in Spanish in El Nuevo Día.
