Congress is considering potential responses to Puerto Rico’s depression and fiscal crisis. Fiscal conservatives are considering whether outside oversight by a “control board” would force feckless local legislators to make difficult choices, such as consolidating rural schools and laying off bureaucrats.
However, if Congress gives the board authority only to cut government spending and raise taxes, it will be unable to clear out the failed policies that have choked growth in Puerto Rico.
Puerto Rico has European-style labor laws that make it difficult to hire and fire workers and force employers to pay higher wages and benefits than are merited by productivity. Red tape slows growth, too—the World Bank rates Puerto Rico between Costa Rica and Mongolia in its “Doing Business” rankings, 50 places below the U.S.
Any successful reform effort must focus on cutting past the cronyism that keeps local anti-growth policies in place.
In addition, Congress must give Puerto Rico’s policymakers—whether the Commonwealth legislature or a future control board—liberty from destructive policies Congress itself has imposed on Puerto Rico.
- Give Puerto Rico authority to set its own minimum wage at a level that makes sense for the island’s prices and productivity.
- Grant Puerto Rico the same status as the U.S. Virgin Islands under the maritime Jones Act to relieve Puerto Rican manufacturers from a crippling cost disadvantage.
The federal minimum wage of $7.25 is close to Puerto Rico’s median wage ($9.42) and prevents Puerto Rico from competing effectively in the tourism industry and pushes many small business employees into the shadows, where they work for less than the minimum and lack legal protections.
Puerto Rico was forced to adopt the mainland U.S. minimum wage in the 1970s, a policy mistake that destroyed 1 out of 11 jobs on the island. This policy led to a wave of migration by young and inexperienced Puerto Rican workers who could not find work at a minimum wage that was almost as high as the island’s median wage. Even with a slow phase-in of the high minimum and high inflation, the minimum wage in Puerto Rico still destroyed jobs at a higher rate than any U.S. recession since the Great Depression.
Alida Castillo-Freeman and Richard Freeman wrote the authoritative 1992 study of Puerto Rico’s job loss and found drastic effects relative to what would have happened under a more reasonable minimum wage:
Imposing the 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.
Just as the minimum wage holds back Puerto Rico’s domestic economy and tourism industry, the maritime Jones Act (which requires all shipments between two U.S. locations to take place on U.S.-built, U.S.-flagged, and 75-percent U.S.-crewed vessels) makes electricity and shipping expensive, preventing outside investment in most types of manufacturing.
Puerto Rico will not recover from its fiscal crisis until it recovers from its economic depression. And it will not recover from its economic depression unless it expands economic freedom. For Congress to take responsibility for the island’s finances without taking serious steps to free up economic growth is a recipe for future bailouts.