Puerto Rico's Disastrous Economy Shows Consequences Of Increasing Minimum Wage
In the past two weeks, both California and New York have passed legislation that would raise each state’s minimum wage to $15 per hour. Though both states have chosen to incrementally increase the wage rate each year, instead of immediately burdening businesses with the new rate, both states will reach the full $15 an hour by 2022.
When signing the bill into law, California Governor Jerry Brown commented that the new policy may not be economically sound, but it was the right political move. Yet, even with the admission that minimum wage laws, “may not make economic sense,” the bill was still signed. As a result, California is going to have to deal with the economic repercussions of raising the minimum wage to such a dramatic extent.
If either California or New York is curious to know what might happen in their states over the next several years, they need only turn their attention to Puerto Rico, American Samoa, and the Northern Mariana Islands.
After the 2007 Fair Minimum Wage Act was passed, each of the fifty states was required to raise the minimum wage from $5.15 an hour in 2006, to $7.25 by 2009.
Something few Americans ever consider is the fact that U.S. territories are required to comply with American minimum wage laws as well. So for Puerto Rico, American Samoa, and the Northern Mariana Islands, their governments would also have to raise the minimum wage to $7.25 an hour.
When the minimum wage is raised, the private sector is left scrambling to find a way to pay for the higher wages. Though many companies will be forced to raise the price of their consumer goods and services in order to continue operating within their profit margins, some might have to find other ways to meet the new wage requirements.
This means that many businesses will be left with no choice but to lay off employees or dramatically cut employee hours. Since those making only minimum wage are in entry-level positions, if their employers are forced to let them go, they lack the skills needed to quickly rebound in the job market. As a result, unemployment begins to rise.
When minimum wage requirements are made at the city or state level, the losses experienced from high unemployment rates are offset in the local economy, since many who are unable to find work often relocate to an area where the minimum wage isn’t as restrictive.
For those living in the U.S. territories, like Puerto Rico, American Samoa, and the Northern Marinas Islands, relocation is not as easy as it is for residents in the continental states. Since such a drastic move is out of the question for many living in U.S. territories, where the effects of a minimum wage hike can be felt on a much larger scale.
According to National Review, “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.”
As the situation grew desperate, the governor of American Samoa testified before the U.S. Congress in 2011, explaining that the new minimum wage policy 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.”
Puerto Rico met a similar fate after the new minimum wage rate went into effect. The increase in wage rate resulted in a minimum wage that was greater than 75 percent of the Puerto Rican median wage.
National Review reports that, “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.”
Additionally, foreign investors were turned off by hiring Puerto Ricans, since residents of Jamaica and the Bahamas would only cost half as much to employee.
As far as the tourist industry is concerned, National Review also points out that, “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.”
By raising the minimum wage to $15 an hour, California and New York are not just setting an American record for highest minimum wage, they are setting a global record as well. Even France, where socialism thrives, has a minimum wage equivalent to only $10.90 an hour.
In fact, the only time in history that the minimum wage rate was increased at economic levels comparable to that of New York and California was in 2007, when the U.S. territories implemented the Fair Minimum Wage Act. As we have just seen the disastrous economic consequences experienced in American Samoa and Puerto Rico, we can only hope that the rest of the states avoid passing legislation that “may not make economic sense.”
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Brittany Hunter is a Staff Contributor at Generation Opportunity a national, non-partisan youth advocacy organization focusing on Millennials ages 18-29.
Tags: Puerto Rico, Disastrous Economy, Consequences, Increasing Minimum Wage, Generation Opportunity, Brittany Hunter To share or post to your site, click on "Post Link". Please mention / link to the ARRA News Service. and "Like" Facebook Page - Thanks!
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