Memo To The Fight For $15: Puerto Rico Happens With A Too High Minimum Wage

The real minimum wage is $0 per hour because when employers cannot justify paying someone who is worth $2/hour while training them the required $7/hour or whatever the minimum wage, they will not employ that person at all. Thus, that unemployed person is not earning anything, which is $0/hour. When government interferes with free markets to create an artificially high minimum wage, less people are employed, fewer people are trained at entry level positions as employers rationally find an artificial minimum wage to be too high. With artificially high minimum wage laws, employers instead invest in more automation, robotics, and hire fewer employees. In addition, where minimum wage laws exist, employers must raise the prices of their goods and services to cover those minimum wages. Should the USA Federal Government impose a $15/hour federal minimum wage, similar negative results will occur as has happened in Puerto Rico with higher unemployment, higher crime.

Tim Worstall – Contributor
Memo To The Fight For $15: Puerto Rico Happens With A Too High Minimum Wage

There’s a number of stories around about the economic mess that Puerto Rico finds itself in. In many ways it’s akin to Greece: a poor economy locked into a monetary union, but without a fiscal union, with a much richer neighbour or two. This means that it has no independent monetary policy (nor, obviously, currency) and also doesn’t get the sort of fiscal transfers that would be necessary to compensate for this. It has a couple of other problems: the Jones Act most certainly doesn’t help. It means that transport costs to and from the island are twice what they are to and from other Caribbean islands. Quite why the American shipping trade should be worth such a stranglehold isn’t obvious: perhaps someone would like to ask the shipping unions?

However, in the reports about the island’s (it’s actually more than one island, just, so perhaps islands’) problems it’s made very clear that the Federal minimum wage is a serious one. And this is interesting: for it bears out what I’ve been saying all along about this Fight for $15 minimum wage on the mainland. Bad things happen to an economy when the minimum wage is too high for the output and productivity of the labour force. And they’ve happened to Puerto Rico. And they’ve happened with the Federal minimum wage having a similar relationship to the median wage there as the $15 an hour has to the current US national median wage.

“Puerto Rico’s long-simmering debt crisis owes much to an economy that has been shedding jobs for years. And blame for that, economists say, stems in part from how the island operates under the same wage rules as the more prosperous 50 states.

The commonwealth is subject to the federal minimum wage of $7.25 an hour, even though local income and productivity are significantly lower than in Mississippi, the poorest American state. The minimum wage in Puerto Rico is equal to 77% of per capita income, compared with 28% in the U.S. overall.

But, but, aren’t we told that a high minimum wage boosts the size of the economy? Puts more into the hands of the poor, who spend all their money, thus increasing aggregate demand? Surely both Nick Hanauer and Robert Reich cannot be in error on this, can they?

From a more formal report by the Federal Reserve Bank of New York:

“Recommendation 1: Reduce Barriers to Job Creation and Labor Force Participation Creating jobs and encouraging active participation in the labor market should be a top priority for policymakers. Opportunities for the young and less educated in Puerto Rico are particularly limited, and these workers are in danger of becoming disconnected from the labor market. We recommend focusing on policies that spur the creation of job opportunities and improve incentives to work. One possible first step would be to consider a young-worker subminimum wage that targets workers under the age of 25. The minimum could be stepped up at regular intervals as the worker continues employment and builds skills with a given firm, so that the worker’s wage would match the federal minimum over a number of years. A wider reexamination of the application of the federal minimum wage and the design of entitlement programs may also be warranted in order to improve incentives to seek employment and increase the number of jobs available for workers on the Island.

They obviously think that the minimum wage is too high for the productivity on the island (s). Or from a report this week from the government of the island:

But even more significant forces on the supply side have been gnawing at growth:

“• Employment and labor costs. The single most telling statistic in Puerto Rico is that only 40% of the adult population – versus 63% on the US mainland – is employed or looking for work; the rest are economically idle or working in the grey economy. In an economy with an abundance of unskilled labor, the reasons boil down to two.

o Employers are disinclined to hire workers because (a) the US federal minimum wage is very high relative to the local average (full-time employment at the minimum wage is equivalent to 77% of per capita income, versus 28% on the mainland) and a more binding constraint on employment (28% of hourly workers in Puerto Rico earn $8.50 or less versus only 3% on the mainland); and (b) local regulations pertaining to overtime, paid vacation, and dismissal are costly and more onerous than on the US mainland.

So, they definitely think that high labour costs ( in benefits) and the high minimum wage are a problem.

Now, of course, we’ve got to try and decide what is “high” as a minimum wage. And yes, this is more art than science but the best we’ve got is that something over 50% of median wage is “high”. Both Arindrajit Dube and Laurence Mishel at the EPI suggest that the mainland minimum wage should be 50% of median wage. I have numerous times pointed to research showing that significant unemployment problems become apparent when that minimum is over the 45-50% level of median wage. These problems become apparent simply because not all that many people get paid less than 45% of median, so whatever effects there are tend to get drowned in the other noise of the chaos of an economy of 320 million people.

So, what is the Federal minimum wage as a percentage of the Puerto Rican median wage. From 2014, we get the Fed minimum at $7.25, the PR median at $9.42. So the minimum wage is at 77% of the median wage. Well above the rate at which we think we’d have problems. And there are very definitely problems and economists who have studied these problems are very definitely pointing to that “too high” minimum wage as at least one of the major causes of those problems.

Hmm. So, the US median hourly wage (for all wages, part and full time, as with our Puerto Rico calculation) is a little over $17 an hour. And the campaign is to get the minimum wage to $15. Umm, 88% of the median wage then. So, we would rather expect, if the Fight for $15 is successful, to see the sorts of problems that are ascribed to Puerto Rico having a minimum wage “too high” for the local median, would we not?

But let’s turn this around the other way. We’re told that a higher minimum wage will reduce inequality. Puerto Rico has that higher minimum wage, relative to average wages, yet PR’s inequality, measured by the gini, is at .57 higher than any US State and significantly higher than the US as a whole. We’re told that a higher minimum wage will reduce poverty: which will produce hollow laughter in Puerto Rico. We’re told that a higher minimum wage will produce more jobs: not the experience of Puerto Rico, is it?

In fact, in a place that does have a higher minimum wage, under pretty much the same laws as the rest of the US, a high minimum wage doesn’t seem to be delivering any, not one single one, of the things that it is claimed a high minimum wage will achieve for the United States as a whole.

Wonder why that could be, eh? Possibly, just maybe, we’re being told tales instead of actual economics here? And it does now become incumbent on those boosters of a higher minimum wage, the Hanauers, Reichs, the Fight for $15 crowd, to explain to us all why the place that does have a high minimum wage ain’t the paradise they’re promising the rest of us. And of course, until they do manage to cobble together an explanation we don’t fall about laughing at, it would be a good idea for us not to raise the minimum wage to the sorts of levels that have screwed over Puerto Rico’s economy, wouldn’t it?

My latest book is “The No Breakfast Fallacy, why the Club of Rome was wrong about us running out of resources.” Amazon and $6.99 and relevant prices in other currencies.

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