California Could Learn from Puerto Rico Raising Minimum Wage

Puerto Rico statues (Ron Kroetz / Flickr / CC / Cropped)
Ron Kroetz / Flickr / CC / Cropped

Twenty states this week began implementing minimum wage increases that are supposed to help 4.3 million workers. However, the damage from a prior minimum wage hike includes the bankrupting of Puerto Rico.

The Fair Minimum Wage Act of 2007 required all 50 states to raise the minimum wage from $5.15 an hour in 2006, to $7.25 by 2009. Most Americans had no clue that the legislation also applied to the U.S. territories including Puerto Rico, American Samoa, and the Northern Mariana Islands.

When the minimum wage is increased, private sector businesses are given the sole responsible to pay for the increases. Advocates argued that companies will simply raise prices in order to continue operating with a profit. Although some workers might see layoffs or less hours, it is assumed that “dislocated workers” will move to similar competitors that now have the same labor costs.

Minimum wage pay is typically associated with entry-level workers who have limited skills and cannot easily transition to new employment. As a result, the unemployment rate for those individuals can rise quickly. This basically describes what happened to people living in U.S. territories outside the continental United States.

According to National Review, the impact on American Samoa and the Northern Mariana Islands was devastating. After only three of the ten scheduled minimum-wage increases after 2006, American Samoa’s overall employment dropped 30 percent — a 58 percent crash in for the critically important tuna-canning industry. Real GDP fell by 10 percent.

But that was much better than their Northern Mariana Islands neighbors, where employment had plunged by 35 percent, and real per capita GDP off by 23 percent.

Despite the governor of American Samoa testifying before the U.S. Congress that due to the new minimum wage policy created by Congress, there is a “real possibility that American Samoa could be left substantially without a private-sector economic base except for some limited visitor industry and fisheries activities.” He added, “American Samoa’s economic base would then essentially be based solely on federal-government expenditures in the territory.”

For Puerto Rico, with a population of 3.8 million in 2006, the minimum wage increase caused the unemployment rate to rise from 9 percent to 17 percent, and its GDP per capita declined by almost 7 percent, over the next 5 years. But the impact is understated, because 350,000 mostly young and able-bodied people left for the U.S. mainland in search of employment.

With workers in Jamaica and the Bahamas costing less than half, foreign investment in Puerto Rico shriveled. Despite Puerto Rico entering into a forbearance agreement regarding approximately $70 billion in municipal debt on June 28, 2015, “vulture capitalist” hedge funds caused the territory to default on August 3, 2015.

California and New York are now engaged in a grand experiment to see what the impact will be from a record high $15 minimum wage. To put that number in perspective, socialist France’s minimum wage is the equivalent of only $10.90 an hour.

The percentage minimum wage increase being implemented by California and New York is about the same percentage increase that was tried in Puerto Rico under the “Fair Minimum Wage Act of 2007.”  It did not work very well in Puerto Rico; it will be interesting to see how the $15 minimum wage impacts California and New York


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