New York Federal Reserve Bank report concluded the minimum wage contributed to a lack of jobs for lower-skilled workers in Puerto Rico

See Puerto Rico’s Pain Is Tied to U.S. Wages: Economists say island’s use of the mainland’s minimum pay helps crimp its economy by Nick Timiraos and Ana Campoy of the WSJ. Excerpts:

"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.

Roughly one-third of workers earned the minimum wage on the island in 2010, compared with just 16% for the U.S. mainland, according to a 2012 report by the New York Federal Reserve Bank. That report concluded the minimum wage contributed to a lack of jobs for lower-skilled workers, in part because businesses can relocate to lower-wage nearby countries.

These problems are laid bare in a report Puerto Rico’s government released Monday by Anne Krueger, a former top official at the International Monetary Fund. Puerto Rico’s economy, which has been in recession for nine years, has struggled to create jobs and has compensated by offering generous tax breaks to companies and income support to residents."

"The island’s lack of competitiveness can be seen in the scant growth of its low-skill and low-wage industries, such as tourism. The number of hotel beds on the island has changed little from the 1970s, and tourist arrivals are down over the past decade, according to the Krueger report.

“They have all the traits of a welfare state gone wrong,” said Arturo Porzecanski, professor of international economics at American University in Washington, D.C.

The minimum wage is also high relative to average worker productivity. A 2012 World Bank study judged that the ratio of Puerto Rico’s minimum wage to the value added per worker was nearly twice that for the Bahamas and Jamaica, and three times that of the U.S. mainland.

The Krueger report recommends that Congress allow Puerto Rico to set its wage below the federal minimum, which is now allowed for a handful of employers. The New York Fed, in its report, separately advised creating a separate “sub-minimum” wage for workers under the age of 25 that gradually increases to match the federal minimum after several years."

"In Puerto Rico, broad use of government benefit programs have further damped workforce participation. Transfer payments, such as food stamps and disability benefits, account for roughly 40% of personal income in Puerto Rico, double the share on the U.S. mainland, according to the New York Fed.

Those payments tend to be generous relative to local incomes because payments are indexed to conditions on the mainland. Moreover, because they decline as wages rise, they can create a disincentive to work. The Krueger report recommends providing lower benefit payments to a larger number of people, which would maintain the social safety net while encouraging more labor-force participation.

At the same time, economists say other local labor laws, including more generous overtime pay and vacation rules, plus laws that make it harder to fire workers, have made employers reluctant to hire."