Minimum wage activists should look to Puerto Rico for clues to the future

By Paul H. Kupiec & Ryan Nabil of AEI. Excerpt:

"The only historical examples close to the California and New York minimum-wage experiments are the unfortunate experiences of Puerto Rico, American Samoa, and the Northern Mariana Islands following the passage of the Fair Minimum Wage Act in 2007. To cut to the chase, large federally mandatory minimum-wage hikes left these economies in shambles.

The Fair Minimum Wage Act mandated an increase in the federal minimum wage from $5.15 in 2006 to $7.25 by 2009. The federal minimum wage applies to all 50 U.S. states and, since 1983, to Puerto Rico. The 2007 law also required local minimum wages in the U.S. territories of American Samoa and the Commonwealth of the Northern Mariana Islands to increase annually until they equaled the federal minimum wage. Minimum wages were required to rise by 50 cents a year beginning in 2007 until they reached parity, even if in the interim period federal minimum wages were increased beyond $7.25.

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.

Appearing before the U.S. Congress in September 2011, Togiola Tulafona, the governor of American Samoa, testified that the mandatory minimum-wage increases 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.”

The law had a similar effect in Puerto Rico where the mandatory increases resulted in a minimum wage that was greater than 75 percent of the Puerto Rican median wage. And the results were predictably catastrophic for the economy.

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.

Foreign investors were deterred by the high cost of hiring Puerto Rican workers. Labor costs in the Bahamas and Jamaica, two direct competitors for foreign investment, were half of those in Puerto Rico.

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 to 27 percent in Jamaica and 16 percent in the Dominican Republic.

Some may dismiss the experiences of American Samoa, the Northern Mariana Islands, and Puerto Rico as irrelevant for predicting the impact of high minimum wages in California and New York. Yet consider that the new $15 minimum wage is not only the highest in the nation, but the highest in the world — and by a lot.

The country with the next-highest minimum wage is Luxembourg where it is under $12. Even France, the bastion of socialism, workers’ rights, and high labor costs, has a minimum wage of only $10.90, equal to 61 percent of the median French wage. Bernie Sanders’s Scandinavian utopias — Norway, Sweden, and Denmark — do not even have minimum-wage laws.

The only instances in world history when minimum wages have been set at the economic levels that will prevail in California and New York have been Puerto Rico, the Northern Mariana Islands, and American Samoa. In these cases, “good politics” turned out to be disastrous policy. Should voters side with progressives and bet against history repeating itself?"