Puerto Ricans are having a rough time, but it has been a month since Hurricane Maria hit and, in between the tears, maybe we can think unsentimentally about the future.
As noted in Can Puerto Rico be a laboratory for the future of the rest of the U.S.? (2015), Puerto Rico already had the lowest labor force participation rate in the U.S.:
The federal minimum wage of $7.25 per hour is 77% of the median wage (comparable to a $13 per hour minimum wage in May 2014 (BLS data showing median hourly wage of $17.09 nationwide)). In other words, it is illegal for companies to hire a large percentage of Puerto Ricans at what would be a market-clearing wage for their particular skills. The result is that labor force participation in Puerto Rico is 43 percent [compare to a national average of about 63 percent at the time] …
In the short run maybe there is some extra demand for labor created by government and non-profit organizations pouring into the territory. But in the long run, now that employers are reminded of the hurricane risk, should we expect less capital investment in the island and therefore less demand for labor at the Federal minimum wage or higher?
Presumably a reduction in the Federal minimum wage is politically impossible. What politician is going to tell voters “Due to your mediocre skills and education, a lot of you aren’t worth too much to employers“?
So should part of the hurricane clean-up and rebuilding effort include planning neighborhoods and cities for a future in which few people work? (The standard American development pattern is horrible for this. Suburbia was designed for people who are going to commute into and gather quasi-socially at a workplace. They’ll be mostly alone at home when they’re home, but they’ll be home and not asleep for only a few hours per day.)
PR’s history has always been of overpopulation and subsistence agriculture or factory work. Anything other than that should be seen as a temporary anomaly.
it is illegal for companies to hire a large percentage of Puerto Ricans at what would be a market-clearing wage for their particular skills.
Where’s the evidence for this? What percentage is the percentage that you’re referring to? Does this concern also apply to Houston – America’s fourth largest city?
Vince: a great practical question for high school statistics and economics students. The raw data from PR suggests that minimum wage at 77 percent of median cuts about 1/3 of the workers out of the workforce compared to the mainland economy where minimum wage is closer to 50 percent of median (depends on state). [of course we would expel any heretics who suggested that Puerto Ricans are lazier than mainland Americans and that would account for part of their lower labor force participation; no thoughtcrime allowed in our classroom!]
I think it would be simpler if you started with a market economy that had no minimum
wage and looked at the effects of a min wage right at the median (expect roughly 50 percent of workers to become jobless). Then look at distribution of pay (can’t be a perfect Gaussian due to hard minimum wage of $0 and potentially unlimited wages on the right tail). Then see how many people are below 77 perfect of the median.
@philg: I think that “one likely factor is that the Federal minimum wage is too high for the Puerto Rican economy” is the most you can say with the evidence you’ve presented so far. You haven’t presented any evidence about the actual shape of the labor demand curve so we don’t know how much higher labor demand would be at say $3.00 per hour vs. $7.25 per hour. We don’t even know know that the market is demand limited rather than supply limited from what you’ve presented. Conversely, we know that there are many other factors which differ between the small isolated PR economy and the much large economy to which it is oddly tied. Demographics alone accounts for about 10% of the labor force participation rate difference. There are the odd and somewhat unique shipping restrictions. PR residents can also travel to and work freely in the much larger US economy and send remittances home and collect from portions of the US safety net designed for a much larger economy. Plus, unlike most of the US the population is shrinking.
Neal: I hope that nobody would say “minimum wage is too high.” The statement doesn’t make sense in a welfare state such as the U.S. You wouldn’t want someone suggesting that it was more virtuous for a U.S. resident to work, even at an unfairly low wage, than to let taxpayers buy him a house, food, healthcare, and phone service, would you?
philg: “Too high” was shorthand for something like “The Federal minimum wage may produce a different and more adverse set of trade offs in Puerto Rico than in rest of the U.S.”
Neal: more value judgments! How can working or not working be considered “adverse” trade offs unless you are willing to say that one is better than the other? And if it is unfair for someone who lives in California to work at the federal minimum wage (plainly it is because citizens of California voted to make this illegal via a higher state minimum wage), how could it be fair for a Puerto Rican to work at a lower-than-federal-minimum wage?
philg: Indeed, selecting any government policy (including no minimum wage) involves making “value” judgements and balancing competing economic interests. My point was that while it does seem feasible (or even likely) that the the Federal minimum wage has a different impact in PR than in the rest of the US (due to different economic conditions), the evidence presented in the post does not support the post’s implication that the minimum wage is solely responsible for the lower labor force participation rate in PR.
a great practical question for high school statistics and economics students. The raw data from PR suggests that minimum wage at 77 percent of median cuts about 1/3 of the workers out of the workforce compared to the mainland economy where minimum wage is closer to 50 percent of median (depends on state).
Perhaps it would be a nice little project for students. Is there an actual correlation between labor force participation rates and the ratio of the minimum wage to minimum wage? The kids should be encouraged to look up the definition of the labor participation rate before getting started. Then they talk to individuals who are not participating. For example, they could ask your mother why she spends so much time on cruise ships instead of participating in the labor force.
Also, I don’t how you would prevent “thoughcrime” in your classroom. You must be able to read minds now. But if you’re going to ban certain thoughts, I hope that you make clear which thoughts are not pemitted before people sign up for the class!