Economy

What Really Caused The Puerto Rican Crisis

CREDIT: Ricardo Arduengo, AP

After Puerto Rico Governor Alejandro García Padilla (D) announced last week that the territory can no longer pay the $72 billion it owes, many started reaching for explanations for what got the island there in the first place. And given that a country with much lower per capita income than the mainland United States has followed the federal minimum wage since 1987, a large number of pundits pointed to an excessively high minimum wage as a big culprit.

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CREDIT: Dylan Petrohilos/ThinkProgress

Much of this hubbub stems from a report released last week from Anne O. Kreuger, Ranjit Teja, and Andrew Wolfe for the Padilla administration, which cited, among many other factors, the minimum wage as a reason the country’s economy has lost competitiveness. “Employers are disinclined to hire workers because…the US federal minimum wage is very high relative to the local average,” they write. It amounts to 77 percent of per capita income there, compared to 28 percent in the mainland U.S. It was also mentioned in a report from the Federal Reserve Bank of New York in 2014.

But according to an economist who studied the impact of increasing the territory’s minimum wage to the mainland U.S. minimum, while it likely isn’t helping, it can’t be blamed as a core cause of the current crisis.

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CREDIT: Dylan Petrohilos/ThinkProgress

“The timing of their problems does not have to do with the minimum wage,” Richard Freeman, the Herbert Ascherman Chair in Economics at Harvard University, told ThinkProgress. “I don’t believe it’s done much positive but it certainly didn’t cause any of the current problems.” For example, its public debt has risen every year since 2000 and jumped from about 90 percent of GNP in 2010 to more than 100 percent in 2015. Yet the minimum wage hasn’t been increased since 2009.

Freeman and Alida J. Castillo-Freeman looked at the impact of Puerto Rico adopting the U.S. federal minimum wage in a study from 1992. “I thought that was going to be the great cause of massive job loss,” he said. Instead, they found that it reduced total employment on the island by 8 to 10 percent, mainly in low-wage jobs. That wasn’t as much as he had expected, and the losses were also concentrated in some industries that were already on the decline. “It’s dubious it would cause the problems today,” he said. An earlier paper from a different economist had found that the claim that the minimum wage increase had a big negative effect on employment “is surprisingly fragile.”

The biggest issue may be that Puerto Rico never really bounced back from the recession. “The island is one of the few places…that just has never recovered,” Freeman said. Its unemployment rate still stands above 12 percent. Its labor force fell significantly in the aftermath of the recession, while it has rebounded and continued to climb on the mainland. The job losses caused by the minimum wage increase, Freeman pointed out, “are nothing comparable to the job losses that they’ve had in this recession.”

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CREDIT: Dylan Petrohilos/ThinkProgress

The recession hit the country after it was already economically vulnerable. “The situation with Puerto Rico was the perfect storm,” said Maria Enchautegui, a senior fellow at the Urban Institute. “So many things happening at the same time.” One big factor that she pointed to was the termination of section 936 in the tax code, which allowed businesses operating on the island to go tax-free. It not only enticed many to relocate there and open up jobs, but it then became a core part of how the Puerto Rican economy functioned.

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CREDIT: Dylan Petrohilos/ThinkProgress

When it was finally phased out in 2006, “That had a domino effect that spread through the whole economy,” she said. Manufacturing jobs in particular have disappeared, falling nearly 34 percent since 2006.

The tax treatment gave the island “the pretense of a healthy economy,” Freeman said. “And then the crash came in 2008, but they probably never were healthy.”

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CREDIT: Dylan Petrohilos/ThinkProgress

The island has also been hemorrhaging population. While it grew steadily for nearly two centuries, it began to decline for the first time in 2006, falling 2.2 percent between 2000 and 2012. Today, more people of Puerto Rican descent live on the mainland than on the island itself.

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CREDIT: Dylan Petrohilos/ThinkProgress

The report from Kreuger, Teja, and Wolfe points to other factors as well: the doubling of oil prices between 2005 and 2012 that hurt an island that imports oil for nearly all of its power generation, transportation costs that are at least twice as high as for neighboring islands, high electricity costs, a welfare system that provides more generous benefits for some than minimum wage income, and other local laws and regulations.

Given that many feel the minimum wage played a large part, however, there has been an emphasis on the need for Puerto Rico to reduce it as part of its reforms. Enchautegui thinks the best course would be to allow the territory to dictate its own wages, as it did before. “From there maybe we can decide whether it should be the same [as mainland U.S.] or not,” she said.

Freeman doesn’t think lowering the wage will do much good. “If I were looking for solutions for getting the economy out of its trouble, I wouldn’t be pushing the minimum wage,” he said. “This is an economy that does need lots of jobs created. But if you lower the minimum wage…there’s a small number of jobs you might create, but that’s not going to deal with this depression that they have.”