Puerto Rico moves toward 24% increase in minimum wage

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Puerto Rico’s government may soon adopt a 24% increase in the island’s minimum wage, with local observers saying it would raise costs for businesses and actually cut employment participation.

On Tuesday the Puerto Rico Senate approved a bill raising the minimum wage to $9 per hour from the federal $7.25 per hour. The Puerto Rico House had already approved a bill increasing the minimum to $8.50 per hour. Leaders of the two bodies are now discussing the bill to arrive at an agreed upon bill for both bodies to vote on.

Advantage Business Consulting President Vicente Feliciano said a proposed increase in Puerto Rico’s minimum wage would lead to lowered employment.

The $7.25 per hour level has been the minimum wage since 2009. Adjusted for inflation that would be $9.10 per hour in current dollars. The proposed bill would also set up a Minimum Wage Board to increase the wage in a staggered fashion every two years.

Puerto Rico’s labor force participation rate for adults is 40.2%, one of the lowest rates in the world. The U.S. rate is 61%. The Puerto Rico Oversight Board has made increasing this participation rate a primary goal of its central government fiscal plan. It has not included proposing increasing the minimum wage, instead trying to encourage participation in the labor force by other means.

“It will hurt precisely those employees earning minimum wage because employers will probably cut hours or worse still lay off employees,” Heidi Calero, president of H. Calero Consulting Group said. “It is usually the young age group with the highest unemployment [who are] the ones who will feel the brunt of this abrupt change.

The board is promoting the expansion of the local Earned Income Tax Credit program to increase labor force participation. The local government is using American Rescue Plan of 2021 money to do this. On Friday Puerto Rico Treasury Secretary Francisco Parés Alicea sent out a statement saluting the chairmen of the Puerto Rico House and Senate Finance Committees for taking steps needed to expand the tax credit program.

On May 19 Puerto Rico Gov. Pedro Pierluisi announced the creation of advisory group to evaluate the minimum wage and its possible raise. The group was given 90 days to provide a recommendation. At least as of Tuesday morning it had not done so.

On Tuesday the Noticel news website reported that Pierluisi said he would probably sign an increase to $8.50 per hour if he does not hear from his group before receiving the wage bill.

Of the employed labor force in Puerto Rico about 10% earn $8 per hour or less and about 33% earn $9 per hour or less, said Vicente Feliciano, president of Advantage Business Consulting. Both Calero and Feliciano are economists in Puerto Rico.

Feliciano said the proposed raise to $9 per hour was a “very bad idea” and that it would would entail a loss of employment much higher than 1%.

“Very bad idea to raise the minimum arbitrarily within 120 days,” Calero said. “This is not enough time for business to make adjustments. Last time, transition from $5.25 to $7.25 took almost three years!”

Calero said to expect more price increases as retailers, restaurant owners, gas stations, bakeries will push higher prices to consumers.

“Sometimes I wonder the lack of knowledge of how an economy works,” Calero said. “It does not consist of isolated slices of activity but works as per the famous physics law: ‘every action has a reaction’ and it may not be what policymakers and consumers expect.”

Puerto Rico’s economy has contracted all but one year since 2006 and the board and others are seeking ways to turn the economy around. Bondholders and bond market participants have looked at the economy to evaluate the ability of Puerto Rico and its authorities to pay its bonds.

Seventeen of the 50 U.S. states currently use the federal $7.25 per hour minimum wage while the rest set higher rates. Washington State hasis the state with the highest minimum wage at $13.69 per hour. Washington, D.C. has a $15 per hour minimum.

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