Monday, July 6, 2015

The Federal Minimum Wage Is Killing Puerto Rico's Economy; How Much of a Jobs' Killer is the Minimum Wage in Your State?

By Preston Cooper

Governor Alejandro GarcĂ­a Padilla of Puerto Rico announced last week that the U.S. territory would not be able to pay off the $72 billion it owes in debt, stoking fears that the island could become America’s Greece. While there are a myriad of reasons for Puerto Rico’s situation, part of the blame lies with the U.S. government, which subjects Puerto Rico to the federal minimum wage of $7.25 an hour despite the fundamentally different nature of the island’s economy.

High minimum wages reduce employment by increasing the cost of hiring for businesses. One way to estimate how well an economy can absorb a minimum wage is by looking at the ratio of the minimum wage to the median wage—the exact middle of the wage distribution in the economy. As this ratio rises, more people are in danger of unemployment because their skills are not valuable enough to employers to justify paying them the minimum wage.

The minimum-median ratio in most states is between 35 and 50 percent, as the following chart shows. In Puerto Rico, however, the ratio is 77 percent. That is 24 percentage points higher than Florida, the U.S. state with the highest ratio. Federal labor policy is making vast numbers of Puerto Ricans unemployable.

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