A report released by the Puerto Rican government this week fingers the territory’s minimum wage as a prime factor in its emerging debt crisis. Though its economy is significantly less developed than even the poorest American states, it is still subject to the federal $7.25 minimum wage, 77 percent of its median wage. This high wage floor acts as a significant employment barrier, contributing to the island’s pathetic 43 percent labor force participation rate and its economic stagnation in general.
Puerto Rico’s minimum wage — and the one being debated across the rest of the United States — is a historic anomaly. When first passed in the 1930s, it didn’t apply to low-wage sectors of the economy like agriculture, retail sales, hotels and restaurants. Rather, it was the shift to the south of northern manufacturing jobs in search of cheaper labor that drove the idea of a federal wage floor. Predictably, even with industry exemptions from Roosevelt’s New Deal wage law, his Secretary of Labor Frances Perkins reported to the president that the new law was causing people to lose jobs.
As part of Lyndon Johnson’s Great Society programs of the 1960s, the law was stood on its head and expanded to cover previously lower-skilled occupations, morphing it into an anti-poverty weapon. However, the minimum wage workforce of today is not aligned with a poverty demographic — the average family income of those benefiting from the last federal wage hike was more than $47,000 a year. Meanwhile, the jobs impact that Perkins identified has only worsened.
The originally exempted industries that had historically employed unskilled labor were places where people learned basic business cultures and expectations before moving into jobs they were previously unqualified to fill. Millions of these starter jobs are now gone in Puerto Rico and the mainland. As a partial result, the unemployment rate today for unskilled youth is 18.4 percent, more than double the rate of previous generations.
Reversing laws like the minimum wage have no political constituency. On the other hand, there can be a recognition that over time the rate adjusted for inflation can get more properly aligned with market demands for the low-skilled and youth job applicants. And in the wisdom of Congress (I don’t think I’ve ever written that sentence before), the federal minimum wage has been settling back closer to a labor market clearing rate.
However, a new chapter is being written in this story. Before the current round of state-based hikes, we typically witnessed jumps in the state or federal wage rate of about 50-75 cents a year. Today, wage proponents have been beating the war drums for a $15 an hour minimum — an admittedly arbitrary and definitely capricious number that would more than double the current federal rate of $7.25. There are few businesses with thin margins of 2-5 percent and labor costs of 30-35 percent that could pass on that level of overhead to their customers.
The results of these dramatic state wage hikes are all around us. Expensive technology that obviates the need for employees in favor of user-friendly self-service-enabling devices is being encouraged by these demands. The political class on the far left is guilty of cutting off the bottom rungs of the employment ladder where so many disadvantaged youth who want to work and gain experience have traditionally found a foothold into the work world.
For those who say business would embrace the technology without the high-wage incentive, I challenge their crystal ball conceit. Business decisions are generally based on economic decisions. But like Newtonian laws of nature, they don’t move forward unless a greater force is introduced to disturb the current state of rest. Why spend money on equipment until you have to, or until it makes more sense to do so?
The hundreds of documented businesses that have substituted technology for labor, cut shifts or jobs, reduced expansion, or gone out of business altogether in response to recent wage hikes bear witness to the classic admonition: “Be careful what you wish for.” The labor unions with their “Fight for $15” are providing the force to change the status quo. But it is a force whose reaction they can’t control. These wage warriors wreaking damage to the entry-level job market may not get away with the crime without leaving any fingerprints — just look at the giant one left in Puerto Rico.
• Rick Berman is president of Berman and Co., a Washington public affairs firm.