Want an idea of where the Left would take the American economy? Look to Puerto Rico. Reports by the Federal Reserve Bank of New York and the Working Group for the Fiscal and Economic Recovery of Puerto Rico conclude that the island’s labor force has atrophied because of a federally set minimum wage that is wholly inappropriate to local conditions and a safety net of government programs that makes employment a losing proposition.
At $7.25 per hour, the federal minimum wage nearly equals Puerto Rico’s median wage of $9.61 (versus the mainland median of $17.40). As the Working Group emphasizes, a Puerto Rican working for the minimum—or even the median—wage takes home less monthly pay than a Puerto Rican household of three might receive in welfare benefits. Only 40 percent of adults in Puerto Rico are officially employed or looking for work, though many hold off-the-books jobs. The result is a stalled economy and inadequate tax revenue for an insolvent government, whose woes only make economic conditions worse.
Florida Republican senator Marco Rubio, a member of the bipartisan congressional task force on Puerto Rico, has proposed a unique approach to these challenges. He is introducing the Economic Mobility for Productive Livelihoods and Expanding Opportunity (“EMPLEO”) Act, which would effectively reduce the island’s minimum hourly wage to $5 and use a federal wage subsidy to close half the gap between the wage paid by an employer and a target wage of $10 per hour. Thus, a minimum-wage earner at the new $5 minimum would receive an additional $2.50 from the government—inserted into every paycheck like a reverse payroll tax—for a total hourly wage of $7.50. Someone paid $8 by his employer would receive a $1 subsidy and take home $9.
The proposal is a creative, compassionate, and market-based tool for addressing Puerto Rico’s challenges. Reducing the minimum wage should create many more entry-level job openings and make hiring more attractive to employers. Pairing the reduction with a subsidy ensures that existing workers are “held harmless” and see no net pay cuts, while drawing prospective workers toward the labor market with a more attractive wage. The subsidy also creates powerful momentum for on-the-books employment, because the subsidy will apply only to documented, tax-paying employment relationships. And it acts as an efficient and targeted fiscal stimulus, injecting money into the economy wherever employers believe low-wage hiring makes most sense.
The proposal could mark a starting point for meaningful reform in mainland economic policy. Many good ideas for boosting economic growth exist, particularly in the areas of tax and regulatory reform. But on their own, they will do little to counteract the structural economic shifts that are leaving less-skilled workers behind. A wage subsidy alone won’t solve that problem, but this type of idea—rethinking the shape of the low-wage labor market and government’s role in it—is a step in the right direction.
Ideally, the “poverty, opportunity, and upward mobility” program put forward by House speaker Paul Ryan as part of his “Better Way” agenda would be full of such proposals. Instead, it leans heavily on experiments-to-be-named-later, emphasizing “evidence,” “metrics,” “evaluation,” “data,” and “research.” With the EMPLEO Act, Rubio and his staff have done the important work of bringing forward a concrete proposal. It provides not just a powerful idea but also the right opportunity for deployment and the legislative details. Here’s hoping that it receives the attention and support it deserves.
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