As the brilliant economist Art Laffer notes, subsidizing something increases supply and taxing something reduces supply. What’s true of goods is also true of services — including people’s labor. By taxing labor (through hikes like the minimum wage) we see less employment. Subsidizing labor through policies such as the Earned Income Tax Credit, by contrast, leads to greater employment.
It’s a rule that the U.S. territory of Puerto Rico has learned the hard way. The current minimum wage is more than 77 percent of the median wage, compared to 47 percent on the U.S. mainland. Applying the U.S. federal minimum wage to Puerto Rico stunts its labor market by removing incentives to create jobs that offer many people their first rung on the employment ladder or their ticket out of poverty.
To mitigate this problem, U.S. Sen. Marco Rubio (R-Fla.) has offered the Economic Mobility for Productive Livelihoods and Expanding Opportunity (“EMPLEO”) Act, which would reduce the minimum wage to be closer to the mainland’s ratio and implement a wage subsidy that both holds workers harmless, and in many cases, increases the size of their paychecks.
“With Puerto Rico’s economy suffering from high unemployment and low wages, it’s hard for many Americans on the island to make ends meet,” Rubio said after introducing the bill last week. “My legislation would help these workers and their families by immediately boosting their pay and reducing the cost of hiring so it’s easier to find a job. By expanding the workforce, increasing opportunity and making work pay more, we can help Puerto Rico get back on the path to growth and prosperity.”
“By expanding the workforce, increasing opportunity and making work pay more, we can help Puerto Rico get back on the path to growth and prosperity”
EMPLEO would extend to Puerto Rico Rubio’s nationwide proposal to enact a federal wage enhancement. Under the optional program, employers would essentially redirect the money they would be sending to the government in the form of payroll taxes into their employees’ paychecks. The bill provides for general revenue to close the resulting payroll tax revenue gap in the Social Security Trust Fund. Rubio hopes to enact this proposal so that it is fully offset.
Under EMPLEO, any worker earning less than $10 an hour would receive a raise, up to a maximum of $2.50 an hour. Employers choosing to participate could reduce their share of a worker’s wage to a minimum of $5 an hour, effectively reducing the cost of hiring new workers.
“The proposal is a creative, compassionate, and market-based tool for addressing Puerto Rico’s challenges,” wrote Oren Cass, a scholar with the Manhattan Institute for Policy Research. “Reducing the minimum wage should create many more entry-level job openings and make hiring more attractive to employers.”
The Congressional Task Force on Economic Growth in Puerto Rico was established by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). Rubio was placed on the task force in July, and his office reports they have held at least 55 meetings with various stakeholders. In addition to the task force, PROMESA also established a separate Puerto Rico Financial Oversight and Management Board, which Rubio is not a member of, and whose work to resolve the island’s debt crisis is expected to continue for several years.
Puerto Rico’s debt crisis has been an underreported story this tumultuous election year on the mainland. As a former municipal bond analyst at Moody’s Investors Service, which, along with other financial firms, has sharply downgraded Puerto Rico’s credit ratings, I am pleased to see that Rubio is proposing a plan that would expand opportunities to an island where too many are struggling to make ends meet. Proposals like this could help turn the island’s economy around by boosting the innovation and job creation to strengthen workers and families.
Carrie Sheffield is a senior contributor for Opportunity Lives. You can follow her on Twitter @carriesheffield and on Facebook.