Maximum impact

If the 205 House and Senate sponsors of the Raise the Wage Act—a proposal to raise the federal minimum wage to $12 per hour by 2020—took a tour of Puerto Rico, they might change their minds.

Puerto Rico’s economy is a shambles, and its governor has declared the territory’s $72 billion of debt “not payable.” Although current minimum wage rules aren’t the only reason for Puerto Rico’s desperate straits, they are a major contributor to Puerto Rico’s closed stores and boarded-up windows.

Ratcheting up the minimum wage has become one of the Obama administration’s central economic goals. In his 2013 State of the Union address, the president called for a $9 minimum wage (the current minimum is $7.25 per hour). Since then the target has steadily increased; some now insist that even $12 per hour is too low.

An increased minimum wage would hurt nearly everyone, including many of the struggling people it is supposed to help. If the government forces businesses to pay workers more than the market rate for wages, the businesses will lay workers off, stop hiring new workers, or both. Even liberal economist and pundit Paul Krugman once recognized this simple truth. “So what are the effects of increasing minimum wages,” he asked in 1998? “Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demand, and hence leads to unemployment.”

Why don’t advocates of higher minimum wages see this? One reason seems to be that the workers a higher minimum wage helps—the workers whose paychecks get a nice bump—are easy to see, while the pernicious effects are less visible. We don’t see the employee who might have been hired if the minimum wage weren’t so high, because that employee wasn’t ever hired. But if the mismatch between the market rate for wages and a government-dictated minimum gets big enough, the consequences become obvious.

This is where Puerto Rico comes in. A new report co-authored by Anne O. Krueger, a former International Monetary Fund official, points to the federal minimum wage as a prime reason only 40 percent of Puerto Rico’s adult population is legally employed or seeking work (for the rest of the United States, it’s 63 percent). Because the island nations that Puerto Rico competes with don’t force employers to pay $7.25 per hour, Puerto Rico finds it very difficult to persuade new businesses to come. And many of the businesses that Puerto Rico does still have can’t afford to hire any employees.

Other boneheaded regulations haven’t helped: For example, an old federal law known as the Jones Act mandates that only U.S. ships and crews can deliver goods coming to or from U.S. ports, which drives up Puerto Rico’s transportation costs.

But the $7.25 minimum wage requirement is a major factor. The Krueger Report urges Puerto Rico’s lawmakers to ask for an immediate exemption from the current minimum wage requirements. Perhaps it could be called the Raise Puerto Rico’s Employment Act.