Puerto Rico is an island commonwealth of the United
States some 970 miles south-southeast of Key West and 1400 miles from
New York City. It is a small tropical island, poor in natural resources,
dramatically beautiful, and densely populated. It is a self-governing
part of the U.S. with a Hispanic culture. Puerto Ricans are U.S.
citizens; some 3.5 million are living on the island and another 1.5
million in the continental U.S.
Puerto Rico has the dubious distinction of always
suffering from staggering unemployment which, at times, may amount to
three times the national average. This is all the more puzzling as the
federal government levies no taxes on Puerto Rico except those imposed
by mutual consent for Social Security, workman's compensation, and other
labor benefits. It collects no income tax from residents on income
earned from local sources. But it makes transfer payments to individuals
and governments totaling more than $3 billion annually, or $850 per man,
woman and child, which amount to some 25 percent of all island incomes.
Moreover, the federal government spends huge amounts and employs many
thousands of civilians at federal facilities such as the U.S. Naval
Station at Roosevelt Roads, the Navy's Sabana SECA Communications
Center, and the U.S. Army Salinas Training Area and Fort Allen. One out
of four Puerto Ricans is working for federal or local governments, and
one is chronically unemployed.1
After 85 years of U.S. Government rule over the island
2 economic conditions are deplorably poor. Surely, they are
more favorable than those of many other countries in Central and South
America. But when compared with income and wealth in the continental
U.S., Puerto Rico is an overcrowded poorhouse where, in spite of
generous alms and transfer payments, many people subsist on minimal
incomes.
Alleged Exploitation
Many observers throughout the world offer explanations
that are taken from the armory of world communism and socialism. The
U.S. as colonial conqueror and ruler of the island is indicted for
"gross exploitation" of the working people of Puerto Rico. U.S.
corporations and capitalists are said to use the island as their
personal plantation and private domain yielding great riches to the
exploiters while impoverishing the natives. No matter how popular it may
be in UN quarters, such an explanation warrants no serious answer. It is
sadly deficient in economic reasoning and utterly oblivious to the
facts.
Most Americans summarily reject the notion of colonial
subjugation and exploitation. But they may want to assign responsibility
and blame to some presumed fault or deficiency on the part of Puerto
Ricans themselves. After all, their society is predominantly Spanish in
language, attitude and activity. Only some 25 percent of the people
understand and speak the English language with more or less fluency.
Although the Puerto Rican government expends about one-third of its
annual revenue for education, the level of education continues to be
rather low when compared with U.S. standards. Similarly, the level of
industrial skills and on-the-job training compares unfavorably with
those on the mainland.
Such an explanation of the Puerto Rican dilemma is, to
say the least, frivolous and Philistine. It tends to preserve the status
quo although it exhorts Americans to ever greater efforts toward
almsgiving and transfer payments. It tends to perpetuate the misery
while denying all hope for early improvement. And, above all, it
confuses cause and effect and shifts the responsibility from the
politicians in Washington to the victims in Puerto Rico.
Actually, Puerto Rico is probably the world's most
vivid example of the absurdity of labor legislation. It demonstrates so
cogently and convincingly that minimum wage laws and other labor
legislation that raise the costs of labor do not improve economic
conditions, but instead make them immeasurably worse. It teaches so
clearly and graphically that government cannot raise wage rates and
improve living conditions by political fiat and police force. But
government can impose and enforce conditions that deny millions of
people the opportunity to participate in economic production.
The Labor Market
In a market economy labor income is determined by labor
productivity. To improve labor conditions is to improve the productivity
of labor through the application of ever more efficient tools and
equipment. It necessitates the formation of capital that makes human
labor more productive and raises the output of goods and services. At
the unhampered market rate anyone willing to work can find a job, and
anyone seeking help can find a worker. There can be neither labor
shortages nor mass unemployment.
In an unhampered market labor and capital tend to
adjust continually to the demands of consumers. Labor tends to migrate
to places where labor productivity and income are the highest. Capital
tends to move to locations where its productivity and yield are the
greatest. This continual adjustment process brings forth a tendency
toward equable prices and rates of income throughout the market. The
migration of production factors ceases only when no further advantage
can be attained from migration.
If there were no institutional barriers Puerto Rican
labor could be expected to flock to continental markets where labor
productivity and wage rates are substantially higher, and continental
business capital could be counted on seeking better investment
opportunities in Puerto Rico. In time, wage rates and living conditions
in Puerto Rico could be expected to resemble those on the mainland.
However, even under ideal conditions of a laissez-faire system the
former would always be lower by a small margin. The island is located
more than one thousand miles from major sources of raw materials and the
primary markets for its products. The relatively high transportation
costs would forever keep the productivity of island labor lower than on
the mainland, and therefore wage rates and levels of living.
In a free economy unconstrained by labor legislation
economic production that is labor-intensive would locate in the island.
Puerto Rico probably would become the U.S. center of a needlework
industry and other highly labor-intensive production. Table and
household linens, embroidered and drawn-work by hand, clothing
embellished with fancy stitching and hand--rolled edges, appliqu6 work
on towels, bridge sets, scarves, doilies, and pillow cases would be
produced on the island, and sold on the mainland. And the American
people as consumers would be greatly enriched by the productive efforts
of some two million adult Puerto Ritans.
Unfortunately, federal labor legislation is strangling
economic life in Puerto Rico, condemning one-fourth of its population to
linger in unemployment and poverty, depriving American consumers of
desirable products or forcing them to rely on higher--priced imports
from Hong Kong and Korea. But then, to alleviate miserable working
conditions in Puerto Rico, the federal government, through taxation and
deficit spending, exacts income and wealth from mainland Americans to
sustain unemployed Puerto Ricans.
Population and Migration
At the beginning there was great hope and good reason
for optimism. When Puerto Rico joined the U.S. market order and tariff
area in 1900 its population of less than one million was suffering from
the effects of centuries of government arbitrariness and mismanagement.
In just three decades under the U.S. flag, visible evidence of material
progress began to multiply. Trade and commerce flourished, agricultural
production multiplied, and mainland industries invested in new plants
and facilities. A middle class was coming into existence. As living
conditions improved the death rate declined significantly, the birth
rate virtually exploded, and the population doubled in just one
generation.
Under U.S. dominion the Puerto Rican rate of population
increase became one of the world's most vivid examples of the current
population explosion. As always, rapid population growth invokes the law
of returns and its derivation, the Malthusian law of population, which
holds that a population growth exceeding the formation of productive
capital and the production of means of sustenance tends to impair
material well-being. It creates a race between economic gains and
population growth, a race in which economic production has to run faster
and faster so that the individual may stay in the same place.
In the early years of American sovereignty Puerto
Ricans did not merely stay in the same place. They progressed despite
the population explosion. But the rate of economic improvement
necessarily lagged behind that of the continental U.S. It prompted the
most adventurous and enterprising among them to emigrate to other parts
of the U.S. During the 1890s thousands went to Hawaii where field hands
were needed in the sugar industry. Early in the twentieth century many
found employment in agriculture throughout the United States. However,
the linguistic and cultural barriers and the great difficulties of
adjustment to an alien environment kept the flow of Puerto Rican labor
at a trickle. The early migration served to establish the needed
beachheads which in time would encourage massive migration. By 1940 New
York City was home to 63,000 Puerto Ricans. Today, with some 750,000
Puerto Ricans, New York City is by far the largest Puerto Rican city.
The large exodus from Puerto Rico since the early 1940s
brought immediate improvements to labor conditions on the island. As
labor emigrated en masse the marginal productivity of labor at home rose
significantly, causing wage rates and levels of living to rise.
Moreover, many Puerto Rican emigrants did what many emigrants do upon
arrival in the U.S.: they remitted some of their savings to family
members left behind, which contributed visibly to improvements on the
island.
Federal Dominion Over Labor
One particular event triggered the exodus of more than
one million Puerto Ricans during and after World War II. The Fair Labor
Standards Act of 1938 virtually lowered the curtain on many types of
labor in Puerto Rico. It set a minimum wage of 25¢ per hour which
produced massive unemployment throughout the island. When all wheels
were grinding to a halt, a 1940 amendment to the Act provided for an
arrangement different from any on the mainland. It created industry
committees, convened by the U.S. Department of Labor, that recommended
minimum wages to the Department. The Secretary then set the rate in
accordance with a Congressional mandate: the rate must be the highest
possible minimum that will not give a competitive advantage to any group
in the industry, that is, it must be as high as comparative wages in the
states. Incapable of earning the mandated minimum in Puerto Rico, many
thousands of workers were forced to search elsewhere. In 1978 the U.S.
Congress committed the ultimate folly: it discarded the obnoxious
industry--committee procedure of determining the highest possible
minimum in favor of the original 1938 mandate - the full U.S. minimum
wage. The minimum of $3.35 an hour was made effective on January 1,
1981.3
On the mainland the minimum wage may amount to one-half
of the average industrial wage and may affect some ten percent of the
working population. In Puerto Rico the same minimum approaches the full
industrial wage and affects the vast majority of working people. The
going wages paid are at, or close to, the mandated minimum. In
agriculture some 90 percent are paid the minimum or near-minimum, in
tobacco processing 99 percent, belt manufacturing 81 percent, women's
hosiery manufacture 63 percent, children's dress manufacture 79 percent,
milk processing and distribution 62 percent, candy and gum production 62
percent, and vitreous china manufacture 69 percent.4
Consequences of Fixing Wages at Higher than Market Levels
Some of the consequences of the federal minimum set
above the Puerto Rico market rates are difficult to observe. Economic
activity is forced to move from labor-intensive methods of production to
capital-intensive methods, or does not occur at all. Labor--intensive
industries no longer settle in Puerto Rico, but move somewhere else. The
unemployment is further exacerbated by reductions in working time. Many
employees are working only 35 hours a week or less although they are
anxious to work more hours. But employment time, too, is a function of
the costs of labor. Thus, while the federal minimum wage lifts some 20
to 25 percent of all workers right out of the labor market, it may
condemn another 10 to 15 percent to underemployment.
Many hapless workers thus cast out from productive
activity may find their way into the under-gound economy where the
federal mandates are completely ignored, or into self--employment and
subsistence farming not covered by the minimum wage law. The long arm of
the federal government cannot possibly reach into the complexities of
self--employment d subsistence farming and manda7te the price of
independent labor f could, it would close the last legal escape route to
a useful existence for many enterprising individuals.
But while this route may yet be open to individuals
with entrepreneurial inclination and ability, the influx of a great deal
of labor set free in covered occupations tends to depress the income
from self-employment and thereby discourages entrepreneurial activity.
Moreover, it only allows for the escape of one entrepreneur at a time.
If one is successful through hard work and long hours of work at
below--minimum rates he cannot legally buy the services of other workers
at his own rates. His would-be helpers again are excluded by the minimum
barrier.
In Puerto Rico, labor participation as a percentage of
adult population is much lower than in the continental U.S., which is a
clear reflection of the "lack of job prospects" for many. In 1978, the
percentage of adult population in the continental labor market was
estimated at 62 percent; in Puerto Rico it was only 44
percent.5 No matter how psychologists and sociologists may
want to explain this difference, the futility of a job hunt surely
contributes to the low participation rates in the island.
Moreover, the high unemployment rates and low
participation rates discourage on-the-job training, which is most
unfortunate in Puerto Rico where both formal education and vocational
training are significantly lower than in the continental U.S. Where
fully trained workers barely earn the legal minimum, there will be
little hiring of trainees at that rate. It denies employers the
opportunity to teach and workers the opening to learn, which may condemn
the latter to remain unskilled for the rest of their lives.
For many Puerto Ricans the movement to the continental
United States, where labor productivity is substantially higher, offers
the only escape from a life of idleness and despair. The federal labor
legislation is thus redistributing the working people over all fifty
states. In Puerto Rico itself the federal mandates have depopulated
whole areas and caused major cities to decline. During the 1950s, a
decade of unprecedented population explosion, of the eleven largest
cities, seven declined in population. Mayaguez, once a center of the
needlework industry, lost 14.9 percent, Bayamon 25.1 percent, Fajardo
19.1 percent, Aguadilla 12.8 percent, Caguas 5.2 percent.6 In
search of better economic opportunities many residents of these old
cities probably found their way to Brooklyn, New York.
The aggregate effect of the U.S. minimum wage on Puerto
Rico is one of incredible devastation and humiliation. Some 25 percent
of the working population are presently unemployed, 10 to 15 percent are
underemployed, some 10 percent are subsisting in self-employment or
primitive farming, 18 percent no longer participate in the labor market,
and 5 percent subsist on public assistance. Altogether, it is a gruesome
picture of the consequences of mischievous labor legislation.
Intent and Design
If labor legislation has such dire consequences in
Puerto Rico, why does the U.S. Congress in its collective wisdom impose
such mandates?
There are the representatives of infinite political
power who deny all cause-and--effect relationships in economic life, but
instead believe in raw political power. They are convinced that the
coercive apparatus of government can accomplish anything its managers
set out to accomplish. If they conclude that wage rates and living
conditions should be improved in Puerto Rico they blithely proceed to
introduce legislation that will enforce the desired improvements.
A great many champions of government coercion consider
themselves noble humanitarians. They are motivated by a laudable
intention to improve the conditions of poor people everywhere. Guided by
a comfort-and-decency standard of life, which they calculate in dollars
and cents, they proceed to legislate it. If economic conditions should
get worse they usually add more legislation and, with humanitarian zeal
and dedication, apply more police force.
Labor unions are organizations of workers that serve a
single purpose: to secure for their members wages and benefits that are
higher than those allocated to them by the voluntary production process.
Only one policy can bring this about: collective force. Labor unions
preach and live by force which may be purely economic, such as strikes
or the threat of strikes, or openly political, through labor legislation
that favors their members at the expense of others. Only such a force
applied consistently and fervently throughout the decades can explain
the great evil that is wrought daily on Puerto Rico.
Labor union leaders in the U.S. are the most vocal
promoters of ever higher minimum wage rates. In the name of "fair
competition" they seek to repress all labor and production that is
performed at rates lower than union rates. Such repression usually
allocates more work and income to them. By depriving Puerto Ricans of
employment opportunities and by reducing the supply of goods
manufactured in Puerto Rico they aim to generate more employment for
mainland workers at union rates. To the degree that they are successful
through federal labor legislation they are enriching their members while
impoverishing the Puerto Rican people as workers and the American people
as consumers.
But even such evil political designs have their
economic limitations as the production restrictions imposed by minimum
wage legislation bring forth rising imports from Hong Kong, Korea, and
other countries that are free from U.S. labor jurisdiction. Imports take
the place of goods not produced in Puerto Rico.7 In the end,
neither Puerto Rican workers nor unionized mainland workers are
manufacturing labor-intensive products, but foreign workers all over the
globe.
It is a well-established principle of interventionism
that a government restriction makes matters worse and leads to more and
more restrictions until every detail of economic activity is controlled
by government. But it is also true that radical intervention aims at
many contradictory objectives that clash with each other and seek to
counteract and offset each other. In Puerto Rico the U.S. Congress and
the Department of Labor endeavor to suppress economic activity below a
minimum scale, which lays waste to the island economy. But the
Department of Health and Human Resources then rushes to the rescue of
Puerto Ricans with massive financial benefits that probably make the
island the most expensive territorial possession in the
world.8
San Juan Worse than Washington
It would be a grievous mistake and an injustice to lay
the blame for Puerto Rican stagnation and poverty on Washington
politicians and bureaucrats alone. After all, the federal rule over the
island has never been so imperious that the voice of the people could
not be heard. Since 1941 the San Juan cabinet has been composed solely
of Puerto Ricans. Since 1946 native Puerto Ricans held the office of
governor. In 1947 a Congressional act granted Puerto Rico the right to
elect their own governor. And in 1952 a constitution for a
self-governing Commonwealth was approved by the voters, and confirmed by
the U.S. Congress.
In numerous local elections most Puerto Ricans have
consistently and convincingly opted for radical government intervention
in their economic affairs. During the 1940s they emulated Roosevelt's
New Deal with all its political ramifications and regulatory offshoots.
In fact, they frequently went far beyond mainland interventionism and
experimented with island socialism.
Under the leadership of Muñoz Marin and his Popular
Democratic Party, which came to power in 1940, the island government
embarked upon a social and economic "revolution" of its own. It
expropriated agricultural land owned by mainland corporations and put it
to government use or sold it to natives. In order to "rationalize"
agriculture through industrialization it established government sugar
farms and purchased mills primarily for "yardstick" purposes. It built
pineapple canneries, slaughterhouses, factories for making shoes, glass
bottles, paper and cardboard, clay products as bricks, tiles, and
ceramics. It built hotels and motels and went into the tourist business.
In TVA fashion it generated electricity and distributed it to all parts
of the island.
The legislature is composed in a large measure of labor
leaders who make constant efforts to raise wages as rapidly as possible.
Every two years a board reviews the Commonwealth minimum wage. If its
recommendation exceeds the federal minimum it becomes the law of the
island. Government enterprises and government itself are viewed as the
employers of last resort, offering jobs to a maximum number of people.
At the present, one out of four Puerto Rican workers is laboring for the
Commonwealth Government.
As one would expect, the indebtedness of the government
and its autonomous public corporations is always hovering at the very
limit of their debt capacity. New credits when granted by mainland banks
and other sources lead to immediate acceleration of public works, which,
when put to a vote by the electorate, are endorsed
overwhelmingly.9
Debts and Taxes
As one would also expect, the commonwealth government
is ever eager and anxious to exact more tax revenues from its subjects.
It imposes a corporate income tax that ranges between 22 percent and 40
percent, an individual income tax up to 72 percent, an excise tax of 5
percent to 80 percent, license taxes at various rates, property taxes of
some 2.3 percent, estate and gift taxes up to 70 percent, municipal
sales taxes from 1 to 5 percent of dollar sales, and a special tax of 50
percent on the "improper accumulation of surplus or profits." Under a
program known as "Operation Bootstrap," the government may grant
exemption from major taxes to firms satisfying certain employment
conditions.
If the general tax burden should not discourage
economic production, the following payroll taxes that directly raise the
costs of labor may erase all doubt:
1. The Social Security provisions of the United States
are in force in Puerto Rico.
2. Employers must pay both the U.S. Federal
Unemployment Tax and the Puerto Rico unemployment compensation tax.
3. All employers are required to pay a Disability
Benefits Tax that finances benefits for illness and accidents whether or
not they are related to employment.
4. Workmen's Compensation Insurance is payable at
various rates.
5. Employers must pay a Christmas Bonus of at least two
percent of a worker's annual wages up to a maximum of fifteen percent of
the employer's net income.10
If it is true that the demand for labor depends on the
costs of labor it must be concluded without risk of contradiction that
the Puerto Rican government itself is significantly raising the costs of
labor and thereby reducing the demand for labor. In short, it is
contributing significantly to the mass unemployment there.
Island Independence
The dismal conditions of labor in Puerto Rico and the
prospects of economic stagnation for generations to come, raise the
crucial question of desirability of island separation from the U.S. Many
Puerto Ricans themselves favor national independence and sovereignty.
They are supported by national liberation forces and their communist
allies all over the world. In the United Nations organization several
dozen countries are strongly urging Puerto Rican independence, and world
public opinion is loudly lamenting the sad fate of Puerto Rico.
But such a solution would probably make matters worse.
It is rather likely that, in a sovereign country of their own, the
Puerto Ricans themselves would resort to radical intervention, different
in some details but similar in basic design to that experienced as part
of the U.S.11 They would inflict immeasurable harm on each
other through labor legislation of their own and other redistributive
policies, but lose the massive U.S. support that is sustaining them now.
Without a tradition of individual freedom and an unhampered enterprise
system, and short of any visible intellectual force and popular support
for individual freedom from political power and arbitrariness, the
intellectual conditions are lacking for a free and prosperous
commonwealth. Instead, it is rather likely that an independent Puerto
Rico would soon follow in the footsteps of many of its Spanish-speaking
neighbors, such as the Dominican Republic, Haiti, and Cuba. And once
again the U.S. would have to brace for a flood of refugees fleeing from
their own misery and chaos and searching for survival in the U.S.
The only hope for a brighter future for all Puerto
Ricans rests in the hands of the lovers and champions of individual
freedom everywhere. There is hope as long as they are pressing the point
that minimum wage rates and other labor legislation cannot possibly
improve the working and living conditions of all the people, but make
them immeasurably worse. There is ample work for everyone and great
prosperity for all in freedom. When American public opinion finally
understands this simple lesson of economics and causes the U.S. Congress
and the Commonwealth legislature to remove the labor shackles from
Puerto Ricans, the island will spring to new life.
At the time of the original publication, Dr. Sennholz
headed the Department of Economics at Grove City College in
Pennsylvania. He was a noted writer and lecturer an economic,
political and monetary affairs.
1. Ernst & Ernst, Puerto Rico, International
Business Series, March 1971, July 1971, Sept. 1973; Earl Parker Hanson,
Puerto Rico: Ally for Progress (D. Van Nostrand Co., Princeton, N.J.,
1962).
2. Spain ceded Puerto Rico, Guam and the Philippine
Islands to the United States by the Peace Treaty of Paris, on Dec. 10,
1898. The Philippines gained independence in 1946. Guam and Puerto Rico
continue to be associated with the U.S.
3. U.S. Department of Labor, Wages and Hour Division,
Minimum Wage Rates for Puerto Rico (WH Publication 1348, Washington,
D.C., 1978).
4. U.S. Department of Labor, Wage Structure and Fringe
Benefits in Puerto Rico (Washington, D.C., 1979), p. 187.
5. Puerto Rico, Bureau of Labor Statistics, Informe
Estadistico 1, No.11, November 1979, Table 1.
6. Earl Parker Hanson, ibid., p. 52.
7. Simon Rottenberg, "Minimum Wages in Puerto Rico,"
The Economics of Legal Minimum Wages (AEI, Washington, 1981), pp.
334338.
8. 1t is interesting to note that the U.S. Government
now manages to spend in excess of $3 billion on Puerto Rico every year,
which is 150 times the amount it paid to Spain in 1899 for the transfer
of sovereignty of Puerto Rico, Guam and The Philippines from Spam to the
U.S. Even if total government expenditures for the Spanish--American
War, which amounted to less than $130 million, were to be included in
the purchase price for Puerto Rico, U.S. Government expenditures for
health, welfare and human services now exceed the costs of war and
conquest many-fold. As seen from a purely financial point of view, the
Spanish-American War has become a very expensive war.
9. EarI Parker Hanson, ibid., pp. 90, 91, 102106.
10. Ernst & Ernst, Puerto Rico, A Digest of
Principal Taxes, July 1971.
11. cf. Robert W, Anderson, Party Politics in Puerto
Rico (Stanford University Press, 1965).
Reprinted with permission from The
Freeman, a publication of the Foundation for Economic Education, Inc.,
June 1983, Vol. 38, No. 6
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