While Puerto Rico Gov. Pedro Pierluisi signed into law minimum wage increases for the island, they will not address long-term economic growth issues, economists said.
Pierluisi on Tuesday signed the law, which will raise the minimum to $8.50 per hour on Jan. 1 from $7.25 per hour. The wage will increase to $9.50 per hour on July 1, 2023 then to $10.50 per hour on July 1, 2024, unless the government’s Minimum Wage Evaluation Commission issues a decree preventing this.
The current minimum of $7.25 per hour is the federal minimum wage, which has not been adjusted since 2009.
“A payment of $ 7.25 an hour is no longer sustainable to live in Puerto Rico, so it was time to do justice to the working class,” Pierluisi said. “This law is the result of a work in consensus between the legislative branch and the executive branch to benefit thousands of Puerto Ricans.”
Of the employed labor force in Puerto Rico about 10% earn $8 per hour or less and about 33% earn $9 per hour or less, said Vicente Feliciano, president of Advantage Business Consulting, which is based in Puerto Rico.
“The initial move to $8.50 per hour will not have a significant impact on employment because over 90% of workers already make over $8.00 per hour,” Feliciano said.
However, the subsequent increases could negatively impact total employment. “As minimum wage increases start to bump up with the Puerto Rico median salary, which is an indication that the minimum wage might be too high,” island employment could be hurt, he said.
Inteligencía Economica President Gustavo Vélez said Puerto Rico’s employers could handle the initial increase to $8.50 per hour. Vélez and Feliciano were two of three economists who advised the governor on the minimum wage increase.
The economy needs to grow to afford the additional wage increases in the long term, Vélez said, and for this to happen, the government needs to introduce structural reforms. Specifically, Vélez mentioned tax reform including the elimination of an inventory tax and a business permit system reform.
Vélez said he favors the structural reforms the Oversight Board has been pushing for several years. However, the local government has not been instituting these.
The reforms’ introduction is the only true road to long-term growth, he said. Right now, the governor and the legislators of both parties are relying on the incoming Hurricane Maria aid to keep the economy rolling. This will help for a few years, he said, but once it peters out the economy will start to contract again without the reforms.
Local politicians only want to be reelected and will not act for significant change unless they feel pressure to do so, Vélez said.
The bankruptcy stay in the Puerto Rico Oversight, Management, and Economic Stability Act has allowed the government to stop paying debt since mid-2017. The stay and federal hurricane and COVID-19 aid has removed pressure from politicians to change things.
The wage increase “is an incentive for workers to join the formal economy,” Feliciano said.
Puerto Rico’s economy has contracted all but one year since 2006 and the board and others are seeking ways to turn the economy around. Bondholders and bond market participants have looked at the economy to evaluate the ability of Puerto Rico and its authorities to pay its bonds.