Analyst: Minimum wage, Jones Act cripple P.R. economy

Written by  //  July 10, 2015  //  Economy  //  No comments

Nicole Kaeding, a budget analyst at the Cato Institute, speaks at the Heritage Foundation in Washington, DC, on the topic: “Can Puerto Rico Return to Growth?”

Nicole Kaeding, a budget analyst at the Cato Institute, speaks at the Heritage Foundation in Washington, DC, on the topic: “Can Puerto Rico Return to Growth?”

WASHINGTON — When it comes to Puerto Rico’s fiscal crisis, Washington is just as much to blame as San Juan. So said Nicole Kaeding, a budget analyst at the libertarian Cato Institute.

Kaeding made her case this week following a speech by economist Anne O. Krueger about the current debt dilemma plaguing the island. The Heritage Foundation, a conservative think tank that, like the Cato Institute, opposes “big government,” organized the Washington event.

She said that two pieces of federal legislation — the 1920 Jones Act and the federal minimum wage, which has applied to the island since 1983 — “make it incredibly expensive to do business in Puerto Rico.”

According to Krueger’s study by the Puerto Rico Government Development Bank, 28 percent of Puerto Rican workers earn $8.50 an hour or less, compared to only 3 percent on the mainland. Put another way, a job that pays minimum wage accounts for 77 percent of the island’s per-capita income, compared to 28 percent on the mainland.

“What we’re really talking about is the equivalent of having a minimum wage of $19 an hour on the mainland, which is way above what even liberals are talking about,” she said. “In a World Bank study of the minimum wage as a ratio of productivity, Puerto Rico ranked 160th out of 186 countries, and Puerto Rico’s ratio was twice as high as the Bahamas and Jamaica, and six times higher than Mexico.”

This, she said, discourages U.S. companies from investing, “because they can go elsewhere in Latin America, pay their workers less and get higher productivity.”

At the Cato Institute, Kaeding focuses on federal and state spending policy. Her articles have appeared in the Chicago Tribune, The Hill, National Review Online and other publications. Before joining Cato, she was the state policy manager for the Washington-based Americans for Prosperity Foundation, where she oversaw the organization’s activities in 34 states.

Kaeding, who has never been to the island, noted that more than 40 percent of young Puerto Ricans between the ages of 16 to 24 are unemployed — compared to 12 percent of youths on the mainland. As such, she suggested that Puerto Rico adopt a “training wage.” Many of the 34 member nations of the Paris-based Organization for Economic Cooperation and Development (OECD), have taken this approach.

Another major disincentive to competition, Kaeding said, is the relatively obscure Jones Act. This obscure piece of legislation, also known as the Merchant Marine Act of 1920, requires all oceangoing vessels carrying cargo between any two U.S. ports — including those in Alaska and Hawaii — to be U.S. flagged, U.S. crewed, U.S. owned and U.S. built. Foreign carriers cannot compete under those rules, leaving only four companies dominating the shipping industry between Puerto Rico and the mainland.

As a result, she explained, it costs $3,000 to ship one container of household goods from the U.S. East Coast to Puerto Rico, but only $1,500 to ship that same container to the Dominican Republic and $1,700 to Kingston, Jamaica.

This helps explain why volume at the Port of Kingston has doubled from 2000 to 2010, while declining by 20 percent during the same period at the Port of San Juan.

“Kingston has overtaken San Juan in total shipping volume, even though Puerto Rico is three times larger and its population is a third greater,” she said. “This Jones Act is making it incredibly expensive for goods to go to this island, and it makes it harder for Puerto Rico to export goods produced on the island.”

The best-case scenario would be for Congress to repeal the Jones Act altogether. But that’s unlikely, Kaeding conceded.

“More pragmatic would be to create an exception for Puerto Rico, even temporarily for three to five years,” she suggested, noting that the Jones Act has never applied to the U.S. Virgin Islands and applies only partially to the Pacific island of Guam.

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