Puerto Rico is in deep trouble and it’s getting worse. Unemployment is at 12%, double the next worst state or territory (Alaska), tourism is down, and poverty is at 41%. Tourists have begun to go elsewhere in the Caribbean: Bermuda, Haiti, Jamaica and Cuba. The island is effectively bankrupt and would have filed for bankruptcy last year except that they legally can’t. But neither can they pay their bills. The territory will go into default in less than 2 weeks, on July 1, 2016 unless congress creates a new funding mechanism for them before then. Statehood would allow Puerto Rico to go bankrupt, but there is no way for statehood to be achieved by July 1.

Puerto Rico’s minimum wage is vastly too high for its median wage. From Preston Cooper, Economics21.

While bankruptcy might help Puerto Rico short-term, as would a new line of credit, it is worthwhile to ask why Puerto Rico is in this bad shape. Why are they worse off than Guam, for example; Guam is far more isolated. Puerto Rico isn’t run particularly well, but it’s no worse than Guam or  Illinois. My first thought of what Puerto Rico should do differently is that they need to lower their minimum wage.

As the chart on the right shows, the wage of the average working Puerto Rican is very nearly the minimum wage. This is because, Puerto Rico’s economy is essentially tourism, and it competes for tourists with lower-wage Caribbean countries, Jamaica, Haiti, and Cuba. Neither Alaska nor Guam compete for tourist dollars with low cost alternatives. And Guam, in particular has a strong military presence; those are their main tourists. Competing for tourist dollars is a disaster for Puerto Rico that they could solve if they could lower their minimum wage. And a lower minimum would not cause people undue suffering because Puerto Rico is a place one can live cheaply. A single person may need to earn $8.50/ hour to live minimally well in Michigan, but his Puerto Rican cousin can get by on far less in Puerto Rico. With a lower minimum wage, tourism would be more attractive, and the government would not spend so much because they could pay their minimal-skill workers less. The net result is more Puerto Ricans would be able to find jobs, and the government would have a better chance to balance its books.

What prevents the territory from lowering its minimum wage is that it’s part of the US, and we set the minimum at $7.25/hour. Many people might prefer to work for less, but they can’t unless the federal government grants them an exemption. Without it, there is no obvious way for Puerto Rico to ever pay its bills.

Four years ago, in my first blog post, I suggested that Detroit should lower its $15/hour ‘living wage‘, a wage unduly burdened the city budget, and added to Detroit’s rampant unemployment and corruption. A year later, the city removed this barrier as part of bankruptcy, and saw significant improvements. I’m not alone in suggesting a lower minimum wage. The alternative is state-hood followed by immediate bankruptcy.

Robert Buxbaum, June 19, 2016.