Dr. Sennholz heads the Department of Economics at Grove City College in Pennsylvania. He is a noted writer and lecturer on economic, political and monetary affairs.
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.
After 85 years of U.S. Government rule over the island 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.
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, appliqué 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 Ricans.
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 dis carded 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.
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.
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 underground 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 and subsistence farming and mandate the price of independent labor. If it 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. 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. 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. 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 Hu man 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.
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 Marín 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.
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 i 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.
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.
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. 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 un derstands 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.
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. It 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 Spain 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 manyfold. As seen from a purely financial point of view, the Spanish-American War has become a very expensive war.
9. Earl 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).