When commentators debate the merits of a federal minimum wage, they usually discuss whether states and cities should be able to set their own minimum wages and the minimum wage's effect on low-skill workers. Often left out of the debate is any discussion of how the federal minimum wage affects United States territories.
Guam, Puerto Rico and the Virgin Islands are still subject to the federal minimum wage of $7.25 per hour, despite a relatively low cost of living. All three have a median hourly wage even lower than Mississippi, the state with the lowest median hourly wage. A low cost of living, combined with a high minimum wage, can have disastrous economic consequences.
Preston Cooper, a policy analyst with Economics21 at the Manhattan Institute (my former employer), argues that "the federal minimum wage is killing Puerto Rico's economy."
Cooper calculated the minimum wage as a percentage of the median wage in the 50 states, Puerto Rico and the District of Columbia. A higher percentage implies more damage from the minimum wage, according to Cooper. "As this ratio rises, more people are in danger of unemployment because their skills are not valuable enough to employers to justify paying them the minimum wage."
While the 50 states all fell between 35 percent and 53 percent, Puerto Rico was a clear outlier at 77 percent. That leads to higher unemployment and workers moving away in search of jobs.
Cooper cited a study that found the federal minimum wage reduced employment in Puerto Rico by 8 to 10 percent. Another study showed that 13 percent of Puerto Rico's labor force has moved away from the island since 2010. Four out of 10 of those emigrating cited "job-related" reasons.
"Federal labor policy is making vast numbers of Puerto Ricans unemployable," Cooper writes. The territory's unemployment rate, 12.4 percent, is more than twice as high as the national rate.
While Puerto Rico's debt crisis is not solely caused by the federal minimum wage, its negative effects certainly haven't helped its financial situation.
U.S. territories American Samoa and the Northern Marianas Islands have special exemptions from the federal law. Now is the time for the rest of the territories to get their own exemptions and have the right to determine their own minimum wages.