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%. US tourists have begun going elsewhere where prices are lower: Bermuda, Haiti, Jamaica, and Cuba. The island is effectively bankrupt and would have filed for bankruptcy last year except that, as a US territory, they legally can’t. But neither can they pay their bills. The territory will go into default in 2 weeks, on July 1, 2016 unless congress creates a new funding mechanism for them. Statehood would allow Puerto Rico to go bankrupt, but there is no way for statehood to be achieved by July 1. Nor will bankruptcy help them, long term.

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

It is worthwhile to ask why Puerto Rico is in such bad shape. Why are they worse off than Guam, for example; Guam is far more isolated. Puerto Rico is run poorly, but it’s no worse than Guam or  Illinois. One problem particular to Puerto Rico is that their minimum wage is way too high relative to the median wage.

Because of the climate, living expense are low in Puerto Rico, but Puerto Rico’s economy is mostly tourism. It competes for tourist dollars with lower-wage Caribbean countries, Jamaica, Haiti, and Cuba. Neither Alaska nor Guam must compete this way, with a nearby, low cost alternative. Puerto Rico could compete better if they could lower their minimum wage. Tourism would be more attractive, and the government would not have to spend as much either for minimal-skill workers.

With a lower minimum wage, more Puerto Ricans would be able to find jobs, and the government would likely manage to balance its books. But Puerto Rico is part of the US, and we set the minimum wage. I think the federal government should grant them an exemption. Without one, there is no obvious way for Puerto Rico to pay its bills.

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

Robert Buxbaum, June 19, 2016.