Does a sub-minimum wage create jobs?

Originally published by The Hill here. The “fight for 15” crowd has managed to gain enough steam to garner mentions in presidential debates, trend on Twitter, and influence policy shifts […]

Originally published by The Hill here.

The “fight for 15” crowd has managed to gain enough steam to garner mentions in presidential debates, trend on Twitter, and influence policy shifts in Seattle, NYC, California, and more, despite the lack of a consensus of support among researchers. But, data never stopped a politician and may not today. As some in Congress have begun advocating for a lower minimum wage in Puerto Rico, should they reconsider given the evidence?

Minimum wage doublers love to bring up this 1993 study demonstrating the positive effects of an increased minimum wage (along with a follow up ten years down the line). The research is commendable given the data that they chose to work with, but subsequent studies counter its claims. To summarize the flaws, the authors simply took the easy route by asking managers about their employment, when verifying payroll records would have produced a more accurate, and contrary result (see here).

An often overlooked, yet important case study analyzes the impact of imposing the federal minimum wage on Puerto Rico, a territory that previously had a much lower wage floor. Suffice it to say that things didn’t work out too well. Some have estimated that total island employment immediately fell by 10 percent as a result, while less-educated labor was driven to the mainland.

Now that Puerto Rico is in dire financial straits, DC is kicking around the idea of going in the other direction, providing a waiver to the minimum wage for those under 25 years of age (see HR 4900). Does the evidence show that a lower minimum wage will have the expected positive effect?

Believe it or not, there is not a lot of data to point to, and there is good reason for it. Minimum wages are pretty sticky. Just like for any employer, it’s much easier for a legislator to sell his or her constituents on a pay increase than a cut, even if compelling evidence shows how much better off your neighbors might be otherwise. Everything that goes up must come down…except for minimum wages.

There is one significant exception, however, that may support the theory that a lower minimum wage will lead to an increase in the number of jobs, all else equal. A number of states have created a waiver for young workers called a subminimum wage, while the federal government has maintained its own exemption since 1990. These policies are created to provide an incentive for employers to provide on-the-job training and a little experience to low- or no-skilled youngsters.

Today, out of desperation to find anything that might stymie Puerto Rico’s economic decay, legislators want to enact a similar policy, allowing its lowest wage rates to fall far below the federal minimum. Will it work?

Given the dearth of research, I had to go back to the early 90s just to find any stateside studies. Prior research finds that, at least in reference to the states’ subminimums, a reduction in the minimum wage significantly improved employment opportunities for the applicable demographic.

Subminimum wage policies would be a little different in Puerto Rico. One of my concerns is whether employment will shift from the currently employed to a younger pool of labor, instead of improving aggregate employment. Given the retracting economy, it may be perfectly reasonable for an employer to say, “hey, I can fire this guy and hire an 18 year old for way less.” Multiply this reaction by thousands, and the economy could be made worse off.

I am also worried about the counter-effect of Puerto Rico’s labor mobility. Whereas a U.S.-wide policy leaves employees nowhere else to go to find higher paying work, Puerto Ricans can just grab a flight to Florida, as they have been doing for more than a decade.

Puerto Rico also has a unique (and huge) informal economy. Estimates of the size of under-the-table work falls between 30 and 50 percent of GDP. Many simply turn down a job that Uncle Sam taxes, in order get welfare benefits along with a few bucks doing something else on the side (welfare policies are another problem, altogether). Hey, the benefits are good and the work is more flexible . . . if you can get it, of course.

Given that Puerto Rico’s population is shrinking at record rates, is it wise to provide another incentive to leave? Although a subminimum wage might not exacerbate the island’s grief, the truth is, no one really knows.

Proponents of increasing the minimum wage have some evidence showing positive effects and plenty more on the negative side, but little that illuminates the brilliance of a minimum wage decrease. You may think either is just the “right thing to do,” but it seems like more and more of these Governor Jerry Brown-type defenses are the best we have to work with: it might not make economic sense, but it sure does feel good. I’m not sure about the voters of California, or Puerto Rico, but personally, I’d prefer “economic sense” over this type of non-sense.

Vélez-Hagan is an economic policy researcher at the University of Maryland-Baltimore County, founder of the National Puerto Rican Chamber of Commerce, and author of The Common Sense behind Basic Economics (Lexington Books,2015). @JVelezHagan