FDR's 'fair labor standards' have been killing jobs in Puerto Rico and elsewhere for 80 years

FDR's 'fair labor standards' have been killing jobs in Puerto Rico and elsewhere for 80 years
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Eighty years ago this week President Franklin Roosevelt signed the Fair Labor Standards Act (FLSA) into law. A crucial piece of New Deal legislation, it created the first federal minimum wage. Labor advocates proclaimed its passage a major victory, and pundits later scoffed at those who had opposed it on economic grounds. But they probably never heard about the people harmed along the way, especially the residents of Puerto Rico. 

The commonwealth offers a series of unhappy illustrations of how a minimum wage can destroy jobs by raising the cost of labor above its productive value, just as the economic theory suggests.

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The first federal minimum wage was only 25 cents and affected less than 1 percent of the mainland U.S. workforce. But Puerto Rico’s lower wages meant that most jobs were covered by the new law. The second-largest industry on the island, home needlework, paid average wages of 3 to 4 cents per hour. Rather than operate at a loss due to unprofitable wages—because customers will only pay so much for the final product—employers curtailed the piecework they contracted out and needlework exports dropped by 75 percent in less than three years.  Poor Puerto Rican families were deprived of a critical source of income as the unintended consequence.

 

After realizing its mistake, Congress passed emergency legislation replacing the single federal minimum wage with local boards that established minimum wages for each industry, temporarily sparing Puerto Rican jobs from the worst of the bite of the minimum wage.

But history was to repeat itself in the 1950s. Mainland employers and garment unions complained about “unfair competition” from low-wage Puerto Ricans, and demanded that Puerto Rico’s minimum wages be raised. After the Minimum Wage Administration did indeed raise the minimum wage,home needlework employment again fell by over 75 percent on the island. 

The minimum wage increases, combined with agricultural reform programs designed to push Puerto Rico’s economy more toward manufacturing, led to a large loss of jobs and subsequent massive outmigration to mainland cities like New York and Miami. Over the course of the decade, 10-20 percent of Puerto Ricans fled their home.

Unfortunately, Puerto Rico’s trouble with the FLSA wasn’t done yet. Amendments in 1974 repeated the FLSA’s initial mistake by gradually raising the local minimum wages until they met the level of the federal minimum wage. Because the average wage in Puerto Rico was only two-thirds of that in the mainland U.S., the federal minimum wage affected a much larger number of jobs there. 

The result was an 8 to 10 percent decrease in Puerto Rico’s total employment, with low-wage industries losing up to 32 percent of jobs. This motivated another outmigration of Puerto Ricans, with government surveys reporting that 80 percent of migrants were specifically leaving to find employment elsewhere.

Unfortunately, Puerto Rico is far from the only example of how a minimum wage can destroy jobs.

Relatively few mainland jobs were directly impacted when the FLSA was first passed in 1938, but the large majority of those affected were in Southern manufacturing industries. The Department of Labor estimated that FLSA destroyed 30,000-50,000 jobs, mostly in the bagging, pecan shelling, and tobacco stemming industries.

Research by Andrew Seltzer, an economic historian at Royal Holloway, University of London, finds that the Southern seamless hosiery and lumber industries were also affected. The former decreased its demand for labor through increased mechanization—a key prediction of economic theory. Meanwhile, the higher cost of production meant the latter lost business to the more-industrialized, less labor-dependent northern lumber industry, another expected outcome.

More recently, Congress required that American Samoa and the Northern Mariana Islands gradually implement the 2007 FLSA amendment that raised the federal minimum wage to $7.25. These remote territories’ economies generally comprise low-wage jobs in the garment and fishing industries. Just as in Puerto Rico in the 1970s, implementing the federal minimum wage caused extreme hardship: The Government Accountability Office found that by 2012 total employment had dropped by 11 percent in American Samoa (after one of two tuna canneries closed) and by an eye-watering 45 percent in the Northern Mariana Islands (primarily due to  the “complete exodus” of garment factories).

So while labor advocates are enjoying the anniversary of their big victory this week, I hope their joy is at least tempered by the knowledge that even the best of intentions don’t always make us better off.

Michael Farren is a research fellow with the Mercatus Center at George Mason University.