According to the World Bank, Puerto Rico has one of the ten lowest labor participation rates in the world. Only 4 out of every 10 people who can work are currently employed or actively seeking employment. Economists have constantly pointed to this statistic when they talk about Puerto Rico’s recession but little, if anything, has been done to try to fix it.
Popular folklore states that exceedingly generous welfare benefits are the root cause of low labor participation. This welfare has enabled multiple generations of (vagos) lazy people to live off the state without contributing their fair share to the economy.
This is a compelling story, but when you take a real look at the numbers, you can quickly tell free-riding and laziness are not the main drivers of this issue. It’s a simple analysis; the amount of money and benefits people on welfare receive in Puerto Rico is not enough to live on. Which means most people must be doing something on the side to make ends meet.
Working on the underground economy for below minimum wage salaries is a well-known phenomenon on the island. But economists and politicians choose to ignore it because it’s hard to explain with traditional theories. Their models can’t explain why these people work for below minimum wage and without labor law protections when there are plenty of legal jobs in the food service industry. They also have a hard time understanding employers who hire these people illegally when they can’t expense their salaries.
It’s quite simple really, under Puerto Rico’s current welfare system, individuals lose their benefits almost as soon as they start to generate income. This also happens in the states, but, in Puerto Rico, the income threshold for losing welfare is considerably lower and well below the poverty line. Therefore, individuals have gamed the system by working on the side and complementing that income with welfare.
Small businesses have had to make accommodations for this type of employee because otherwise they would have limited access to a workforce. They make up for not being able to expense employee salaries by lowering wages and increasing work hours; it’s a lose/lose.
Like many other things in Puerto Rico, welfare is a mess, but there is an easy fix, Universal Basic Income. Universal Basic Income would help eliminate the perverse incentives mentioned above. Our government should be lobbying Congress, presidential candidates and supporters of this idea for Puerto Rico to be its testing ground.
Like I mentioned in last month’s column, Congress can legally discriminate against Puerto Rico, so it can change our welfare laws without affecting the States. Being a “remote” island with a small population makes this the perfect testing spot for such a concept. Puerto Rico has to become relevant to the mainland; being an economic, social, and immigration testing hub for projects that we choose and that have the potential to immensely help our population is a great way to start.