It should be noted that average hourly earnings of 39.9 cents in the food industry in Puerto Rico (1954-55) compare to $1.67 on the mainland (1954). However, these rates are not strictly comparable because the mainland rates include overtime pay. While there is a considerable absolute differential, the relative increase in the Puerto Rican and the mainland rate has been the same-namely 32 percentbetween 1949 and 1954. (See table 107 for changes in Puerto Rican average straight-time hourly earnings 1949-55.)

Table 108 shows labor cost as percent of sales or costs.

In every case except 1, where it is 33 percent, labor-cost proportions are less than one-fifth, and in 7 of the 17 proportions given in the table, they are onetenth or less. These are comparatively low for manufacturing industries.#

TABLE 107.-Food and related products industries in Puerto Rico: Changes in average straight-time hourly earnings between 1949-51 and 1954-55

1 Earnings figures are mostly as of 1949. They are for payroll periods in 1949 for the following groups Biscuits and crackers; citrons in brine; fruit and vegetable canning; fruit and vegetable packing; and preserves, jellies, sirups, and nectars. They are for payroll periods in last quarter 1950, 1st quarter 1951 for confectionery and related products and for miscellaneous items included in total but not separately shown because comparable earnings figures do not exist for the 1954-55 survey period.

Excludes malt beverages. Includes the groups listed and also some miscellaneous items not separately shown because comparable earnings figures for both survey periods are not available.

Source: U. S. Department of Labor, Wage and Hour and Public Contracts Divisions.

TABLE 108.-Food and related products industries in Puerto Rico: Labor cost as percent of sales, or of total costs, specified years

Source: 1952 data computed from Census of Manufactures Puerto Rico, 1952; other data from information received by the Wage and Hour Division, labor-cost data from Census of Manufactures refer to wages of production workers; labor-cost data from other sources are not defined.

44 Ibid., p. 43.

The food and related products industries makes it possible to compare some rates set by industry committees with rates set by the insular minimum wage board. As table 109 shows the rates set by the Puerto Rican board were equal to the rates set by industry committees in 1 case, in 2 cases they covered a range with a higher maximum than the rate set by industry committees, in 1 case the maximum of the range was equal to the rate set by the industry committee and only in 1 case was the rate definitely below the rate set by industry committees.

TABLE 109.-Insular minimum wage rates as compared to rates set by industry committees

SECTION III

IMPLICATIONS FOR WAGE POLICY

I

A realistic wage policy must recognize two factors: (1) Puerto Rico is an economic entity of its own, it is at a different stage of economic development than the mainland and must, therefore, deal with problems of a different kind. Generally speaking, Puerto Rico is an undeveloped country-with a concomitant shortage of capital funds as compared to the mainland economy. (2) At the same time Puerto Rico is intimately linked to the mainland economy. It is within the United States tariff system. It is highly sensitive to changes in the overall economic situation on the mainland and it has benefited considerably by preferential tax treatment and other Federal payments. Last but not least Puerto Rico competes with mainland industries.

This dual relationship raises a question which is basic for the determination of minimum wages in Puerto Rico; namely, to what extent should the internal problems and needs of the Commonwealth of Puerto Rico be the criteria for wage policy? And to what extent must the intimate connections between the economy of Puerto Rico and the rest of the United States be taken into consideration?

The Fair Labor Standards Act of 1938, as amended, determines the framework within which this question is to be discussed. The act states:

The policy of this Act with respect to industries in Puerto Rico engaged in commerce or in the production of goods for commerce is to reach as rapidly as is economically feasible without substantially curtailing employment the objective of the minimum wage *** (prevailing on the mainland) * *. The Administrator shall from time to time convene an industry committee * *

***The committee shall recommend to the Administrator the highest minimum-wage rates for the industry which it determines, having due regard to economic and competitive conditions, will not substantially curtail employment in the industry, and will not give any industry in Puerto Rico * * a competitive advantage over any industry in the United States outside of Puerto Rico ***

The act thus emphasises the impact on employment-a problem to be investigated in terms of the Puerto Rican economy taken as a unit of its own-as well as the impact on competitive conditions. which necessitates an exploration of the economic relationships between Puerto Rico and the mainland.

Let us first consider Puerto Rico as an economic unit of its own. The ultimate purpose of the act is to eliminate "conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers." This, generally speaking is also the purpose of the economic development program of the Commonwealth of Puerto Rico. Industrialization in

1 Fair Labor Standards Act of 1938, as amended, sec. 8 (a) and (b),

general and technological progress in particular are among the most important factors determining how quickly this goal can be reached. Wages cannot outrun industrial progress without creating substantial unemployment nor should they be allowed to lag behind the potential inherent in a given stage of industrial development. It is, therefore, suggested that the following two criteria are to be taken into consideration in determining minimum wages in Puerto Rico: (1) Changes in the cost of living, and (2) changes in productivity.

There will be little disagreement about the use of a cost-of-living index for wage adjustments. But it could be argued that it is not desirable to increase wages exactly in proportion to increases in productivity. It may be said that productivity gains should be divided in some way between workers and management in order to provide for capital resources essential in an underdeveloped economy. Such an argument would have to be further considered and may be significant at a certain stage of economic development. But the review of the economic development in Puerto Rico during the last 15 years has shown that capital resources originating in earnings have not been of major importance for Puerto Rico and are not likely to be so in the near future. The tax program is another major factor to be considered in this respect.

Under these circumstances it is suggested that wages are adjusted with full consideration of productivity gains, particularly in view of the great need to increase the standard of living of wage and salary

earners.

The investigation of the increase in wages during the last 9 years has shown that average hourly earnings would be approximately 20 percent higher--as of January 1, 1955-if they had been adjusted according to (1) changes in the cost of living, and (2) changes in productivity in manufacturing industries in Puerto Rico.

An adjustment of wages according to changes in the cost of living and of productivity must be considered a minimum adjustment of wages which does not take into consideration the second criterion stipulated in the act; namely, the competitive advantage which Puerto Rican industry may have over certain mainland industries.

The increasing differential between wages in Puerto Rico and wages on the mainland is a factor to be examined first in this connection. In 1940, the differential in average hourly earnings amounted to 44 cents, in 1950 to 98 cents, and in 1954 to $1.31. It is necessary to adjust these differentials for differences in the structure of industry in Puerto Rico and the mainland. Such an adjustment narrows the differential by 19-27 cents in 1954.

Obviously, if wages in Puerto Rico had been adjusted in agreement with changes in the cost of living and in productivity the differential would not have broadened as much as it did during the last 9 years. But there is no question that the differential would have grown even if wages had been adjusted as suggested in this report. The question, therefore, remains, as to what extent and in which way the differential between the island and mainland wages should be used as a criterion in determining minimum wages.

The following considerations are important for a sound judgment in regard to this question:

(1) The differential by itself is not a valid indicator of the competitive advantages which Puerto Rico may have. Productivity in the

Puerto Rican economy as a whole is lower than on the mainland. There are, furthermore, certain high-cost items which compensate at least partially for the low labor cost in Puerto Rico. Costs of training, of supervision, and in some instances cost of transportation both to and from the island must be listed besides the imponderable but significant cost of operation in a nonindustrialized society.

It is certain that Puerto Rico still operates under a cost advantage in certain segments of the economy if all calculable cost factors are taken into consideration. An area of judgment as to how much this cost differential should be narrowed must be recognized. But there is no doubt that any attempt to eliminate this differential would strangu late the economic development of Puerto Rico, as long as the main basis for this development is the attraction of capital from the mainland to an island 1,400 miles for New York, 1,000 miles from Miami, speaking a different language and being removed from the traditions of an industrial society.

The question of a competitive advantage must, furthermore, take into consideration the relative magnitudes involved: The total number of new jobs created in Puerto Rico during the last 10 years amounted to about 24,000; a figure which does not take into consideration the decline in homework needle trades. While the question of an unfair competitive advantage in regard to certain sectors of the mainland economy deserves the most careful consideration, it can hardly be said that the number of jobs created in Puerto Rico during the last 10 years constitutes a threat to the mainland economy as a whole. It is, therefore, important to find a solution for the problem of unfair competition without interfering with the overall economic development of the Commonwealth of Puerto Rico.

Partly this problem may be solved by special measures taken on an industry-by-industry basis. Partly it is a general question of the differential between average hourly earnings on the mainland and in Puerto Rico. As far as the latter is concerned a possible solution can be found by narrowing the differential gradually depending upon the industrial growth of Puerto Rico.

As the industrial foundation of the Puerto Rican economy becomes more solid and wider, the mainland-Puerto Rico differential should be narrowed.

In view of the growth of almost 50 percent in investment of machinery and equipment in Puerto Rico between 1950 and 1954, some adjustment of the differential is certainly justified. An adjustment is. furthermore, called for by the impending increase of the minimum wage on the mainland.

In comparing the impact of an increase in the minimum wage on the mainland to the impact of an increase in the minimum wage in Puerto Rico, it is important to avoid mechanical comparisons of relative increases.

An increase of the minimum wage has a much greater impact in Puerto Rico because minimum wages are to a much greater extent prevailing wages in Puerto Rico. In the lowest classifications, a 33-percent increase of the wage rate may be estimated to imply an increase of the direct wage bill from 25 to 30 percent. On the mainland, on the other hand, an increase of the minimum wage from 75 cents to $1 is estimated to increase the total wage bill in manufacturing industries by less than 1 percent. It would obviously be misleading