Committee Prints

to compare two extremes; namely, an increase in the wage bill in Puerto Rico in a sector of the economy where an increase in the minimum wage has the strongest impact with an average for the mainland which hides significantly higher increases in the wage bill in certain mainland industries which are in competition with Puerto Rico. We get a more realistic picture by comparing increases in the wage bill in particular industries. In the mainland work-clothing industry, for example, the direct wage bill is estimated to rise by 11 percent, in men's and boys' dress shirts by 7 percent and in seamless hosiery by 6 percent (as a result of the increase of the minimum wage from 75 cents to $1).

An adjustment of 5 to 10 percent to compensate for the forthcoming changes on the mainland seems, therefore, indicative of a rather conservative range of judgment.

It is true that such an adjustment does not take into consideration the competitive advantage of 25 cents gained immediately by the "marginal producer" who operates at the minimum wage and who can shift his operation from the mainland to Puerto Rico. This is a problem to be explored further. It should be stated, however, that the marginal producer does not only constitute an infinitesimal fraction of mainland industry. He is also the kind of producer whom no section of the country should be particularly interested to rely upon. While the marginal producer is a problem to be examined carefully it is only one criteria determining the overall adjustments of wages in Puerto Rico in relation to the mainland.

The total adjustment in average hourly earnings arising out of the application of the three criteria discussed so far: (1) Changes in the cost of living, (2) changes in productivity, and (3) competitive differentials-would therefore amount to

Approximately 20 percent of average hourly earnings (criteria 1 and 2); plus 5 to 10 percent (criteria 3); total, 25 to 30 percent of average hourly earnings Since adjustment according to criteria (1) and (2) refer to the past, whereas adjustment according to criterion (3) refers to the future, the two percentage ranges have been merely added up.

In determining this range, wage increases after January 1, 1955 have not been taken into consideration.

It is not possible to give an exact indication of the effects of these changes. But the increase in average hourly earnings in manufacturing in Puerto Rico resulting from wage increases during 1955 may be generously estimated to be between 5 and 10 percent of average hourly earnings. They are most likely to be close to 5 percent of average hourly earnings in manufacturing.

It may therefore be argued that the wage increases which took place in Puerto Rico during 1955 should be considered as an "advance correction" for the competitive advantage accruing to Puerto Rico as a result of the adjustment of the minimum wage on the mainland from 75 cents to $1. Technically this is correct in the sense that both adjustments are within the 5 to 10 percent range.

However, the Puerto Rico wage increases in 1955 occurred in industries which did not have any wage increases for about 4 years.

The increase in wages during 1955 can, therefore, not be considered to be an "advance correction" in the sense of anticipating future events, it is nevertheless a compensating change in average hourly

earnings which has to be considered in determining the overall adjustment of wages in Puerto Rico which can be justified on the basis of the three criteria mentioned above.

This overall adjustment as of January 1, 1956, according to the three criteria used may, therefore, be estimated to amount to approximately 20 percent in terms of average hourly earnings-a range arrived at by adding the 5 to 10 percent "cost differential adjustment" to the 20 percent "productivity and cost of living adjustment" and subtracting the 5 to 10 percent estimated increase in avarege hourly earnings during 1955. A range of error must be recognized in these estimates. However, it is highly probable that corrections made in these estimates will be of a compensatory rather than of a cumulative nature. The most important element in these computations-the productivity increases are based on official Puerto Rico data which, incidentally, do not take into consideration any of the productivity increases which occurred since January 1, 1955.

So far we have reasoned on the basis of general overall relationship. A review of particular industries in Puerto Rico has shown different stages of economic development, different capitalization, hence different productivity and ability to raise wages. It is one thing to say that industry as a whole can and should raise wages, let us say 20 percent in terms of average hourly earnings and to state that each industry affected could do so.

Puerto Rico is in this respect quite different from the mainland. Particularly the spread of productivity gains and hence their "availability" for wage increases in certain little mechanized industries takes more time during the present stage of industrial development in Puerto Rico than it does for the mainland industry.

The "unevenness" of the industrial development in Puerto Rico in conjunction with the sensitivity of the economy is, therefore, a major factor to be taken into consideration. It makes flexibility in wage adjustments highly desirable.

The Senate bill fully recognizes this situation by acknowledging the vital role of industry committees for minimum-wage adjustments in Puerto Rico. One of the important features of S. 2168 is the improvements in industry committee procedures in order to make them better instruments for wage adjustments in Puerto Rico.

But there is a serious question whether the political, economic, and administrative forces which slowed down wage adjustments in Puerto Rico in the past will not continue to do so in the future.

Two factors make it imperative to raise doubts in this respect. The first factor is of a temporary nature. It is one thing to trust improved industry committees to make adequate adjustments in the future. It is another thing to expect them to correct the shortcomings of the past 10 years. And there can be no doubt that industry committees in the past-whatever the reasons may be have fallen far short of doing an adequate job. The Senate bill is based on the assumption that there has to be a period of transition during which minimum mandatory adjustments are made. Anybody familiar with the economic problems involved will agree that it is extremely difficult to find a formula for mandatory adjustments which takes full consideration of the complexity of the situation. This explains the complexity of the formula incorporated in S. 2168.

Broadly speaking it provides for an increase of less than 20 percent of the existing rates as of January 1, 1956, for industries which had wage increases in 1955, with exception of the lowest classification in the needle trades which are to be increased 33.3 percent. For industries whose wage rates have not been increased in 1955-many of them did not have wage increases for several years the increase as of January 1, 1956, is 33.3 percent-a relative increase also to be achieved 1 year after the date of the effective wage increase for those industries which had wage adjustments in 1955.

In comparing these relative increases to the figures given above, it should be recognized that S. 2168 deals with increases in wage rates whereas the economic analysis of desirable wage increases has been made in terms of average hourly earnings.

The second and more fundamental point deserves most careful exploration. Even a cursory examination of the recommendations made by the industry committees and of the decisions made by the Wage and Hour Administration convey the impression that the provision of the act to avoid "substantial curtailment of employment"-has been interpreted in an unrealistic way which is detrimental to the growth of an industrial community. The Economic Development Administration stated that "there were only 2 closings which were directly attributable to the many and substantial minimum wage increases which actually took place" 2 during a period of 15 years. It is of course true that "with so high a level of unemployment and so few alternative job opportunities*** the loss of even low-paid jobs is a serious matter for the individual." But the purchasing power effects and the beneficial effects of giving a stimulus to improved technological and managerial efficiency, which result from a less timid wage policy will in all likelihood more than compensate for what is feared to be the impact of a more aggressive wage policy.

It is fully realized that there has been in the past and that there will be in the future an objective toward which industry committees are working, namely the minimum wage on the mainland. This is a statutory objective of the act. But it is not an adequate objective for day-to-day decisions of industry committees because the speed with which this ultimate objective can eventually be reached depends largely upon the progress of the industrialization program in Puerto Rico. It is, therefore, suggested that more palpable and immediately relevant objectives be used as yardsticks to guide the impact of the year-to-year decisions of the industry committees.

The emergency situation which arose out of the failure to adjust wages properly during the last 9 years has been dealt with by the Senate bill. However, this report is not only designed to indicate the economic reasons for speeding up the increase of wages in Puerto Rico. It is also intended as a starting point for a discussion and thorough investigation of a wage policy for Puerto Rico-a policy which will combine overall adjustments based on the criteria discussed in this report with the acknowledged need for a flexible procedure adapted to the peculiarities of the various sectors of the economy of Puerto Rico.

Mimeographed statement submitted to the Subcommittee on Labor, Senate Committee on Labor and Public Welfare, p. 7. 3 Ibid., p. 2.

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APPENDIX

Voting records of industry committees 1–16

SPECIAL INDUSTRY COMMITTEE NO. 1 AND NO. 2 FOR PUERTO RICO