For example, employers are subject to federal minimum wage laws, despite the fact that the federal minimum of $7.50 per hour is much higher relative to per capita income on the island than it is on the mainland. A mainland U.S. worker earning the minimum wage is making about 28 percent of per capita income in the country as a whole. A worker earning the same in Puerto Rico earns 77 percent of the island's per capita income. This means that even entry-level workers are much more expensive to hire in Puerto Rico.
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Additionally, the report found, social safety net benefits are, given the cost of living on the island and the relative earnings of minimum wage, more generous than on the mainland.
"Workers are disinclined to take up jobs because the welfare system provides generous benefits that often exceed what minimum wage employment yields; one estimate shows that a household of three eligible for food stamps, AFDC [Aid to Families with Dependent Children], Medicaid and utilities subsidies could receive $1,743 per month — as compared with a minimum wage earner's take-home earnings of $1,159."
One result is that only 40 percent of the adult population is gainfully employed, versus more than 60 percent in the mainland.
The report paints a picture of an island trapped in a vicious cycle. Poor economic growth, the result of past fiscal mismanagement, has led to an increasing need for deficit spending, which further depresses growth, perpetuating what Garcia Padilla has called a "death spiral."
With a population greater than that of 22 states, Puerto Rico has economic significance for the U.S., and its extensive use of the bond markets in the past decade means that a widespread default could be a major shock to the markets. (The island's per capita debt load would also, as the Krueger report points out, involve an unprecedented request for relief from creditors.)
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The report posits a "voluntary exchange of old bonds for new ones with a later/lower debt service profile." That essentially means bondholders would have to take a haircut.
"Negotiations with creditors will doubtlessly be challenging," the report said. "There is no U.S. precedent for anything of this scale and scope, and there is the added complication of extensive pledging of specific revenue streams to specific debts. But difficult or not, the projections are clear that the issue can no longer be avoided."