The real story behind Puerto Rico’s low 40.6% labor-participation rate
Puerto Rico's historically low 40.6% labor-participation rate (LPR) has drawn much attention of late. It was even the centerpiece of the recent speech delivered on the island by CNN Host & Time magazine Editor-at-Large Fareed Zakaria.
Nevertheless, lost in the debate is a stark realization: The island's LPR hasn't broken the 50% mark since 1950, when it averaged 55%.
That's roughly 60 years with more than half the population not working, creating a virtually permanent albatross on growth in the island's economy.
The reasons behind this labor-market crisis have yet to be fully studied on the island, but a review by CARIBBEAN BUSINESS reveals a series of underlying forces that render illusory the notion that the problem can be solved simply by creating jobs or cutting welfare benefits.
Low labor participation, it turns out, is here to stay, at least for the foreseeable future.
Today's 40.6% labor participation means 1,860,000 people of working age (16+) are neither working nor looking for work, vs. 1,057,000 who are employed and another 214,000 who are unemployed but looking (the latter representing the current 16.8% unemployment rate).
On the U.S. mainland and most developed and emerging economies, by contrast, labor participation (the employed plus the unemployed actively looking) hovers at 60% to 65%. If Puerto Rico had a 65% LPR (the U.S. mainland rate), about 2,035,150 people would be in the labor force, or 764,150 more than is the case today.
Conventional wisdom says the crisis would be solved and people actually would work if only the island's economy—mostly the private sector—created those 764,150 jobs, combined with a sharp reduction in welfare benefits, since these reduce incentives to work.
Nonetheless, those assumptions are clouded by history. Even during the roaring days of the "Puerto Rico Miracle" and raging economic growth—the 25 years or so that ended with the oil crisis and the dawn of paralyzing partisanship in the mid-1970s—the island never had more than 48% of the population working.
At the time, growth in the island's gross national product (GNP) was high, reaching as high as 9% in some years, as companies and jobs sprouted all over. Abundant welfare benefits weren't even around yet (they were introduced in the 1970s).
Economist Edwin Irizarry Mora of the University of Puerto Rico at Mayagüez (UPR-RUM by its Spanish acronym)—author of one of the most highly read college-level textbooks on the local economy— attributes the low LPR at the time to the island's massive migration to the U.S. mainland, which lowered the number of working-age people, which then included people ages 14 and older. Another factor, he said, was the growing number of adolescents going to school instead of working.
DEFYING JOB CREATION
In the '80s and '90s, excluding the recession years that opened both decades, local growth averaged 3.2%, spurred by heavy public infrastructure spending, housing and retail construction, and a thriving pharmaceutical and manufacturing sector. Still, the LPR remained stuck at an average of 47%, as if labor participation in Puerto Rico remains low no matter how many jobs are thrown at it.
Irizarry and others attribute the low LPR beyond the mid-1970s to the combination of low pay and expanded public-assistance programs, including PAN (the local nutritional-assistance program) and Pell Grants in the 1970s.
In addition, the economy failed to create the well-paying jobs needed to offset the growth in population, and a slew of labor protections and benefits further hurt job creation by increasing the net cost of labor on the island.
A 2006 Center for the New Economy (CNE)/Brookings Institution report noted the biggest shortfalls in the local LPR were for groups with relatively low potential savings and most likely to receive benefits, whether they worked or not—the young, the old and women.
The study observed, however, that the LPR for men on the island was strikingly low compared to the U.S. mainland. It also found a proportionately higher number of people on the island than on the mainland (one in 10 vs. one in 20) received Social Security income, particularly disability payments.
After peaking again at 47.7% in 2005, the recession-turned-depression that began in 2006 took the LPR from bad to worse, thanks to the loss of some 200,000 jobs and a 12% nosedive of the island's gross national product (GNP).
This brings us to the historically low 40.6% LPR in March 2011, breaking the postindustrialization record of 41.1% in 1983—not that far from today's levels—and creating a frenzied concern about the island's job crisis. Zakaria and others compare it to African levels, clearly one of the lowest LPRs on the planet.
However, as the history dating back to the 1950s makes clear, the crisis is far deeper. The first challenge, of course, is to restore growth, recover the 12% of GNP that has been lost since 2006, and create the 200,000-or-so jobs that have been lost.
That alone is a daunting task, given growing doubts about where those jobs will come from.
The Puerto Rico Planning Board and most economists expect the economy to remain in negative growth for the current fiscal year (which ends June 30) and just slightly above zero growth in fiscal 2012 and 2013.
The recovery after that is expected to have a 2.5% average annual growth, which would be insufficient to generate the employment needed. Rapid and significant job creation requires 5% to 6% growth.
At the 2.5% pace, it would take until 2018 just to make up the 12% recession dive and return to 2006's job and GNP levels.
This brings us to the second challenge: How to surpass, once and for all, the island's "normal" labor-participation rate of 47%.
That would require the creation of an additional 200,000 jobs, and that's just to break 50% labor participation.
To reach a more respectable, but still substandard, 55% (the Dominican Republic is at 56%) would take another 100,000 jobs. That is, 200,000 to get back to the 2006 level and 300,000 to get out of the global LPR gutter, for a total of 500,000 new jobs.
The economic impact of such job creation, or reversing the nearly 70- year LPR funk, would be absolutely game-changing. Said differently, the damage caused by having a majority of the island's working-age population permanently unemployed is enormous, since it creates:
- A huge base of consumers with weak purchasing power, hurting business growth.
- A large group of people engaging in criminal activity, keeping quality of life low and making Puerto Rico less attractive as a place to visit and do business.
- A gigantic underground economy where business activity is, by nature, small, unproductive, tax-evading and, in large measure, drug-related and illegal.
- Depressed tax revenue, severely limiting the ability of the government to solve such social problems as health, education and infrastructure which, in turn, would improve business and lead to growth.
- Worst of all, are the hundreds of thousands of people, from one generation to the next, who fail to reach their full potential and help the island grow in untold ways— lost innovators, investors, teachers, leaders, entrepreneurs and more.
"To the extent the labor-participation rate drops and the productivity of employees doesn't make up for the loss, the economy's potential is reduced," said economist Alfredo González, former head of UPR-RUM's economy department.
With fewer people generating income from productive work, there is more dependence on their working fellow citizens, undercutting consumption and economic well-being, he explained.
Puerto Rico's GNP—goods and services generated in a given year— is 23% to 36% smaller than the GNP expected with the size of its working- age, civilian, noninstitutionalized population, said economist José Alameda, a UPR-RUM professor, noting the fluctuation in percentages reflects pre- and postrecession employment-rate figures.
This, he said, represents $15 billion to $24 billion that the island's economy has failed to generate each year.
So, what will it take for Puerto Rico to break its 47% to 48% LPR barrier? Why hasn't significant job creation solved the puzzle before?
For a crisis of such significance, there is a surprising absence of research and study to provide answers.
Thus, blinded policymakers and government leaders have failed to put forth, much less implement, any solutions.
"No one has done the deep research yet," acknowledged the highly regarded UPR-RUM economist Edwin Irizarry Mora, also a former candidate for governor.
Harold Toro of the Hato Rey, San Juan-based CNE, admits to barely scratching the surface. "We only looked at some aspects," he said.
By comparison, there is no shortage of studies on the island's education, health and crime crises. Yet, ironically, the absence of jobs and the excess of nonwork are forces that guarantee a worsening of those crises.
BREAKING THE BARRIER
The starting point is to understand who exactly makes up the 1,860,000 working-age population that doesn't work, and whether 500,000-700,000 of them would likely work if jobs became available. The latest Puerto Rico Labor Department numbers break down as follows:
• Retired: 327,360
"Proportionately, there are substantially more people retired in Puerto Rico than in the U.S.," Toro said.
The main reason: low pay on the island. When people get near or past retirement age in the States, more of them continue to work than in Puerto Rico, because they earn more while working than if retired, he added.
"In Puerto Rico, when people compare their pay to what they would receive in Social Security, pension and public assistance of various types, they realize they would be better off retiring," Toro explained. However, neither possible solution, higher pay economywide or reduced public assistance, "appear to be in the cards anytime soon," he concluded.
• Students: 383,160
The same goes for this group. Young people who choose to study do so in unusually high numbers on the island, given the easy availability of financial aid and the proliferation of higher-education alternatives.
Nonetheless, the high student population is also due to the low pay in entry-level positions compared to the States, Toro said. Irizarry agreed: "That is correct, plus the fact that Puerto Rico simply does not have the jobs at the moment."
• Homemakers: 623,100
This number is particularly baffling to economists. It includes traditional homemakers plus people who place themselves in this category when Labor Department surveys ask why they aren't working.
"No one knows for sure the exact composition of this category," Irizarry admitted. "It hasn't been studied," Toro said.
• People with disabilities: 249,240
Recent media reports on the island have suggested a high incidence of fraud in the declaration of disability, and therefore the eligibility for benefits, in Puerto Rico.
In his walks through island neighborhoods as a gubernatorial candidate, Irizarry says he has "clearly seen more disabled individuals than one would expect, but this is anecdotal. We don't really know how many people in Puerto Rico are really disabled or how many say they are to avoid work and receive benefits."
Once again, low pay is a factor, economists say, since it encourages people to find ways not to work, and live on welfare and other public benefits that pay the same or more.
"It really explains much of the reason why labor participation remained so low even when the economy created lots of jobs over the years," Toro said.
The CNE/Brookings study shows lower taxes on the poor would improve take-home pay and, with it, the math that favors work over welfare.
Sure enough, the tax reform that kicked in this year eliminated taxes on all reported income below $20,000 and put in place an earned-income tax credit for those reporting more.
"It's too early to say what the impact will be, but it is certainly a step in the right direction," Toro said.
• Others: 277,140
"People who answer the Labor Department survey by saying they are 'simply unwilling to work and would rather stay home' fall under this category," Toro explained, as do people who "are ill or have a disability," who are "too young or too old to work," who "lack skills and/or experience," who are "discouraged" and "idled through their own will" (ociosos voluntarios).
"There are a lot of people who just plain refuse to work," Irizarry said.
By most estimates, that includes a large proportion of the 320,000 Puerto Rico residents below age 34, who showed up as "outside the labor force" in the 2010 U.S. Census, although this group appears to be represented in other categories as well.
In fact, the March survey found those in the category who "don't want to work" fell to 16,000, down from 28,000 during the same month last year. Meanwhile, people considering themselves "too young or too old" increased from 112,000 to 122,000 during the same period. People who said they "lack training, knowledge or experience" doubled from 2,000 to 4,000.
Those who attributed their status outside the labor force to "health condition, illness or incapacity" dropped from 81,000 to 60,000.
The number of people in another category that includes "discouraged workers" and "seasonal workers for whom the reference week fell in an off-season" increased from 65,000 to 76,000.
In terms of age, about half the 1,860,000 people outside the labor force are ages 55 and older—919,000, according to the March survey. The next big group, 568,000, includes those ages 16 to 34. Finally, 372,000 people are ages 35 to 54.
In contrast, among the 214,000 people classified as unemployed in March, 102,000 were ages 16 to 34, while 94,000 were 35 to 54. Only about 16,000 were 55 and older.
Puerto Rico Labor Secretary Miguel Romero said the Gov. Luis Fortuño administration is addressing the problem by creating policies that reward those who work.
"In an economy like ours, which has such a huge gap in salaries compared to [the U.S. mainland], as well as a tax system that is largely confiscatory, this has encouraged an informal economy that can't be measured statistically," he said, noting the informal legal and illegal economy could be as large as $13 billion to $14 billion, according to a 2007 study done by the agency.
An Estudios Técnicos study commissioned by the Government Development Bank, issued in August, found the informal economy has grown during the past two years due to the deepening local recession. It estimates the underground economy grew from 24% to 27% of the total local economy during the period, or from about $12.7 billion to $14.2 billion a year. The informal sector remained stable during most of the 2000s, says the study, which attributed the recent uptick to the growing number of unemployed people doing off-the-book menial work.
"The structural changes that have now been made, including increasing the work credit [on income-tax returns], and exempting people earning no more than $20,000, will reward people for entering the workforce. This will increase the labor-participation rate," Romero said.
BIG GAP IN VALUES…
Even so, there is more keeping down the LPR than just low pay and high public benefits.
Having gone through nearly three generations with such a high number of people not working has created yet another phenomenon: a large group of people who lack the values and work ethic that would allow them to hold a job even if one were available.
Iris López, human resources manager at Socio-Economic Community Institute, a nonprofit established in 1986 to help the unemployed, low-wage and poor families throughout the island become self-sufficient, points to an even deeper obstacle: the lack of values and work ethic that make people employable to begin with.
In the process of recruiting, she said just four out of 10 people who submit résumés and are called for an interview actually show up.
"Many don't even have the courtesy, the discipline or cordiality to call and cancel," said López, whose organization manages federal Community Service Block Grants for work training and placement programs. "This could be a problem with a lack of professionalism and crass irresponsibility."
López said this situation isn't limited to poor, chronically unemployed people, saying that when she worked as a recruiter for Kelly Engineering, which hires for pharmaceutical and other companies, she had seen a similar attitude among unemployed engineers and technicians.
"I used to give these people a second chance, but found the 'no-shows' were perfect indicators that they were going to have problems with attitudes, absenteeism and arriving late for work," she said.
Solving the values and work-ethic crisis would require, experts say, the sort of massive grassroots and social transformation that doesn't appear likely in the near future.
…AND IN SKILLS
To this big values gap, economists would add a big skills gap.
"This is a serious problem in Puerto Rico. There is a large structural gap between existing and potential jobs in the marketplace that require skills, and the large number of people who don't have them," Irizarry said.
Solving the skills gap, he said, would require a training and retraining blitz of equally massive proportions to bring hundreds of thousands of people up to speed.
"Hiring so many unskilled workers requires two things: sufficient low-skill, labor-intensive jobs, and training and retraining of those who can fill the higher-skill positions that are increasingly characterizing today's economy and labor market," he indicated.
He said this would require a "titanic effort" involving commonwealth and municipal governments, vocational schools and churches, and a focus on local economic development.
"You should try to integrate poor people into these renewable-energy projects being developed," said Irizarry, who is an expert on the potential growth of the green economy and its resulting jobs.
In fact, Romero said his agency is working to close the skills gap by developing a data system to align labor demand and educational offerings.
"The Labor Department is producing data on occupational demands through 2016, and the Education Department and universities will be required to use this information to develop their curricula, so students can choose academic offerings in line with job offerings," he said.
THE UNDEREMPLOYMENT QUAGMIRE
Poverty expert Linda Colón, the former and first general coordinator of La Fortaleza's Special Communities Office (2001-2004), said a key factor discouraging people from joining the labor force is the downward trend in full-time jobs and the prevalence of underemployment on the island.
She blames much of the problem for the sheer lack of jobs, not the abundance of welfare benefits and public assistance.
Colón points to underemployment as a telling sign. In January 2006, just two months before the start of the current recession, there were 640,000 people working less than 40 hours a week, making up 55% of the total 1,162,000 people working on the island at the time, she said, citing Labor Department figures.
This figure shot up to 715,000 or 68% of the average 1,051,000 people working in 2010.
Her latest book, "Sobrevivencia, pobreza y 'mantengo': La política asistencialista estadounidense en Puerto Rico: el PAN y el TANF" ("Survival, poverty & handouts: The federal welfare program in Puerto Rico: NAP & TANF"), seeks to debunk long-held myths concerning the relationship between the island's low participation rate and public-assistance programs.
She concludes in the book that most people receiving PAN are senior citizens and single women with children, most of whom presumably wouldn't work in any case.
"All economic analyses agree Puerto Rico has not been able to create the number of jobs necessary for the available labor, and this fact, along with low salaries, is one of the factors that most contribute to maintaining high poverty rates and dependence on government assistance [programs]," she said.
The Nutritional Assistance Program, or PAN, was modified in 2007 to allow people starting a new job to continue receiving help so they aren't discouraged from seeking employment.
Among those enrolled in PAN, 51,511 were people who were employed, or 4.7% of beneficiaries, Colón said.
Among working PAN beneficiaries as of September 2007, the average monthly salary was $270.59, equivalent to an average of 52 hours of work a month based on the then federal minimum wage of $5.15 an hour. Most, she concludes, were part-timers completing an average of 13 hours of work per week.
Colón also notes they are concentrated in agricultural-based municipalities, given that PAN beneficiaries are allowed to receive payments during planting and harvesting seasons to encourage work.
Only 21.8% of the labor force under the poverty level was employed in 2006, said Colón, citing Labor Department figures.
Within this group of people, ages 16 and older living in poverty, 10.3% reported having worked full time in the previous 12 months, and 61.6% reported having worked part time.
She said these figures show "what has been a characteristic of the economy of Puerto Rico in the past century: the low labor-participation rate and marginalization of low-skilled workers, and those from the poor sectors of the labor market."
Puerto Rico, she added, isn't producing its own wealth but instead "distributes the wealth of others," noting that low salaries and income, compared to the island's cost of living and consumption levels, also are devaluing work.
She said this is particularly true of jobs in the retail sector, which generally provide part-time employment and lack fringe benefits, including medical insurance.
Automation also is leading to job cuts, she said, without new jobs being created to compensate and increase the labor force.
While retailers say local labor laws are too restrictive, these same businesses usually benefit from government incentives and federal nutritional assistance and health funding to the poor, Colón argued.
"Too many businesses on the island operate in a comfort zone because they depend on U.S.-based chains or the government," she said.
As head of Special Communities, Colón tackled the unemployment problem by helping establish 17 production cooperatives, including vocational workshops. She said these businesses have faced serious obstacles, such as a lack of financing from banks.
EDUCATION, EDUCATION, EDUCATION
The lack of adequate education is another factor keeping people in poverty and out of work, she said.
According to the 2006 U.S. Census Puerto Rico Community Survey, 66% of the population ages 25 and older had completed high school, while 20.7% had obtained a bachelor's degree or more.
In contrast, among the island's population living under the poverty level, 62% didn't complete high school, 38% completed high school and 10% had a university degree.
With this educational background, the island's poor are in a clear disadvantage, said Colón, who, citing a 2007 Puerto Rico Labor Department report, noted 59.2% of the island's employees that year had a university degree or had taken college-level courses, and 26.8% just had a highschool diploma.
She said this was "very worrisome" because 34% of the population ages 25 years and older hadn't completed high school that year.
"I can assure you that when I was at Special Communities, people from the communities I visited always asked for work," she said. "But one thing is to say I want to work and another is to go out and not find any work."
She acknowledged the concept of work in Puerto Rico, particularly in government, is being devalued due to a lack of direction by many people in a society with "market-driven aspirations" steered by partisanship.
"You don't just find people who don't work among the poor, but also in the middle and upper classes, including people who have a job post but aren't working," she said.
"The prevailing ethic is to do the least work and earn easy money because, at the end of the day, in the government, the party giving me the job will judge me by my loyalty and not by my capacity to do work," she said. "There is a lack of respect for professional and productive work; as a public employee, your work is of no consequence."
There seems to be nothing on the horizon pointing to a transformation of local society's attitude toward work and work-ethic values, nor to the creation of low-skill jobs at the magnitude needed to put a serious dent in the island's LPR crisis—nor, for that matter, are there plans being laid out by leaders at any level to execute the massive training blitz required to create a labor market with the skills required for today's and tomorrow's jobs.
The result: "It looks like we are in for many more years of low labor participation," Irizarry concluded.
This suggests a sort of permanent underclass, suffering perpetually from the social plights of high crime, poor health and low education—a large underclass that besides hurting their own human potential, impoverishes the quality of life of those who do work (leading growing numbers to move to the States). This also hurts business growth by undercutting the island's consumer base and purchasing power and keeps it up to $26 billion below what it otherwise would be.