The methodology of this section differs fundamentally from the earlier work of Reynolds and Gregory, as well as most current empirical research on minimum wages. Nonetheless, their assessment of the impact of minimum wage policy on the labor market during the island's early years of industrialization still seems to hold. Minimum wage policy in Puerto Rico has had more than just a distributive effect on income and standards of living. It appears to have fundamentally influenced intersectoral labor mobility, the duration and timing of job search, and the labor-leisure choice. It is to Reynolds and Gregory's credit that economic predictions made over twenty years ago find empirical support in the present.
The Puerto Rican labor market has adjusted rather quickly to the post-1974 minimum wage hikes. This is as expected, inasmuch as both employers and workers are able to accurately project future movements in island minimum wage levels. 44 Although most research on minimum wages concentrates on its disemployment effects, this chapter shows that unemployment and nonparticipation effects also need consideration. Moreover, the quantitative impact is large for Puerto Rico, certainly larger than anticipated by supporters of the legislation.
Time series methods have been criticized, somewhat justifiably so, because they are applied mechanically. A more fundamental critique is that temporal relations are established with little or no theoretical content or justification. The position subscribed to here is that multivariate time series models, when based on theory, are powerful components of economic policy analysis.
Investment of U.S. firms in Puerto Rico has significantly influenced the structure of production and employment on the island. But the contribution of these firms is often overstated, to the extent that talk of eliminating the tax exemption provisions as they apply to Puerto Rico brings about cries of economic calamity. The direct employment loss resulting from elimination of tax-preferred status to U.S. firms would probably not be large. Whether this vacuum would be filled by the emergence of new export-competing firms is subject to debate, but the labor market impact would not be severe.