Flags of Puerto Rico and USA. Arturo de La Barrera/Flickr. Some rights reserved.

On January 26, 2017 the conservative governor of Puerto Rico signed a bill, commonly known in the Caribbean archipelago as the Labor Reform. In ‘rice and beans’ – as Puerto Ricans colloquially refer to explain puzzling concepts – this bill flexibilizes and deregulates even more the insular labor market. The main motive behind the labor reform, according to the actual government, is to create an investment climate, reduce operational costs of businesses and increase the competitiveness of Puerto Rican firms. There are a number of issues and implications to the Puerto Rican labor force and the labor rights that have been disrupted with the reform, including the hypothetical positive relationship between flexibilization and employment creation. Awareness of the historical context of the Puerto Rican economic and fiscal crisis is also relevant to the case.

What changes with the Labor Reform?

A recently published article in Diálogo[i] – University of Puerto Rico’s newspaper – showed that 12 labor laws were modified or eliminated as a consequence of the Labor Reform. For example, the labor reform reduces the number of annual leave days (i.e., vacation days) from 15 to 6 during the first year of employment[ii], increases the number of monthly hours an individual needs to work in order to have the right to accumulate days for paid sick-leave and annual leave (from 115 hours to 130), increases the probationary period where an employer can terminate an employee without reason or compensation from 3 months up to 9 months (12 months for those considered as specialized professionals), and reduces the Christmas bonus. In addition, employment could be terminated as a measure to increase the level of competitiveness or productivity of a business, the severance pay compensation is also reduced, and extra working hours will now be compensated at a 1.5 rate – previously working overtime was paid double.

We do not need to be erudites to confirm that the new labor reform hampers the rights of the working population. However, we must ask whether the academic evidence confirms that the flexibilization of the labor market is accompanied by the expected creation of employment. And also, question the kind of employment that this type of reform creates.

Does deregulation and flexibilization of the labor market creates employment?

Using Italy as a case study, two researchers discovered that the positive expectations of the flexibilization and deregulation of the Italian labor market were not met. Younger working population find themselves in a cycle of precarious employments, and their labor market entry did not speed up as a consequence of the labor reform. Their research “shed light on what can be seen as a ‘dark-side’ of the deregulation: the substitution of typical employment positions by subprotected, marginal jobs”[iii]. But Italy is not an isolated case, Portugal, Spain and other European conservative governments have implemented the flexibilization and deregulation neoliberal prescriptions by the Troika (European Commission, European Central Bank and the International Monetary Fund) with disastrous effects on employment.

Referring to the 2010 Spanish Labor Reform, Professor Dani Rodrik argued: “I hope someone from the IMF or OECD -- the two institutions responsible for convincing the Spaniards that such a reform is an urgent priority -- will explain to me how reducing the cost of firing workers can lower unemployment in the midst of a decline in labor demand”.[iv] In 2017, several would still request an explanation to those institutions as the unemployment rate in Spain is at 19.35% and the youth unemployment rate is 48.4%.[v] In addition, let us examine some of the outcomes of the flexibilization and deregulation in the Spanish labor market: a reduction in total number of hours worked (from 722 to 620 collective million hours), a massive abandonment of the labor market (more than 650 thousands), and becoming one of the top European countries in temporality rate.[vi] Is these what the government of Puerto Rico wants to achieve? More precariousness, less job security and less people working in the formal market – consequently the government receiving less revenues via direct taxes.

A comparative study of 15 European countries over the period 1992-2007 found that the labor market deregulation reforms have not translated to lower risks of unemployment of the low-skilled workers.[vii]  In line with previous research, it also confirms that the main effect of deregulation has been the replacement of low-skilled permanent jobs with temporary ones.[viii] Given the significant negative socio-economic effects of temporary employment[ix], the Puerto Rican labor reform might also increase the social inequality.

Given the existence of abundant academic references showing the negative impacts of flexibilizing and deregulating the labor market, we must assume that the government of Puerto Rico pretends to fix the economic problems of the archipelago with a magic wand and a rabbit in a hat.

Historical context of the crisis

Since 2006 Puerto Rico’s economy has shrunk by more than 10%, more than 250 thousands jobs have been lost, more than 45% live on relative monetary poverty, and around 60% of the adult population is either unemployed or outside of the labor market. There has been drastic socio-economic consequences from the economic crisis. Over the last 5 years more than 150 schools (around 11%) has been closed, and the childhood relative income poverty rate has risen up to 56 %. Thousands of public servants were dismissed, especially between 2009-2012. The former government’s budget allocated 16% of it for debt repayment, almost doubling the share assigned to education and health, and almost 6 times higher than the share assigned to the Police Department. And more than 50 thousand Puerto Ricans are fleeing to the United States of America (US) each year; representing an annual population loss above 1%.

In order to deal with the economic crisis, the former governments have been recurring to constitutional and unconstitutional debt issuance. According to Sergio Marxuach – Policy director of a Puerto Rican economic think tank -  the country “managed to triple its public debt from US$24 billion in 2000 to US$72 billion in 2015.  Indeed, during this period Puerto Rico’s public indebtedness grew at a compound annual rate of 7.6%, while its income [gross national product] grew at a nominal rate of only 3.6%”[x].

The policy tools available to Puerto Rico were limited. Because of its colonial status, Puerto Rico is not able to recur to the International Monetary Fund or the World Bank for loans. In 1984, the US Congress remove the right of Puerto Rico to declare bankruptcy. However, the US considered as the only viable solution to appoint a board of seven individuals to oversee the country’s finances, ‘recommend’ austerity fiscal policies, rethink ways to repay the debt and get Puerto Rico back on the track of economic growth.

The entity is known as the Fiscal Control Board – officially, the Financial Oversight and Management Board for Puerto Rico – and has been meeting regularly since September 2016. One of the most criticized powers of the board members is the immunity towards lawsuits, penal charges or civil charges for decisions taken in the name of the Fiscal Control Board. Another one highlighted by Hedge Clippers, is the role of 2 of the 7 members played in the issuance of large part of Puerto Rican debt while working with the municipal bond business of Santander Securities.

 Many may wonder, how is it possible that the US is able to rule over Puerto Rico in the XXI century? The fact is that Puerto Rico is just one of the several colonies in the present time. Puerto Rico has been a non-sovereign territory of the US since the military invasion of the North-Americans in 1898. In 2005, under the administration of George W. Bush, it was reconfirmed that Puerto Rico was a territory subject to the authority of US Congress under the Territorial Clause. It was noted that the US Congress could revise or revoke the current status at its discretion and legislate directly on local issues.  Therefore, the US has the power to legislate on Puerto Rican residents, even though Puerto Rico has no voting members representing the archipelago in the US Congress or Senate, nor they have the right to vote for the President.

However, the economic and fiscal crisis was not caused by the colonial status of Puerto Rico, but because of the inefficiency of previous insular administrations. The colonial status simply has limited and continue to limits Puerto Rico's options and tools available to solve its crisis.

After taking into consideration the Puerto Rican status and the incumbent government recent decision to flexibilize the labor market, the question is who will be the winners and losers from this reform. As it was confirmed by the Latin American ‘lost decade’, and the actual European ‘lost decade’, austerity policies do not work to promote economic growth, reduce poverty and promote the general wellbeing of the population. Therefore, with less benefits and rights the working population is expected to be the losers of this reform. Whereas the owners of the means of production have now a new tool to continue increasing its share of the pie. If the austerity policies, the deregulation and flexibilization of the labor market did not work in the past, why is the Governor of Puerto Rico expecting it will work now? It seems that only he and his advisors know the answer to this inquiry.

[i] Adriana De Jesús Salamán, "Reforma Laboral: Trastoque De Derechos Y Leyes Datadas Desde El 1935," Dialogo, January 19: http://dialogoupr.com/reforma-laboral-trastoque-de-derechos-y-leyes-datadas-desde-el-1935/ 2017.

[ii] Employees that have worked for the same employer between 1-5 years will accumulate 9 vacation days a year, those with a labor history between 5-10 years will accumulate 12 vacation days, and those with more than 15 years of labor history with the same employer will accumulate the former 15 vacation days a year. Important to note, that every time an individual move to a new job, he/she will have to start accumulating vacation days from 6 days a year. This could encourage a vicious behavior by the employers, since they could circulate his/her employees through their corporations and thus subjecting them in perpetuity to a precarious number of annual leave days.

[iii] Paolo Barbieri and Stefani Scherer, "Labour Market Flexibilization and Its Consequences in Italy," European Sociological Review 25, no. 6 (2009): 689.

[iv] Dani Rodrik to Unconventional thoughts on economic development and globalization, 09 September, 2010, http://rodrik.typepad.com/dani_rodriks_weblog/2010/09/some-economists-topsy-turvy-world.html.

[v] OECD (2017), Youth unemployment rate (indicator). doi: 10.1787/c3634df7-en (Accessed on 26 January 2017); OECD (2017), Unemployment rate (indicator). doi: 10.1787/997c8750-en (Accessed on 26 January 2017).

[vi] Stuart Medina, Miguel Carrion, and Esteban Cruz to Tribuna Abierta, 23 January, 2017, http://www.eldiario.es/tribunaabierta/desempleo-siempre-decision-politica_6_604799552.html.

[vii] Michael Gebel and Johannes Giesecke, "Labor Market Flexibility and Inequality: The Changing Skill-Based Temporary Employment and Unemployment Risks in Europe," Social Forces 90, no. 1 (2011).

[viii] Lawrence M Kahn, "Employment Protection Reforms, Employment and the Incidence of Temporary Jobs in Europe: 1996-2001," Labour Economics 17, no. 1 (2010).

[ix] Johannes Giesecke and Martin Groß, "External Labour Market Flexibility and Social Inequality," European Societies 6, no. 3 (2004).

[x] Sergio Marxuach to Center for a New Economy 2015, http://bit.ly/2bhixY2.