On October 15, Puerto Rico’s public sector labor unions promise “the most massive movement” in their history. Yesterday union leaders clashed with riot police outside La Fortaleza, the governor’s mansion in San Juan.
A general strike is being called in response to Governor Luis Fortuño’s decision to layoff 17,000 government workers in order to avoid a budgetary crisis. Puerto Rico faces a budget deficit of $3.2 billion.
It’s a bold move, considering that 25 percent of all those employed in Puerto Rico work in the government sector. The move is part of a larger plan to deal with Puerto Rico’s poor economic growth, growing public sector, and the lowest credit rating in the U.S. (now at BBB-).
While the unions argue that layoffs will drive up the unemployment rate, what is striking about Puerto Rico is the long-running anemia of its private sector. Stephen Davis and Luis Rivera-Batiz find in a 2005 study that employment rates in Puerto Rico are 55 to 65 percent of US employment rates. The employment shortfall is concentrated in the private sector, in particular for labor-intensive jobs.The authors cite several causes:
- High minimum wage requirements,
- Tax incentives for capital-intensive activities,
- Regulatory barriers, and
- A business climate that rests on being able to secure favors from the government.
In other words, economic policy — heavily reliant on government transfers — has discouraged private sector growth making the government sector a leading provider of jobs.
The cuts are, in a sense, unavoidable. Public sector employment is a main driver of the commonwealth’s budgetary crisis: nearly 70 percent of Puerto Rico’s budget is for payroll.