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It Has Got To Stop.

BY Francisco Javier Cimadevilla, Editor

March 8, 2001
Copyright © 2001 CARIBBEAN BUSINESS. All Rights Reserved.

The continued erosion of Puerto Rico’s business and economic competitiveness resulting from an ever-growing set of legislated labor fringe benefits that only add increased cost to businesses bottom lines has got to stop.

Almost daily we read stories about the high cost of doing business in Puerto Rico and the uphill battle it is to attract new companies to the island. Economists warn of the dangerous erosion of our economy’s competitiveness. In administration after administration, good, well-intentioned government officials in charge of our economic development rack their brains grappling with this issue. Yes, there are more things we can do to create more incentives to attract companies that create jobs. But is that our biggest problem? No!

The costs of locally legislated labor fringe benefits are eating away whatever competitiveness we might still enjoy on the average hourly wage rate vis-a-vis the U.S. mainland. In Puerto Rico we have twice as many paid legal holidays as in the states, many more legislated sick and vacations days than any state, forced severance pay after 90 days of employment, and legislated double pay for overtime, instead of time and a half as in the states.

One report estimates an average 22% to 25% of payroll goes to legislated employee fringe benefits in Puerto Rico, far higher than requirements on the mainland. Imagine how much higher they are than in Latin America and the Far East.

Almost invariably, however, bureaucrats and legislators fall into the trap of thinking that the basic problems of Puerto Rico’s economic competitiveness can be cured with a little tinkering with the tax code or some other incentive. They seem to believe that a tax exemption or a tax credit, whether federal or local, can remedy the problem.

Wrong. Tax exemption means nothing to a business that cannot turn a reasonable profit. Ask any businessperson whether he or she would prefer a more reasonable cost structure that would allow his or her business to operate profitably or a tax credit that will offset a net loss. You won’t have to wait for the answer.

Yet too many government officials, especially legislators, perhaps because of their own inexperience in running a business, seem oblivious to that reality. Instead they believe the answer is to run to Washington to demand more federal tax breaks. Tax breaks don’t mean anything if you are not making a profit. If you are in the red, you don’t pay any taxes. How can you get a better tax break than that?

Enough sugar can sweeten any deal. But we don’t necessarily want to attract companies that come to the island for tax breaks. Yes, if we can get more tax breaks, that’s another attraction that helps. But, what we need even more is reduced operating and transaction costs to allow companies to turn a good profit, leaving favorable tax treatment to what it should be, icing on the cake.

In the wake of recently enacted legislation to increase the two-month mandatory maternity leave compensation in the private sector from 50% to 100% and to provide a mandatory 30-minute recess for mothers to breastfeed or extract milk while at work, sounding the alarm over the issue of the increased cost of employee fringe benefits might be misinterpreted by some.

We suppose that legislators faced the same dilemma. No politically savvy legislator would have wanted to raise his voice in alarm about the added cost they represent and risk the politically mortal label of being "anti-motherhood."

But as private sector representatives tell us, some of this protectionist labor legislation might end up hurting the very employees it intends to help. Furthermore, the issue is not the effect of any one of these measures, rather the collective effect of increasing overall transaction costs for businesses on the island that has been building up for years.

In that sense we find it ironic that one of the last pieces of legislation enacted by the past administration was the Small Business Ombudsman, a new bureaucrat who will try to ensure that small business not be disproportionately affected by the excess of legislation and regulations, as if the problem did not affect medium and large businesses as well.

We wish him or her good luck.

This Caribbean Business article appears courtesy of Casiano Communications.
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