AEPR opposes Oversight Board’s suit to nullify new labor reform
By The Star Staff
The Puerto Rico Economists Association (AEPR) has come out against the Financial Oversight and Management Board (FOMB) lawsuit to nullify Act 41 of 2022, a new law that returns certain workers’ benefits eliminated or reduced by the 2017 Labor Transformation and Flexibility Act.
The FOMB, on September 1, sued the government in the federal Bankruptcy Court to nullify Act 41, which restored certain workers’ rights repealed in 2017. The new law also amended the formula for calculating severance payment and the language of the “just causes” for termination under the Unjustified Dismissal Act, the hours of work required to accrue vacation and sick leave as well as the monthly accrual rates for these benefits, meal period provisions, and Christmas Bonus provisions.
The AEPR said over the weekend that strengthening labor rights can jumpstart economic activity. The Association also said it supports the government’s decision to reject the Board’s petition to repeal Act 41 and noted that the new law falls short of its objectives.
The Association noted that neither the FOMB nor the government has determined the impact of labor reform. While the Association said it could not assess the law’s impact either, it backed its claims after reviewing the literature on the subject.
“Our analysis of the available literature leads us to conclude that to promote economic Development; we should have labor laws that not only restore workers’ rights but also expand those rights,” the group said.
The AEPR noted the importance of increasing salaries and promoting better working conditions to increase production and labor participation. The group also said the government could extend specific incentives and subsidies currently enjoyed by large corporations to small and medium-sized businesses to offset any adverse effects of labor reform in this sector.
The FOMB, in the court action, said its analysis performed by Robert K. Triest, chair of the Economics Department at Northeastern University, shows that Act 41-2022 would be detrimental to the economy. Act 41 repeals critical labor reforms and adds new employment law requirements that negatively impact labor market flexibility in contravention of express provisions in the certified Commonwealth fiscal plans.
The new law’s elimination would likely reestablish onerous provisions related to probationary periods, overtime, and bonuses, making the hiring environment more costly in the formal sector. Its repeal would discourage new hiring and reduce the labor market flexibility, thus limiting the effectiveness of the Earned Income Tax Credit expansion in promoting labor force participation, economic growth, and the revenues associated with that growth.
By reversing labor reform advances, Act 41 discourages new hiring and reduces labor market flexibility, which will cause a significant adverse economic impact on the Commonwealth’s economy and revenues in direct contravention of the 2022 Fiscal Plan, the Oversight Board said.
The FOMB and numerous Commonwealth fiscal plans have required the Puerto Rico government not to reverse labor reforms enacted in 2017. The Oversight Board said it also repeatedly directed the government not to pass Act 41 and attempted to engage the Government in a dialogue about the severe negative impacts of Act 41—to no avail.
Given that Act 41 impacts the entire private sector workforce and, as a consequence, the whole economy of the Commonwealth, the government’s decision not to prepare an estimate of the law’s impact on the Commonwealth’s revenues is not merely reckless; it is fiscally irresponsible, the FOMB said.
The Board said it conducted its analysis of Act 41, which the government did not contradict. The FOMB said the government proposed to the Board that when the law’s adverse effects are detected, the Oversight Board could adjust the Fiscal Plan to account for the Act’s negative impact on the labor market and the Commonwealth’s revenues.
While Triest acknowledged the 2017 law failed to increase labor participation, which is currently 40%, the economist said Act 41 will increase the amount or provision of employer-paid benefits. As a result, employers’ costs for any given wage will increase, causing the labor demand curve to shift back. It will also increase the desirability of jobs from the standpoint of employees, causing the labor supply curve to shift. The combined effect of the decrease in labor demand and the increase in labor supply is downward pressure on wages, with low-wage workers getting hit the hardest.
Triest also said Act 41 will result in an $8.17 billion decrease through 2051 in government revenues.
He said the empirical evidence from different countries shows that stricter labor regulations are associated with lower labor participation and higher unemployment in emerging and transition economies, especially among young workers.
In developing economies, cumbersome labor regulation reduces labor market flexibility, reduces the employment of marginal workers, and generates inequality in the larger society. In addition, more stringent regulations result in a larger unofficial economy and thus, lower tax revenue.
Employers subject to increased employee benefits tend to recoup this cost by reducing wages. However, when employers cannot decrease wages to offset costs of mandated benefits, as may be the case with a minimum wage worker, they may choose to reduce the number of workers they hire, Triest analysis says.