The Effects of Minimum Wage Increases on Employment and Firm Dynamics in Puerto Rico

Recent research has increasingly questioned the canonical prediction that minimum wages have negative effects on employment. This paper studies Puerto Rico's Act 47-2021, which raised the island's minimum wage by 44.8% in three steps between 2022 and 2024, the largest minimum wage shock in any U.S. jurisdiction in recent decades. Puerto Rico presents a uniquely powerful natural experiment: as a U.S. territory subject to the federal Fair Labor Standards Act but with a Kaitz ratio of approximately 0.60, the highest of any U.S. jurisdiction, it sits at the theoretical boundary where competing models make opposing predictions.

Using several econometric specifications, I estimate causal effects on total nonfarm employment, manufacturing productivity, and business establishments across a twelve-year inter-sectoral panel. I find no evidence that Act 47-2021 reduced total nonfarm employment, with results directionally pointing towards positive employment gains though statistically indistinguishable from zero.