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Executive Summary

The chemical industry, which includes the pharmaceutical industry, was one of the few manufacturing segments to show an increase in employment in Puerto Rico between 1980 and 1984, according to a recent report prepared for the Puerto Rico-U.S.A. Foundation by the Washington, D.C. consulting firm Robert R. Nathan Associates. "Between 1980-1984, average employment in all manufacturing industries declined by about 3.8%0 to reach its 1984 level of 148," the report said. Ranked by labor intensity, only three of 20 industries -- chemicals (least labor intensive), machinery, except electrical (fourth least) and electric and electronic equipment (seventh least) -- did not register a decline. The report, entitled "An Assessment of the Effectiveness of a Wage Credit in Puerto Rico," was prepared in response to the Treasury Dept.'s proposal to replace the product income based possessions tax credits with credits based on employee wages. The proposal was part of the dept.'s tax simplification plan. The Reagan Administration is expected to embrace the tax simplification plan, with some revisions, at the end of May. In its tax simplification proposal, the Treasury Dept. criticized Sec. 936 for not producing enough jobs in Puerto Rico to justify the federal govt.'s loss of tax revenue. Noting that some corporations, primarily in the pharmaceutical and electronics industries, might restructure or close their operations in the possessions, Treasury said the wage credit "should attract more labor intensive industries" by reducing labor costs of eligible establishments. Labor Intensive Industries Inappropriate For Puerto Rican Economy, Report Asserts The report asserts that "there are two fundamental reasons why a wage credit without 936 would not meet Treasury's objective concerning a reduction in unemployment: (1) without 936, even with a wage credit, many Puerto Rican jobs would be lost; and (2) the jobs lost pay more than any jobs that would be retained by a wage credit, meaning that total earnings from manufacturing employment would decline." The Puerto Rico-U.S.A. Foundation report takes issue with the value Treasury places on labor intensive industries. "Using a wage credit to stimulate activity by labor intensive industries would be ineffective given the state of economic development in Puerto Rico," the report maintains. "That economy is well beyond the point where its competitive advantage in world markets lies in labor intensive activities using relatively low cost labor." Maintaining that the Puerto Rican economy "mirrors that of the U.S.," the report states that "a major growth sector" in the economy in recent years is "high tech industries, largely made up of possessions corporations." The report adds that "among 936 industries, only those which had low labor intensity had shown growth in employment." The report cited Bureau of Labor Statistics data on employment trends in the 1973-1983 period and declared: "Employment has grown where labor intensity has been relatively low. It has stayed virtually unchanged where labor intensity is about average in relative terms. It has declined where labor intensity is relatively high. Although apparel is still a significant industry in Puerto Rico, its importance as an employer is eroding as the economy of Puerto Rico has become more advanced over the last decade. Concurrently, employment in less labor intensive operations among 936 corporations has increased." According to Puerto Rico Labor Dept. and U.S. Bureau of Labor Statistics data on Sec. 936 industries, chemicals and allied products posted an annual increase in employment of 3.8% and instruments 2.9% over the 10-year period, while apparel and food posted decreases of 2.9% and .5%, respectively.The average for all manufacturing industries during that time was a decrease of .7%. The consulting firm's report asserted that a change to the Treasury formula would adversely affect ancillary employment on the island. "The impact on the indirect labor force would be very significant since it is the high paying jobs, which the Treasury proposal would eliminate, which generally provide the most jobs indirectly," the report stated. The report concludes that even if a wage credit were substituted for 936 provisions, the cost of labor in Puerto Rico "would far exceed that of other countries from which the U.S. imports many labor intensive products" and thus a wage credit "will not draw labor intensive industry to Puerto Rico." For instance, the report notes that the hourly wages in Puerto Rico are $4.64 with no wage credit and $2.63 with wage credit (excluding wages from pharmaceutical companies, which would presumably leave after recision of Sec. 936). By comparison, hourly wages in other countries are much lower: Jamaica ($1.38-$3.50); Brazil ($1.98); Mexico ($1.43); Haiti ($.33); Hong Kong ($1.37) and Korea ($1.04). The report adds that there is a trend away from these sites to countries such as India, Sri Lanka, Malaysia and Indonesia where wages are even lower. Robert R. Nathan Associates' report, dated May 1, is the first of two on Treasury's Sec. 936 proposal. The firm noted that a subsequent paper currently in progress "will address the effect on employment and the economy of Puerto Rico by withdrawing 936."

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