ELIAS R. GUTIERREZ

FACTOR PROPORTIONS, TECHNOLOGY TRANSMISSION

AND UNEMPLOYMENT

IN PUERTO RICO

Facror Proportions, Technology TraPs­mission and Unemployment in Puerto Rico was

presented by Elias Ruben Gutierrez Sanchez as hi_ doctoral dissertation at Cornell University. Dr Gutierrez is professor at the Graduate 5-:h Jl of Planning of the University of Puerto Ric and member of the Consumer Research In ·titute of the School of Business Administra­tion of the University of Puerto Rico. On account of his experience, doctor Gutierrez is highly qualified for this type of work. He has been consultant to several government agencies _ uch as The Department of Natural Resources, to the Puerto Rico Planning Board, and to private industry. He was member of the Gov­ernor's Committee on Puerto Rico and the Sea 'Sub-<:ommittee on Research and Development) in 1972. His research work and publications, include: A Simulation System for the Econ­omy of Puerto Rico, a research Project currently

underway at the Graduate School of Planning; A Regional Planning Model for Puerto Rico, prepared for the Puerto Rico Planning Board

(1970): En tomo a/ aumento de las tarifas solicitado por Ia Autoridad de Acueductos y Alcamarillados de Puerto Rico: un andlisis cuanritatil'O prepared for the Consumer Re­,earch Institute (1970) in collaboration with

J. A. Herrero and J. J. Villamil; Un ana/isis economico de Ia Puerto Rico Telephone Com­pan; y su relacion con Ia I. T. T.: un caso de empresa regulada (1972), that will be published :hortly by the University of Puerto Rico Press.

Factor Proportions, Technology Tral's­mission and Unemployment in Puerto Rico was

presented by Elias Ruben Gutierrez Sanchez as his doctoral dissertation at Cornell University. Dr. Gutierrez is professor at the Graduate School of Planning of the University of Puerto

Rico and member of the Consumer Research

Institute of the School of Business Administra­tion of the University of Puerto Rico. On account of his experience, doctor Gutierrez is highly qualified for this type of work. He has

been consultant to several government agencies such as The Department of Natural Resources, to the Puerto Rico Planning Board, and to private industry. He was member of the Gov­ernor's Committee on Puerto Rico and the Sea

r Sub-committee on Research and Development) in 1972. His research work and publications, include: A Simulation System for the Econ­omy of Pueno Rico, a research Project currently

underway at the Graduate School of Planning; A Regional Planning Model for Puerto Rico, prepared for the Puerto Rico Planning Board

(1970): En tomo al aumento de las tarifas solicitado por la Autoridad de Acueductos y Alcantarillados de Puerto Rico: un ami/isis cuamitatil•o prepared for the Consumer Re­">earch Institute (1970) in collaboration with

1. A. Herrero and J.J. Villamil; Un anti/isis econ6mico de Ia Puerto Rico Telephone Com­pany y su relaci6n con la I. T. T.: un caso de empresa regttlada (1972), that will be published

hortl} by the University of Puerto Rico Press.

FACTOR PROPORTIONS. TECHNOLOGY TRANS!\tiSSION

AND UNEMPLOYMENT IN PUERTO RICO

PLAN, lNG SFRILS L-2

GRADUATL SCHOOL OF PLANNING

OFFICERS OF THE

UNIVERSITY OF PUERTO RICO

ARTURO MORALES CARRION

PRESIDENT

�MAEL RODRIGUEZBOU

CIIANCELLOR

GERARDO NAVAS

DIRECTOR

GRADUATE SCHOOL OF PLA liNG

This publication was supported by Grant No. 5-T21 MH-12154. awarded by the Center for Metropolitan Studies of the National Institute of Mental Health (N. l.M.H.)

ELIAS R. GUTIERREZ

FACTOR PROPORTIONS,

TE CHNOLOGY TRANSMISSION

AND UNEMPLOYMENT

IN PUERTO RI CO

PLANNING SERIES E-2

GRADUATE SCHOOL OF PLANNING

EDITORIAL UNIVERSIT ARIA

UNIVERSIDAD DE PUERTO RICO

1977

First Edition, 1977

An Official Publication of

The Graduate School of Planning

University of Puerto Rico

Catalogaci6n de Ia Biblioteca del Congreso

Library of Congress Cataloging in Publication Data

Gutierrez, Elias R.

Factor proportions, technology transmission. and

unemployment in Puerto Rico

(Planning series ; E- 2)

Originally presented as the author's thesis, Cornell, 1972.

Bibliography: p. Include;, index.

ALL RIGHTS RESER YEO

(c) Graduate School of Planning

University of Puerto Rico

I. Unemployment. Technological--Puerto Rico--History 1. Ti tic. I I. Series. HD633l.2.P9G87 1976 331.1 '37'042097295 76-4635 ISB\' 0-84 77-2439-5

Tipograffa y �lontajc por: �1aster Typesetting of P.R. \kuaninc•. Banco de Ponce Hato Rcy. Puerto Rico

lmprcso en Puerto Rico

TABLE OF CONTENTS

LIST OF TABLES ....................................... vii

LIST OF ILLUSTRATIONS ................................. ix ACKNOWLEDGMENTS .................................. xi PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii

FOREWORD, by Gerardo Navas .............................. xv

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1. Purpose and Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2. Future Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

3. Wage Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4

4. An Overview of the Thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2

CHAPTER I

CAPITAL-LABOR SUBSTITUTION IN MANUFACTURING:

PUERTO RICO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

1.1.0 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

1.2.0 Comments on Structure and Tendencies . . . . . . . . . . . . . . . . . 28

1.3.0 Investment Decisions in Puerto Rico EDA

Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

1.3 .1 A Model of Entrepreneurial

Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2

1.3 .2 The Role of the Elasticity of

Substitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

1.4.0 Empirical Evidence . . . . . . . . . . . . . . . . . . . . . . ... . . .. . . 41

1.4.1. Estimates, Methodology and Results . . . . . . . . . . . . . . . . . 4 2

1.4.2. A Digresion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

1.4.3 Locational Elasticities of Substitution . . . . . . . . . . . . . . . . 51

1.5.0 Historical Changes in the Labor's Share . . . . . . . . . . . . . . . . . . 57

1.6.0 Summary . . . . . . . . . . .. . .. . . . . . . . . . . . . . . . . . . . . . . 59

v

APPENDIX TO CHAPTER I: A MODEL OF GROWTH WITH

INTERNATIONAL TECHNOLOGY TRANSMISSIO :AN

APPLICATION TO PUERTO RICO ........................ 61

A.1.0 Introduction ................................... 61

A.2.0 Presentation of the Model .......................... 64

A.2.1. Some Concepts and Definitions .................... 64

A.2.2. Existence of a Learning Function for

Labor .................................... 67

A.2.3 The Contribution of Resource Augmentation

to Growth ................................. 69

A.2.4 The Concept of Capital Stretching ................... 69

A.2.5 Structural Equations ............................ 76

A.2.6 The Impact of the Degree of Capital

Stretching on the Adapted

Production Function .......................... 74

A.2.7 Minimum Assimilation Criterion .................... 74

A.3.0 Empirical Evidence ............................... 75

A.3.1 Econometric Aspect ............................ 75

A.3.2. Finding .................................... 76

A.3.3 Interpretation of the Results ...................... 76

A.5 .0 Summary ..................................... 79

Mathematical Note to the Appendix of Chapter I. .............. 81

CHAPTER II. A PROPOSED STRATEGY FOR FUTURE ACTION ..... 83

CHAPTER III. SUMMARY AND CONCLUSIONS .................. 89

3 .1.0 Introduction ................................... 89

3.2.0 Finding I ...................................... 89

Interpretation I .................................. 90

Finding II ..................................... 91

Interpretation II ................................. 91

Findingiii ..................................... 92

Interpretation III ................................ 92

3.3 .0 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

3.4.0 Some Final Comments

APPENDIX OF TABLES ................................. 95

BIBLIOGRAPHY ..................................... 1 09

vi

LIST OF TABLES

TABLE

i.l Selected Time Series of Income and Product:

Page

Fiscal Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

i.2 Employment Status for 16-2 4 Year Olds 1967-68 .. . . . .......... 10

i . 3 Employment Status of Males 16 to 2 4 Years of Age, by Age and Sex: (Males ) Fiscal Year 1966 ..... . ..... . .. . ..... 12

i.4 Projections 1972 Labor Force by Age and Sex (000) ...... . . . . . . . 13

i . 5 Average Hourly Earnings for Selected Manufacturing Industries 1949, 1956, 1962 and 1968 . . . ............. : .... . 15

i.6 Average Hourly Earnings of Production Workers in EDA -Sponsored Manufacturing Plants and in U.S. Manufacturing (1954 to 1965) ..... . ......... . . . . . .... . . . 2 1

1.1 Wage Bills, Hourly Wage Rates, and Employment in EDA 1966-67 and 1967-68 .. . .. . . . . . ..... . . . .. . ..... . .. 2 9

1.2 Estimates for <J : EDA 1967 .. . . . . . . ... . ... . . . .......... 45

1.3 Estimates for the Elasticity of Substitution Puerto Rico - EDA and U.S . Manufacturing . . . . ...... . . . . . . . .. 46

1.4 Elasticity of Substitution EDA and SA U SA . . . . . . . . . ... . . . .... 54

A.l.l Employment and Unemployment in Puerto Rico . .... . ... . . . ... 63

A -1 Average Hourly Earnings in Selected Industries: Puerto Rico as a Percentage of Unite d States

Average 1952 -1967 ..... . ...... . . . . . ... . . . ...... . ... . . 97

A-2 Average Hourly Earnings in Selected Industries: Puerto Rico as a Percentage of U . S . 1958-1964 . . . . .. . . . . . . . .... 98

vii

A-3 EDA- Promoted Firms by Industry Group 1954-64

Profit as Percentage of Average Equity . . . . . . . . . . . . . . . . . . . . . 100

A-4 U.S. Manufacturing Firms Profits as a Percentage

of Average Equity 1954-1964 ........................... 101

A-5 Total Capital Per Employee in EDA -Promoted

Firms by Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

A-6 Calculation of Elasticity of Substitution From

Inputs and Factor Prices: Periods 1956 to 1963

and 1961 to 1964 ................................... 104

A-7 Calculation of Elasticity of Substitution from

Factor Inputs and Factor Prices: Puerto Rico's

EDA Sector VS. a Sample of South Atlantic

States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

viii

LIST OF !LUSTRA TIONS

ILLUSTRATION Page

1 . Graph i.1 Trends in Average Hourly Earnings for Selected Manufacturing Industries:

Puerto Rico 1952-196 3 ........................ 19

2. Diagram i.l Two Models ot Technical Change with Fixed and Semi-Fixed Production ................. 2 4

3. Figure 1.1 Elasticity of Substitution Along Isoquant .................................. 3 8

4. Figure 1.2 Illustration of Alternative Constant Values for the Elasticity of Substitution ............. 39

5. Figure 1.3 Factor Costs and Factor Proportions: EDA-P.R. and SAU S .......................... 52

6. Figure 1.4 Factor Costs and Optimum Factor Costs: U.S. and Japan .............................. 56

7. Diagram A.l Alternative Technology Regions on the Production Space ............................ 65

8. Diagram A.2 The Complete Model ....................... ... 6 8

9. Diagram A.3 Alternative Paths for the 'c' Coefficient ............. 71

1 0. Diagram A.4 Relationship among 'B' and 'C' Coefficients ................................ 73

1 1 . Graph A.l Capital Stock for Puerto Rico 1950-1967 ............ 78

1 2. Diagram M.l Bounded Rate of Growth of Capital ................ 8 2

IX

ACKNOWLEDGMENTS

We are indebted to many persons for the completion of the thesis. An

attempt to mention all would undoubtedly result in some being unintention­

ally omitted. Special gratitude must, however, be expressed to Professor Tom

E. Davis· for his guidance and dedication; to Professor Staller who kindly

substituted Professor Hildebrand during his absence; and to Professor Barclay

1 ones for his incisive questioning of basic premises. To our friend Raul

Eckerman, who belabored with both his and our own challenges as graduate students at Cornell, goes our deepest gratitude.

We must also thank Dr. Robert Harris of the Federal Deposit Insurance

Corporation for the financial assistance of that institution. The Graduate

School of Planning of the University of Puerto Rico provided the basic

economic assistance for the time we were in residence at Cornell.

Finally to Mrs. Teresita Benitez de Leon, who willingly went through

the odyssey of typing the preliminary and final manuscripts, go my "gracias."

Elias R. Gutierrez

xi

PREFACE

Tllis dissertation was presented for defense to the special committee on

January, 1970. It was formally submitted to Cornell Graduate School on

October, 1972. During the intervening period we have been able to undertake

research on such areas as small systems planning as a faculty member of the

Graduate School of Planning of the University of Puerto Rico. This, together

with other quantitative studies which we have carried out for the Consumers

Research Institute of the School of Business of the University of Puerto Rico

on such industries as the Puerto Rico Telephone Company, Puerto Rico

Aqueducts and Sewers Authority and the Water Resources Authority have

convinced us of the valiclity of the general policy conclusions and the

empirical findings pertaining to changes in relative factor juries and technical

factor substitution reported herein.

xiii

FOREWORD

The research presented in this book was performed during 1968 and 1969.

It was presented as a Ph.D. dissertation in 1973 and is now published by the

Graduate School of Planning given its relevance to the public policy debate of

Puerto Rico's present and future.

The outstanding characteristic of the economic growth of Puerto Rico

during the past two and a half decades (up to 1974) has been a constant rate of

growth of per capita income which can be considered high by any comparison.

In spite of such growth and in spite of intense government sponsored massive

migration of more than a million and a half Puerto Ricans to the United States,

during the same time period, Puerto Rico has been unable to reduce the rate of

unemployment from a fluctuating level of 10 to 12 per cent of the labor force.

This dissertation studies the teclmological nature of the unemployment

problem in Puerto Rico. Emphasis is placed on the relationship between factor

endowments and rapidly changing relative factor prices under the pressure of

federal minima wages imposed by the United States and the effect this has on the

employment generating capacity of the manufacturing sector.

Various theoretical models are presented to explain entrepreneurial

behaviour in the government sponsored manufacturing sector (EDA) regarding

the observed process of substitution of capital for labor under intense wage

pressure. A number of alternative methods are utilized to obtain econometric

estimates of the degree with which the EDA manufacturing sector responds to

�hanges in relative factor prices. This degree of response, measured by the

ehsticity of substitution, is found to be relatively strong in the sector. In fact,

tentative estimates for the manufacturing sector as a whole (government

S?Qnsored and otherwise) shows the coefficient of substitution to be close to

unity (and perhaps even stronger).

XV

The labor surplus nature of the Puerto Rican economy presents the need for technological modifications and adaptation of imported technology in order to maximize employment per unit of capital invested.

A planning strategy is outlined with the aim of both protecting and utilizing in an intensive manner· the agricultural potential of the island as an endogenous income and employment generating alternative.

It is concluded that present growth policies which emphasize industrializa­tion based on foreign capital and modern labor saving techniques for the production of exports will not solve the employment problem in Puerto Rico. The need for a policy of selective importation of technology and for the fuller utilization of the agricultural potential requiring control over basic public policy instrumel)ts such as minima wages and import tariffs is concluded.

The findings put forward in this book are important, not only in theoretical grounds but for practical purposes, in the analysis and design of development projects. A recently initiated project in Puerto Rico, designed to set up an educational-economic institution called the parallel economy of a fundamentally agrarian nature, is one of these efforts. The project is aimed towards the incorporation of a youth force, estimated at twenty to thirty thousand Puerto Ricans, of ages fifteen to twenty-five. As an economic institution, the aforementioned is intended to operate as a marginal or dual economic activity, most specially in terms of its economic output. That is, as initially understood by us, it could be directed to generate an alternate (paralell) market encompassing an institutionalized sheltered, or protected, consumer nucleus of the twenty to thirty thousand participants. Another of the project's possible goals is that it could be directed to use a labor oriented technology in order to optimize the participation of the labor force i.e. the youth, in the production process.

The effectiveness of such an institutional arrangement as an alternate path to the traditional control over basic public policy instruments, such as those mentioned by Gutierrez, i.e., minima wages and imports tariffs, needs to be measured by the actual viability of the paralell market, in terms of the economic production, as well as on the use of a labor oriented technology.

These were not necessary parts of the project's official rationale. However, it seems to us that the concluding fact pointed out by Dr. Gutierrez, in the sense that Puerto Rico has proven helpless to control key socio-economic planning instruments under present political arrangements, is- in itself decisive to the viability of such a project as well as its most important meaning. The practical relevance of Dr. Gutierrez work is thus broad in scope and critical in terms of Puerto Rico's development alternatives.

xvi

Gerardo Navas, Ph. D.

Director Graduate School of Planning

INTRODUCTION

I. Pt:RPOSE AND BACKGROUND

The purpose of this dissertation is to test some hypothesis regarding the • re and chronic unemployment which has characterized the economy of

o Rico in spite of its accelerated growth during the last two decades . . hasis is placed upon the technical nature of unemployment and its relation

.:tor endowments. It is possible to distinguish various causes for prolonged periods (15 weeks

- more) of time without being employed.1 One of these reasons can be the - re of the technological change, as embodied in the new capital equipment,

dt is taking place in the production organizations. New investments may -� uire less labor or a different kind of labor as a complementary factor in

_ ction. The character of new equipment and techniques is influenced by rates, wage levels and inventions (or discoveries) stemming from

. .. �th. If the available labor force lacks the skills necessary to operate the new ment, it will remain unemployL J. If the new equipment is capable of

data obtained by quarterly surveys undertaken by the Department of Labor's :-e.u of Labor Statistics are based on the question: Were you seeking a job during

i; eek? (the week of the survey). Persons who would have been seeking a job during �t week but did not because: a) expected to return to a previously held job from "cll they were suspended for some indefinite period of time; b) thought there were

employment opportunities within their community or occupation; c) were �rarily ill: are also included as unemployed. Cf. Como Mide Nuestro Gobierno el

!N:sempleo. �egociado de Estadisticas del Trabajo: Departamento del Trabajo, Puerto ;ocrubrede 1965.

supplying the market most profitably, excess capacity (idle equipment or only partly utilized equipment) will result. If labor of the required skill level is not available locally, it can be (and is) imported, e.g., technicians for the operation of chemical production such as petroleum cracking, etc.

Technical possibilities of substituting capital (usually in the form of equipment) for labor varies by industry. Given the flow of new inventions, the relative prices of two factors of production -labor and capital -will determine the profitability of replacing old equipment with new. The unemployment generated by these circumstances may be called technological unemployment.

The continuous presence of a sizable portion of the labor force unemployed due to technological circumstances is a pressing problem for developing countries. In Puerto Rico, despite the development that has occurred, a considerable portion of the available labor force remains unemployed.2

The development of Puerto Rico since the late 1940's has been regarded by many to be quite spectacular.3 By most welfare indicators, the island has "taken off' towards economic "maturity" -or so at least is the feeling of many economists (to say nothing of politicians). Table i.l illustrates the behavior of some important variables for Puerto Rico for the last two decades. The available evidence seems to indicate that the distribution of income has moved against low income brackets- at least for the period 1950-1963; for the period 1940-1950 there is some question as to the direction of movement but it seems difficult to believe that it was in favor of the lower income brackets.4 In 1953 the poorest

2. The Junta de Planificaci6n Economic Report to the Governor, 1968 and the Junta de Planificaci6n Four Year Economic and Social Development Plan of Puerto Rico 1969-1972 by the Planning Board of the Commonwealth, plus other studies such as the Junta de Planificaci6n Manpower Report to the Governor: A Report on a Society in Transition (undated but released in the fall of 1968), also by the Planning Board, recognize the magnitude and urgency of the unemployment problem in the Puerto Rican economy.

3. For an excellent background in to the economic, political and sociological conditions characterizing Puerto Rico and other Caribbean countries we refer the reader to Gordon Lewis, Puerto Rico: Freedom and Power in the Caribbean, Monthly Review Press, (New York, 1964).

And for a description of the fundamental problem of industrial productivity and employment the reader should see Uoyd Reynolds and Peter Gregory Wages, Industrialization and Productivity R. 0. Irwin, (Homewood, Ill., 1965).

4. Cf. (1) Fuat M. Andie, "La distribuci6n del ingreso de Ia fuerza obrera en Puerto Rico 1949-1959", Revista de Ciencias Sociales, Vol. 7, June 1963, pp.277 ff.

( 2) Rolando Castaneda & Jose A. Herrero, "La distribuci6n del ingreso en Puerto Rico: algunos comentarios en base a los anos 1953-1963", Revista de Ciencias Sociales, Vol. 7, No.4, Dec. 196 3, p.34 3 ff.

(3) Fuat M. Andie, "Un comentario en torno a Ia distribuci6n del ingreso en Puerto Rico: un estudio realizado en base a los anos 1953-1963", Revista de Ciencias Sociales, Vol. 9, No. 4, Dec. 1965, pp.363 ff.

(4) Rolando Castaneda & Jose A. Herrero, "Mas sobre Ia distribuci6n del ingreso: contra replica al doctor Andie", Revista de Ciencias Sociales, Vol. 7, No.3, June 1963, pp.277 ff.

See also Junta de Planificaci6n, Jnforme Economico a/ Gobemador, 1968, Temas Especiales, 2nda. parte.

2

J'Aill I i '1

Sl:l 1.1 C: I I I> I IMI SJ 1 01 S 01 INCOMI /\NU I'IHJI HJC f I ISC/\l VI /\HS

1!1&11 1060 1061 1062 1063 1964 196!.1 1966 1967 1968 1969

(iiUs� f'r orhrct $ MiiiiOIIS /!Jt1.!J 1,681.3 1,831.7 ? ,086.0 2,256./ 2,4 75.4 2.748.4 3,039.5 3,335.6 3,701.3 4,093.1

Prlvotn I d. 633.7 1.'115.0 1,530.9 1,709.9 1,899.6 2,072.4 2,313.6 2,558.4 2,805.3 3,110.4 3,449.3

Public I d. 120.8 266.3 300.8 326.1 357.1 403.0 434.8 481.1 530.3 590.8 643.8

Gross domestic product I d. 723.9 1,693.4 1,859.0 2,078.5 2,311.4 2,548.5 2,854.0 3,182.1 3,511.1 3,892.6 4,326.1

Net income I d. 613.6 1,353.1 1,511.6 1,696.9 1,912.2 2,086.5 2,313.7 2;539.3 2,782.6 3,079.1 3,403.0

Agriculture I d. 149.4 180.2 190.9 198.9 226.4 205.2 190.3 184.6 185.9 185.4 175.5

Manufacture I d. 88.7 288.8 339.2 397.2 455.1 506.6 556.9 634.9 701.7 794.2 908.4

Commerce I d. 101.7 236.9 259.2 291.9 314.3 359.9 415.4 463.7 504.4 548.4 607.9

State Government

Municipalities I d. 70.2 174.9 198.8 219.1 244.7 276.2 307.2 341.5 387.3 430.1 489.0 w

Federal government I d. 45.7 79.2 89.8 92.2 97.7 112.6 110.7 120.5 124.4 141.2 141.3

Others I d. 157.8 393.1 433.6 496.9 574.1 626.0 733.3 794.2 878.9 979.8 1,081.0

Net income to persons I d. 571.3 1 '185.1" 1,308.1 1,453.8 1,611.0 1.758.2 1,966.1 2,164.0 2,355.5 2,603.5 2,857.8

Personal income I d. 653.4 1,389.3 1,539.2 1,718.3 1,904.3 2,082.3 2,338.4 2,594.7 2,827.3 3,136.6 3,443.8

Disposable personal

income I d. 637.8 1,352.4 1,496.1 1,667.0 1,841.6 2,086.6 2,244.7 2,494.9 2.717.4 3,010.3 3,287.8

Personal consumption

expenditures I d. 662.5 1,398.3 1,484.3 1,650.1 1,790.4 2,021.6 2.219.9 2,476.7 2,607.0 2,866.5 3,198.5

CONSTANT PRICES (1954=100)

Gross Product I d. 878.7 1,475.0 1,552.8 1,666.1 1,798.0 1,910.0 2,058.8 2.214.9 2,327.7 2,480.1 2,634.8

Private I d. 730.3 1.239.3 1.291.9 1,392.9 1,509.5 1,590.5 1.722.9 1,854.8 1,942.2 2,058.3 2,184.5

Public I d. 148.4 235.7 260.9 273.2 288.5 319.5 335.9 360.1 385.5 421.9 450.3

1950 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969

Gross domestic product $Millions 844.1 1,486.4 1,580.1 1,710.0 1,854.8 1,984.8 2,162.6 2,352.8 2,491.9 2,661.3 2,843.9

Net income ( 1) I d. 716.8 1,221.2 1,377.7 1,482.0 1,645.6 1,768.2 1,923.3 2,072.9 2,185.9 2,361.3 2,511.5

Net income to persons ( 1) I d. 667.5 1,069.5 1,157.6 1,269.7 1,386.4 1,490.0 1,634.4 1,766.5 1,850.4 1,996.6 2,109.1

Personal income ( 1) I d. 763.3 1,253.8 1,362.1 1,500.7 1,638.8 1,764.6 1,937.2 2,118.1 2,221.0 2,405.4 2,540.0

Disposable personal income (1) I d. 745.0 1,220.5 1,324.0 1,455.9 1,584.9 1,700.5 1,865.9 2,036.7 2,134.6 2,308.5 2,426.4

Personal consumption expenditures I d. 773.6 1,262.2 1,313.2 1,441.0 1,541.5 1,712.4 1,845.9 2,022.1 2,048.0 2,198.0 2,360.7

PER CAPITA AT CURRENT PRICES

.j>.

Gross product Dollars 343 717 766 833 903 967 1,049 1 '140 1,235 1,358 1,484

Net income I d. 279 577 632 694 765 815 883 952 1,031 1,136 1,234

Personal income I d. 297 592 643 703 762 813 889 973 1,047 1,151 1,248

Personal disposable income I d. 290 577 625 682 737 784 857 936 1,006 1,106 1,192

Personal consumption expenditures I d. 301 596 621 675 716 789 847 929 966 1,052 1,160

PER CAPITA AT CON·

STANT PRICES (1954=100)

Gross product I d. 399 629 649 682 719 '746 786 831 862 910 955

Net income I d. 326 521 559 606 658 690 734 778 810 866 911

Personal income I .de 347 535 569 614 656 689 739 794 823 882 921

1U!Jll 1UUU I !lUI lOili' 1!1113 1 !)(ill 1UUb 1Uiill lOll/ 1!1118 l!IU!I

Personal disposable income Dollars 338 520 553 596 634 664 712 764 791 847 880

Personal consumption expenditures I d. 351 538 549 590 617 669 705 758 759 806 856

OTHER STATISTICS

Gross fixed domestic investment $Millions 111.4 354.9 377.5 447.7 489.3 584.0 720.3 747.0 903.9 973.4 1,089.6

Construction I d. 78.7 ·227.0 252.5 306.7 322.8 381.2 500.8 504.6 612.9 690.3 744.5

Housing I d. 25.6 88.1 101.5 125.5 132.8 158.3 211.6 245.2 . 269.4 301.3 332.7

Private I d. 21.0 72.4 81.6 97.4 115.3 140.1 189.6 216.8 226.3 258.1 287.1 Vl Public I d. 4.6 15.7 19.9 28.1 17.5 18.2 22.0 28.4 43.1 43.2 45.6

Others Ia. 53.1 138.9 151.1 181.2 190.0 222.9 289.1 259.4 343.5 389.0 411.8

Machinery and equipment I d. 32.6 127.9 125.0 141.0 166.5 202.8 219.5 242.5 291.1 283.0 345.1

Gross fixed domestic as a

%of gross product I d. 14.8 21.1 20.6 22.0 21.7 23.6 26.2 24.5 27.0 26.2 26.6

Wage bill $Millions 388.9 929.4 1,038.5 1,172.6 1,314.7 1 ,456. 1 1,629.9 1,807.8 2,004.1 2,237.2 2,511.3

Wage bill per employee $ 652.5 1,714.7 1,812.3 1,987.4 2,187.5 2,329.7 2,480.8 2,670.3 2,930.0 3,191.5 3,478.2

Wages and salaries $Mill ions 377.7 872.5 973.0 1,099.5 1,224.1 1,351.9 1,515.6 1 ,681.0 1,854.9 2,074.6 2,304.2

Average income per

family:

Current prices $ 1,500 2,836 3,074 3,346 3,559 3,789 4,143 4,485 4,701 5,018 5,391

Constant prices (1954=100) $ 1,752 2,563 2,720 2,923 3,064 3,211 3,444 3,668 3,695 3,846 3,979

1950 1960 1961 1962 1963 1964 1965 ·1966 1967 1968 1969

Average number of per-sons per family 5.05 4.79 4.78 4.76 4.67 4.66 4.66 4.62 4.49 4.36 4.32 Productivity (2) $ 1,474 2,721 2,710 2,824 2,992 3,056 3,134 3,272 3,403 3,538 3,649

Total employment (3) 596 542 573 590 601 625 657 677 684 701 722

Net income from Tourism $Millions u 19.4 18.8 25.3 29.2 35.2 45.2 53.2 64.3 80.4 96.0

Consumer price index 85.6 110.8 113.0 114.5 116.2 118.0 120.3 122.5 120.3 130.4 135.5

Population ('000) 2,202 2,345 2,392 2,444 2,500 2,561 2,620 2,666 2,700 2,726 2,758

------------------------------------------------------------------------------------------

0\

(I) Dena ted by the consumer price index.

(2) Based on gross domestic product at constant prices.

(3) Since 1963 average employment is based on a 12 months sample.

Source: Junta de planiftcacion. lngreso y Producto Puerto Rico !969. (Tablas Scleccionadas. San Juan, Puerto Rico. pp. 1-3.

�0 per cent of the families earned 5 per cent of the income while in 1963 they eJrned only 4 per cent. In 1953 the richest 20 per cent of the families earned 3-l.5 per cent of the income while in 1963 they earned 35.5 per cent of the income.

The rate of unemployment, is obtained on the basis of individuals ··actively seeking employment."s Thus defined, unemployment has remained at :: level of 15 to 12 per cent of the labor force during the period 1940-1968.6 The highest rate was observed in 1955 when 15.3 per cent of the labor force was ·lassified as unemployed. That same year Gross Domestic Product at constant

1954 prices rose at a rate of 6.6 per cent. Even more baffling is the fact that :llthough in 1960 the absolute level of unemployment was 82,000, in 1967 this level had increased to 99,000.7 During that period, the industrialization program Jnd other sectors in the island were able to create only 30,000 new jobs, while the labor force grew by 47,000 new entries.

The older and the younger members of the labor force are hit hardest by this situation. Of the 99,000 unemployed in 1967, about 47.5 per cent (47,000) vere 16 to 24 years of age; 43,000 were in the 25 to 54 age brackets; and 8,000 were 55 to 64. These unemployed persons possess low levels of education or training. Of the 99,000 without work (but seeking employment), 48,000 had less than six years of school; 47,000 had 7 to 12 years. Thus, the rate of unemployment for workers with less than 13 years of education was 14 per cent. On the other hand only 2,000 workers with 13 or more years of schooling were unemployed - this represents 2.2 per cent rate of unemployment. Unemploy­ment in this category tends to be frictional, i.e., of short duration.

The sex distribution of the unemployed is also interesting. Of the 99,000 unemployed for the year 1967, 22,000 were women. This represents a rate of unemployment for women members of the labor force of 10 per cent, which is lower than for men. The relative figure for 1967 is also a reduction from the levels of 1950 when unemployment among women was 20 per cent. A change in composition, favoring women, has taken place in the labor force itself: today 28 per cent is composed of women while 72 per cent are men. This participation

rate was 26 per cent and 74 per cent respectively for 1950. The level of education for women "actively seeking work" has also increased; 39 per cent of

This figure may be somewhat deceiving. Several economists in Puerto Rico feel that the way the surveys arc made by the Department of Labor and the design of the sampling questionnaires - especially the question "Are you seeking a job this week?"- tend to severely underestimate the real unemployment rate. The steady decrease in the participation rates and the serious underemployment rates make many believe that the real unemployment rate should be closer to 30 per cent of the real potential labor force than to l2 per cent as the ofticial figures rctlect.

6. One may even conjecture that a constant rate of unemployment today may be less acceptable than two decades ago. The "demonstration effect" upon personal expectations may contribute to a collective feeling of frustration upon those affected and those responsible.

7. This represents 99,000 persons 11·ho are consuming what others produce, but 11·ho do not even help to produce what they themselves consume.

7

the women have completed two years of high school, compared to only 15 per cent for men. This difference in training may account in part for the lower unemployment rate among women and the predominance of light industries in the island, employing mainly female labor, accounts for much of the rest.

These figures are quite alarming when one observes that during the period 194 7 to 1968 Puerto Rico has managed to increase its per capita net national income, in real terms, at 5 to 6 per cent year - for 1967-68 the rate of growth was 7.1 per cent for net income per capita in constant prices. As pointed out above, Gross National Product has grown 10 per cent annually throughout the period. Few developing countries will grow as rapidly. But if their growth patterns parallels that of Puerto Rico, none will solve the unemployment problem.

The main expansive sector in terms of employment creation has been manufacturing, which contributed 24 per cent of GDP in 1967-68 as compared to only 13 per cent in 1939-40. Between 1950 and 1962 manufacturing added 36,000 workers; between 1962 and 1968 it added 37,000. By comparison, construction added 24,000 in the earlier of those two periods and 18,000 in the latter. Government, 12,000 and 33,000 respectively. Services, 20,000 and 32,000, respectively. Together with smaller increases in utilities, trade, and finance, 115,000 jobs were added in 1950-62 and 161,000 in 1962-68. However, despite the effort to promote manufacturing and not withstanding the seven fold increase in output for the period 1950 to 1968, employment increased by only a factor of 2.48.

This is explained in large part by the sharp decline in employment opportunities in agriculture. In the decade 1950 to 1960 agricultural employ­ment fell from 214,000 to 124,000, and in 1968 it has been further reduced to 91,000. This represents a total reduction of 57.5 per cent. The labor released from agriculture is almost exclusively male. The process of industrialization has favored women workers. This development has placed great pressure on the family structure of a society which is based on a patriarchal system.

The employment problem is still more serious when underemployment is considered. The Puerto Rico Department of Labor defines an underemployed person as one who is: (a) working 35 hours per week for wages or salaries and who desires to work more hours: s (b) subsistance farmers without consideration of hours worked, who desire to work more hours; (c) self-employed persons (not included in (b) above) irrespective of the number of hours worked, who want to work more hours. Under this definition the Department of Labor estimates that in 1966, 83,000 workers were underemployed. Of these 65 per cent were saiary and wage earners, and the remaining 35 per cent were in the self-employed

8. Again this definition may be underestimating underemployment. Persons who do not desire to work more may be underemployed if account is taken of illegal activities, such as narcotics peddling, selling (and "buying") stolen automotive parts � which has become big business in the island. Crime and illegal activities have acquired alarming proportions in Puerto Rico to the point where some experts rank the island as a bigger market for narcotics than New York City.

8

category. Around 18,000 were working on farms; 13,000 were self-employed, mainly subsistence farmers. Underemployment was especially serious in the household sector - where women predominate - and in the self-employed commercial category.

Concern about the effects of underemployment in the younger age groups was expressed in views held with consultants in the Planning Board and with officials of the Corporaci6n de Renovaci6n Urbana y Vivienda. 9 The proportion of young men between the ages of 16 and 24 neither holding a job or attending school in the public housing project Nemesio Canales in 1966 was around 50 per cent.1o The impression obtained in interviews is that most of these young people see no advantage whatever in seeking a job or going to school. Activities which in many instances are illegal render incomes which are more attractive in dollar terms and in the surroundings of the "caserio" are more "prestigious". School is generally regarded especially by men as irrelevant to their needs.

Table i-2 shows that among male workers in the 16 to 24 age brackets unemployment is estimated at 32 per cent of the labor force in that age bracket. This represents an increase from the previous year of 0.31 per cent. The picture in the 20-24 category, in which one out of every four workers is unemployed, is particularly discouraging. Of the 28,000 unemployed in this category, one out of every six was a household (family) head, and one third were married. In addition, over 22,000, or 9 per cent in age brackets 16-24 are "idle," i.e., neither attending school or "actively seeking employment."

Underemployment, not surprisingly, is also high in this age bracket. Of the

19,000 young men employed in agriculture during 1967-68, 53 per cent worked less than 35 hours a week. In contrast, only 33 per cent of those employed in light industries (where female employment is concentrated) were found to be underemployed. In the services, underemployment among female workers is estimated to be 60 per cent, and even higher for males.

Underemployment in recent past periods has fluctuated. In the period 1953-54, underemployment was estimated to account for 20 per cent of all employment. This rate dropped to 17 per cent in 1957-61, but climbed again to an average monthly rate of 26.3 per cent in the 1963-64 period. According to recent figures it has dropped back to 12.2 in 1966 and 11.5 in 1967.

evertheless, it remains a formidable problem; from 69,000 to 86,000 of Puerto

Rico's labor force worked Jess than 35 hours in the year.

9. Alfred P. Thorne, in an interview, Rio Piedras, Puerto Rico, December 1968. Angelina Castro Diaz, in an interview, Ithaca. New York. September, 1968.

10. Criminal arrests as a percentage of persons 18 years and over in Nemesio Canales housing project was 10.9 in 1961. There were also a 70.9 per cent of persons 25 and over with less than 8 years of education in the same "caserfo" (housing projects for low income families) in 1965. Also, only 53.2 per cent of persons 14-19 were attending any school for that year (1965). See Manpower Report to the Governor, op. ci£., pp. 128 and 129. That same Report shows that the percentage of unemployment in 1965 in that "caserfo" was 40.7 per cent of the labor force (p.125, Manpower Report). The percentage for males is not available but as said in the text above, it is the belief of knowledgeable people that it may be above, 50 per cent. There were about 1,150 families in that "case rio" in 1965.

9

....... 0

TABLE i.2

EMPLOYMENT STATUS FOR 16-24 YEAR-OLOS 1967-1968

(Fiscal Years)

(000)

Sex Females

A e Bracket

Year 1967

Population 120 119 116 122 117 117 120

Labor force 47 44 96 99 17 18 48

Employed 32 30 74 78 12 13 41

Unemployed 15 14 22 21 5 4 7

Not in labor force 73 76 20 23 100 99 72

Domestics .:::1 .:::1. .::J .:::1 49 46 62

In school 58 60 II 13 58 60 10

Handicapped ..::J .:::1 2 3 ---- 21 ----

Idle 15 15 7 7 21 ...21 ...2! Unemployment% 31.91 32.23 22.92 21.44 29.41 25.15 14.58

Notes:

-�/Means not able to ascertain due to small sample size. Figures do not add up due to rounding.

Source: lnforme Economico a/ Gobernador. 1968, op. cit., pp. 2-84.

1968

123

50

44

7

73

61

11

�

21 13.48

The Four Year Economic and Social Plan for Puerto Rico 11 suggests seven factors that account for high unemployment:

(1) the lack of skill for which there is actual and potential demand; (2) the relatively high minimum wage level in relation to the levels of

productivity of labor; (3) the lack of complementary resources for the factors of production,

namely entrepreneurship, capital, arable land and technically trained personnel;

(4) the prejudice against certain types of employment, e.g., cutting sugar ne and domestic service;

(5) the relatively high "reserve price" that prevails among large numbers of ·he unemployed.12

(6) the tendency among employers to adopt the U.S. patterns of age rejection;

(7) the predominance of light industries where mainly female labor is employed;

Of these, (1 ), (2), (5), and (7) reflect changes in relative factor prices :illd/or technical change, upon which this dissertation will focus. Point (3) will

e discussed (at least an aspect dealing with entrepreneurial effects upon eificiency) in a somewhat cursory manner.

� FUTURE OUTLOOK

The industrialization program of the Economic Development Administra­·ion (FOMENTO) has been impressive to say the least. 1,666 new factories were

.::tually in operation by June 30, 1968. As previously observed, manufacturing 3S become an important contributor to GNP by reaching a level of 24 per cent

<.- total gross production in 1968. It employes 16.7 per cent of all persons at ork in the island. Productivity levels advanced at a rate of 13.3 per cent per

_ ear from 1960 to 1967, which is the highest for all sectors during that period.13 . 'evertheless, the unemployment totals do not diminish because the labor pool is .:. owing in Puerto Rico at a rapid rate. Senior and Watkins estimated that the I bor force will be between 915,000 and 1,059,000 by 1975.14 The P.R. Phnning Board now expects the labor force to reach a level of 959,000 in 1972

see Table i-3). Using this target, a rough notion of the task confronting the FOMENTO

b'rogram emerges. Up to 1968 the EDA program has been able to create some I �0.000 jobs, direct and indirect. (It estimated that one job created in

II. Puerto Rico Planning Board, op. cit., p.4 7. 1:. This "reserve price" is a function partly of the level of the public relief and assistance

in all forms. The "reserve price" rises \\·hen relatives, especially sons and daughters, obtain better paying jobs.

13 .\fanpower Report, op. cit. p.42. Also our computations in the Appendix to Chapter I. 1-. Oarence Senior and Donald 0. Watkins, "Towards a Balance Sheet of Puerto Rico

Migration," Selected Background Studies Prepared for the U.S.-P.R. Commission on rhe Status of Puerto Rico (Washington D.C.: U.S. Congress Prin ting Office, 1966), p.6 9 ff.

II

TABLE i.3

EMPLOYMENT STATUS OF MALES 16 TO 24

YEARS OF AGE, BY AGE AND SEX: (Males)

FISCAL YEAR 1966*

Males 16 to 24 20 to 24

Civilian non-institutional

population 122

Labor force 49

Participation rate 40.16%

Employment 34

Unemployment 14

Unemployment rate 28.57%

Not in the labor force** 73

In Schools 48

Idle 16

Idleness rate 13.11%

*Independent figures may not add up to t.otal due to rounding.

**Includes those keeping house or disabled.

110

92

83.64%

72

20

21.74%

18

10

6

5.45%

Source: Puerto Rico Department of Labor, Bureau of Labor Statistics.

12

Age

14-19

20-24 �5-29 30-34 35-39 4044 45-49 ·o-54 55-59 60-64

65 +

Total

TABLE i.4

PROJECTIONS 1972

LABOR FORCE BY AGE AND SEX

(000)

Male Female

1969 1972 1969 1972

50 51 15 15 81 91 41 45 88 92 30 41 74 81 35 48 66 70 32 35 63 67 35 29 59 62 18 21 53 56 18 19 44 49 10 12 29 44 5 7 35 40 4 5

642 692 242 267

ource: Social and Economic Plan, op. cit., p. 33.

Total

1969 1972

65 66 122 137 126 134 108 118

98 105 88 96 77 83 71 75 55 61 35 40 39 45

885 959

FO�iENTO plants generates an additional indirect job outside that sector.) E.cnployment per plant for the EDA sector approximated 70 workers per plant in

.e period 1947-1961; however, the new plants are only employing, on the

.erage, 33.3 workers per plantls in contrast to 238 workers per plant for the i.rst 5 plants promoted in the early stages of the industrialization program in the �.:.rly 1940's. If average employment per plant remains at 33, the projected 2,000 �ts will not create sufficient employment to cope with the projected increase

1:. The 264 establishments which started operations in 1966-67 averaged 33.3 workers per plant. This average is obtained by dividing total employment of these plants in June 1968 by the number of plants starting operations in 1966-67; this procedure allows for ;he usual 10 per cent increase which is observed in the first year of operations for those ;":!ctories. Employment for those plants in 1968 was 8,800. See !nforme Economico al GoberlU1dor, 1968, op. cit., p. 2 1.

13

in the labor force.16 If instead of 33 workers per plant on the average, the long run average of 70 workers is employed, the 2,000 new factories (the Program target for 1975) will create 46,800 new jobs (directly and indirectly). These new jobs, added to the 1968 total for 701,000, raise estimated employment to 74 7,800 in 197 5. Even using the"lowest estimate of the labor force (915 ,000), the rate of unemployment would still be 8.2 per cent. If the Planning Board's labor force projections are used the rate of unemployment will be 13.4 per cent.l7 Growth in employment in other sectors might hold at 11.5 to 12 per cent if new EDA plants hire 7018 workers per plant.l9

3. WAGE BEHAVIOR

Puerto Rico can be classified as a dualistic-labor-surplus-open economy in the Lewis sense2 o - a traditional agricultural sector and a dynamic industrial sector producing for exports towards which the center of balance is gradually and steadily shifting. Labor-surplus models such as the Fei and Lewis type are characterized by a constant real wage until the labor-surplus condition is eliminated. Puerto Rico exhibits a high degree of unemployment and underem­ployment, especially in the agricultural sector; nonetheless the behavior of money and real wages has not been constant nor early constant through the 20 odd years examined in this study. On the contrary, the level of wages in real terms, has been pushed upward by a dramatic increase of money wages that have exceeded the increase in the price level.

In the decade 1950-1960, the average hourly earnings of production workers in the EDA sector rose by 139 per cent. In the following five year period, from 1960 to 1965, these earnings rose by another 28.6 per cent. This represents a yearly rate of increase of 12.9 per cent. This has resulted in a steady tendency for the narrowing of the wage differential between Puerto Rico and the mainland U.S. wages.

16. A similar analysis but with earlier figures has been made by Senior, op. cit. pp. 739-740.

17. The Planning Board estimates immigration at 8,000 and 6,000 in 1970 and 1975 respectively. Their estimates depend on: (a) the ratio of returning Puerto Ricans to the population of Puerto Ricans in the U.S. during the last few years; (b) Puerto Rican population in the U.S.; (c) the immigration of non-Puerto Ricans among different groups of age and sex. Some allowance is made for the level of employment in the U.S. See Plan, op. cit., p.31.

18. ibid., p.77. 19. The Four Year Economic and Social Plan projects the largest increase, over 100 per

cent, precisely in the chemical and aUied industry group which is characterized by low labor intensity of production. The total manufacturing establishments in P.R. in October 196 7 was 2,519. Of that total 58.3 per cent employed less than 20 persons, 17.0 per cent from 20-49 persons, 15.8 per cent from 10-149 persons, and 8.9 per cent employed 150 persons and over. See P.R. Department of Labor, Censo de Industrias Manufactureras de P.R., Bureau of Labor Statistics, (San Juan, Puerto Rico: 1967), p. viii.

20. An objection to this classification may be set in terms of the fact that wages in real and monetary terms have experience a secular upward trend during the period. But this trend has been caused by exogenous institutional forces as shall be seen.

14

Vl

TABLE i.S

AVERAGE HOURLY EARNINGS FOR SELECTED MANUFACTURING INDUSTRIES

1949, 1956, 1962 AND 1968

Average Index of Average

Hourly Earnings Hourly Earnings

{dollars per hour) {1959=100)

Industry Group 19497 1956 1962 19678 1949 1956 1962 1967

All manufacturing industries1 .428 .639 1.072 1.431 100 149.3 250.5 334.3

Food & kindred products .507 .747 1.124 1.504 100 147.3 221.7 296.6

Canning & preserving .261 .516 1.108 1.518 100 197.7 424.5 576.2

Dairy products .376 .562 .961 1.362 100 149.5 255.6 362.2

Bakery products .432 5.77 .949 1.199 100 133.6 219.7 277.5

Sugar .599 .975 1.200 1.446 100 162.8 200.3 241.4

Confectionary & related products .309 .419 .883 1.326 100 135.6 285.8 429.1

Beverages industries .460 .821 1.289 1.898 100 178.5 280.2 412.6

Miscelaneous foods .318 .453 .750 1.121 100 142.5 235.8 325.5

Tobacco manufactures --- .428 --- 1.204

Cigars .290 .544 1.044 1.369 100 187.6 360.0 472.1

Tobacco stemming and drying .288 .406 .678 1.066 100 141.0 235.4 370.1

Textile mill products .456 .715 1.067 1.365 100 156.8 234.0 299.3

Broad woven fabric mill,

narrow fabrics --- .795 .928 1.300 Knitting mills .443 .751 9.120 1.373 100 169.5 252.8 309.9 Floor covering mills .473 .577 .943 1.363 100 122.0 199.4 288.2 Dyeing, finishing & miscel-

laneous textile goods .365 .603 .914 1.329 100 165.2 250.4 364.1 Apparel & related products .301 .614 .981 1.304 100 204.0 325.9 433.2

Men's and boy's suits, coats,

& overcoats .336 .534 .873 1.207 100 158.9 259.8 359.2 Women's, misses; & juniors'

outerwear .299 .577 .979 1.292 100 193.0 327.4 432.1

Children's outerwear .282 .503 .900 1.182 100 178.4 319.1 419.1

Women's etc. undergarments .297 .758 1.070 1.377 100 255.2 360.3 463.6 -

Miscellaneous apparel & 0\

accesories .275 .492 .816 1.206 100 178.9 296.7 438.5 Miscellaneous fabric textile

products .336 .627 .950 1.143 100 186.6 282.7 340.2

Paper & allied products .502 .782 L421 1.789 100 155.8 283.1 356.4

Printing, publishing & allied

industries .540 .781 1.316 1.858 100 144.6 243.7 344.19 Chemicals & allied products .515 .899 1.317 1.770 100 174.6 255.7 343.7

Industrial chemicals,

plastics, & synthetics2 .515 .805 1.824 2.365 100 156.6 354.9 460.1

Drugs .307 .815 1.186 1.673 100 265.5 386.3 545.0

Agricultural chemicals3 .651 1.128 1.271 1.559 100 173.3 195.2 239.5

Petroleum refinning rubber, &

miscellaneous plastic industries4 --- .934 1.479 1.797

Average Index of Average

Hourly Earnings Hourly Earnings (dollars per hour) (1959 = 100)

Industry Group I 19497 1956 1962 19678. 1949 1956 1962 1967

Petroleum refining & related industritv --- 1.200 2.004 3.037

Rubber footwear, fabrics rubber products --- .757 1.078 1.279

Leather & leather products .367 .555 .861 1.169 100 151.2 234.6 318.510

Footwear except rubber .393 .562 .872 1.188 100 143.0 221.9 302.3

Tanning & finishing, gloves handbags .345 .546 .854 1.217 100 158.3 247.5 352.8

-.)

Lumber & wood products, furnishing & fixtures .396 .553 .957 1.303 100 139.6 241.7 329.011

Lumber & wood products .450 .646 .943 1.273 100 143.6 209.6 282.9

Furnishing & fixtures .386 .545 .835 1.476 100 141.2 216.3 382.412

Stone clay & glass products .557 .835 1.289 1.778 100 150.0 231.4 319.2

Glass & glass products .600 1.253 1.720 2.030 100 208.8 286.7 338.3

Portland cement & structural clay products5 .679 .975 1.541 2.279 100 143.6 226.9 335.6

Concrete, gypsum & plaster products miscellaneous .486 .659 1.112 1.544 100 132.9 224.2 317.7

Fabricated metal products .449 .759 1.309 1.585 100 169.0 291.5 413.1

Machinery (except electric); transport equipmen� .564 1.059 1.448 1.758 100 187.8 256.7 311.7

00

Electrical machinery, equip-

ment & supplies -- - .770 1.309 1.611

Professional & scientific

instruments etc. --- .729 1.278 1.570

Miscellaneous manufacturing -- - .651 .963 1.303

Toys and sporting goods .314 .555 .923 1.129 100 176.8 293.9 359.6

Costume, jewelry, novelties,

buttons, miscellaneous notions .496 .583 .915 1.693 100 143.6 225.4 417.0

I Beginning with 1956 establishments were classified according to the SIC Manual, Division D, "Manufacturing Industries," prepared by the U.S. Bureau of the Budget and dated 1967. Since the data for the earlier years arc based on classification according to the previous edition of the Manual, the pre-1956 data are not strictly comparable with those of 1956 and later years.

2Thc industrial chemicals industry group did not include plastics prior to 1956. The 1954 data include drugs. 3Prior to 1956, the agriculture chemicals classification included only fertilizer mixing plants. 4Thc J 954 data for these industrial divisions do not include plastic products. 5The data for I <l49 includes cement only. ?The 1949 data represent averages for the whole year. The data for all other years except 1969 are for the month of

October. The data for 1968 arc for the month of September. 8From Department of Labor, Bureau of Labor Statistics, Censo de Industrias Manufactureras de Puerto Rico, San Juan,

Puerto Rico. 91ncludes paper.

lODoes not include tanning and finishing whose wage per hour in October 1967 was $1.350. 11 Docs not include miscellaneous wood products, $1.178. 12Does not include household furniture and fixtures, $1,290.

Source: L. Reynolds and P. Gregory, op. cit., pp. 69-70 and Empleo y Salarios en las lndustrias Manufactureras de Puerto Rico, Septiembre, 1968, Department of Labor, Commonwealth of Puerto Rico (Bureau of Labor Statistics, San Juan: 1968).

-

\0

$1.60

1.20

1.00

. 80

.60

.40

.20

,.··

.··

·

...

.. ·

·

I

/

... ··· ·· ·· ····

· · ·-

... . .

.=··

.. •··· verage Industrial

•. .. / Minimum Wage

US Minimum

-�-�_Food processing -0-0-Sugar _ x _x _Corsets etc. --0--0--0 Rubber footwear

oooooooo Real average hourly

f '

earnings for production

workers (J 957-59=100)

-D-CL_.Men's and boys suits

Tobacco, steaming and drying.

O' 1952 '54 '55 '57 '59 1960 '61 '63 '65 '67 Graph i.J. Trends in Average Hourly Earnings tor Selected

Manufacturing Industries: Puerto Rico 1952-68.

This closing of the wage gap occurs industry-by-industry. Table i-5 shows the wage increases by industry for Puerto Rico from 1949 to 1967. The index for Puerto Rico manufacturing sector as a whole rose during that period by 334.3 per cent. The range for that index is bounded by a lower level of 239.5 per cent for agricultural chemicals and an upper bound of 576.2 per cent for canning and preserving foods.

Graph i.l illustrates the time trend of wage rates in six typical industries during the period 1947 and September 1968. The b�havior of the Federal Fair Labor Standard Act minimum is shown by the heavy stepped line. The real wage for production workers is shown by the dotted line. All industries move upward under the price of the Federal minimums, and rapidly tend to approach the minimum level. The rapid rise in wages of those industries which were paying wages lower than the minimum, reflects the expressed policy of the minimum wage industry reviewing committee, i.g., to raise Puerto Rican wages to U.S. levels as fast as possible so as to catch up with the minimum "without causing layoffs." No mention is made, of course, with respect to the additional employment forgone as a result of the disappearance of wage differentials, between the island and the mainland.21

Annually wages increase approximately 6.6 per cent as compared to 5.0 for the Federal minimum. Table i-5 shows the trends for the EDA sector and U.S. manufacturing as a whole in terms of average gross hourly earnings for production workers. The data for years before 1950 is not reliable for Puerto Rico because of the small number of firms reporting to EDA; but the trend from 1950 to 1965 indicates a clear shrinking of the gap. EDA wages were 28.6 per cent of U.S. wages in 1950 and 48.8 per cent in 1965.

The industry-by-industry picture is reflected in Table i-5. In 16 selected industries, the wage differential between U.S. and Puerto Rico has dwindled considerably, despite wide variations occurring from one industry to another. In 1952, wages in the drug industry in Puerto Rico represented only 22 per cent of wages in the drug industry in mainland U.S. By 1967, the largest differential occurred in women's and children's undergarments where wages were only 45 per cent of the mainland counterpart. This data is summarized in Table i.6 for 29 industries. The genl!ral tendency for wage differentials to decline is apparent.

This general trend in wage behavior has led Reynolds and others to conclude that the minimum wage regulation has been almost solely responsible for the lag in employment creation by the manufacturing sector in the island. Reynolds asserts that the effect of substitution of capital for labor in Puerto Rico has not been a determinant factor of the trends observed in measures of productivity and employment creation.22 The differences in Reynolds' approach and ours is explained in the next section.

21. An excellent description of the process of wage determinations through the Federal Act machinery in Puerto Rico and the political and competitive implications which permeate the process is given by Reynolds and Gregory, op. cit. pp.42-61.

22. Uoyd G. Reynolds, "Wages and Employment in a Labor Surplus Economy," American Economic Review, Vol. LV, No.1, March, 1965, pp.19-39.

20

TABLE i.6

AVERAGE HOURLY EARNING OF PRODUCTION

WORKERS IN EDA-SPONSORED MANUFACTURING

PLANTS AND IN U.S. MANUFACTURING

( 1954 TO 1965)**

Reale wage U.S. rate

EDA- Manufac- EDA as % of (P.R. prod. Year P.R.a turing U. S. workers)

1947 $0.412b $1.217 34.8% N.A.

1948 .481b 1.328 36.3 N.A .

1949 .467b 1.378 34.9 N.A.

1950 .412 1.440 28.6 N.A .

1951 .448 1.56 28.6 N.A.

1952 .458 1.65 27.7 $0.498

1953 .475 1.74 27.3 0.522

1954 .505 1.78 28.4 0.539

1955 .607 1.86 32.7 0.599

1956 .720 1.95 36.9 0.701

1957 .830 2.05 41.4 0.784

1958 .884 2.11 41.8 0.820

1959 .935 2.19 42.7 0.834

1960 .983 2.26 41.6 0.890

1961 1 .026 2.32 44.3 0.921

1962 1.100 2.39 46.0 0.969

1963 1.159 2.46 47.1 1.024

1964 1.203 2.53 47.5 1.044

1965 1.263 2.61 48.8 1.071

1966 2.71 1.065

1967 2.77 1.22d

aocto ber of each year. b Annual averages.

cDeflatcd by the consumer price index for wage earners with 1957 = 100. dseptem ber of that year.

**Notes:

1. During period 1948-52, not all EDA reporting firms reported 'hours.' Those

21

figures refer thus to a smaller number of plants and do not equal average hourly earnings as do latter figures.

2. Hourly wage rates (P.R. and U.S.) are on a gross basis regarding overtime, late shifts work, etc.

Sources: Economic Development Administration, Annual Statistical Report for EDA

Manufacturing Plants, 1961-62, 1962-63 and 1963-64. Puerto Rico Department of Labor, Censo de 1ndustrias Manufactureras, October, 1957 and successive numbers, Bureau of Labor Statistics, (San Juan: Puerto Rico). U.S. Department of Lahor, Monthly Labor Review, Bureau of Labor Statistics, Washington, D.C Economic Report of the President, with Annual Report of Council of Economic Advisors, 1967 Washington, D.C.: 1967), Table B-29, p. 247.

4. AN OVERVIEW OF THE THESIS

This thesis is designed to test the hypothesis that technical substitution of capital for labor has played an important role in the manufacturing sector of Puerto Rico. To support his opposite contention to the contrary, Reynolds refers to the behavior of three variables in the manufacturing sector during the period 1954 to 1961: (1) the capital-labor ratio; (2) the average productivity of labor (output-labor ratio) and (3) the capital-output ratio. He observes (1) that the capital-labor ratios have. been increasing at very rapid rates; (2) that labor productivity has also increased rapidly - in fact, so rapidly that in some industries it exceeds the U.S. average for that industry; and (3) that in the EDA sector (for which data is available on capital employed) the capital- output ratios have remained constant for the period.23 From this evidence� and from indications that suggest reduction in waste, introduction of better management techniques, and outright reductions in labor, employed in many factories of the EDA sector, Reynolds concludes that the pressure of wage increases has not resulted in the introduction of labor-saving capital equipment, because labor has been reduced in relation to both capital and output.

This analysis may be correct, but the data is not completely convincing. Alternative theoretical descriptions are consistent with the same relationships observed in Puerto Rico. Reynolds' model has the advantage of being simple -in fact, what he is claiming is that production functions operating in the

23. The measure is obtained by dividing total capital employed by dollar of sales receipts, as obtained from Economic Development Administration, Annual Statistics Report of EDA Manufacturing Plants, successive editions through 1964; allowance for changing product mix is made by dividing the sample into two groups, i.e., those firms with more than one million dollars in assets and those with less than one million dollars in assets. For the year 1964 which Reynolds could not consider (as he wrote in 1963, and has figures for 1961 only, in many instances), the values obtained were $0.94 in 1954 and $0.87 in 1960 for firms with less than one million dollars in assets: $1.27 for 1954 and $1.23 for 1960 for those with more than one million dollars in assets. The relation as calculated by us for 1964 confirms that it has remained stable at the levels obtained by Reynolds for the previous years. The values are $0.995 and $1.226 for each group respectively.

22

industrial groups of EDA are similar to the Leontief type, i.e., characterized by zero elasticities of substitution. This is illustrated in Diagram i.l, 24 where a comparison is made between the fixed coefficient (or zero elasticity of substitution) hypothesis and the alternative tested in this thesis.

The diagram on the left depicts a fixed coefficient unitary production contour, aa, i.e., a contour in the production function where one unit of output is produced with different combinations of capital and labor. The diagram also illustrates how labor requirements per unit of output (Jl) are decreased from Jlo to p3, solely on responses by the wage pressure which raises the capital-labor ratio for (K/L)0 to (K/Lh. This process25 is possible without changing the capital-output ratio which remains constant at k0, because "unnecessary" employment is reduced in relation to capital and output. Hence, substitutability of capital for labor is not needed to explain the constancy of the capital-output ratio.

The diagram on the right depicts an alternative explanation. The unit-contour aa exhibits substitutability. In fact, the unit contour aa is seen as an "envelope" of non-substitutable technologies which are determined abroad (in the United States, in the Puerto Rican case). Thus, if the firms in an industry are at a point "A" in the unit contour, with labor requirements per unit of output Jlo and capital requirements per unit of output k0 - provided an alternative technology "B" is available from tlte outside and can be imported; and provided the labor force employed can be trained to utilize that technology - then, on the expectation of an increase in the factor-price ratio, that technology would be adopted and the capital-labor ratio will increase to (K/Lh. But we see that the capital coefficient will have attained a new higher level at k 1.

If the wage jncrease is observed as a trend and if management takes appropriate actions (thus introducing a third factor as well as considerations of the scale of operation), then, the labor coefficient can be reduced to a still lower level of 112 by the introduction of "process innovations" - which Reynolds documents thoroughly in his book - thus producing an increase in productivity in the entire enterprise. The net result would be to shift the unit contour towards the origin so that a position "C" is finally attained at the technology ratio K/L1, with labor requirements p2 and at the previous level of the capital coefficient k0 -which is seen to remain constant. Thus, the shifting from a position "A" to "B" induced to "C" represents a technological component from "A" to "B" by the pressure of expected wage increases and a component representing innova­tions, from "B" to "C" which results from the introduction of more efficient procedures of management organization and utilization of factors and resources within the plants. This description appears reasonable in the light of the low wage structure prevailing at the beginning of the period; rapid industrial growth; and tax exemption; which combined to assure the profitability of the enter-

24. A similar diagram will be presented and expanded in Chapter II. 25. Reynolds & Gregory observe the net result of a process and thus fall into an

identification problem.

23

K

a

K/L3

N I I / """

113 112 Ill Jlo

Diagram i.l.

K

I ' a

K/L1 a

I

I I I I

\ ' I K/L2 I '

I

I

K/L2 I I I I

/i�/ I

K/L1 I I ' K/L0 I o

K/Lo

a Ko

I /;'/: ���

L �i :

112 Ill

: a

' - ...... - ....... � ... - .... --- - - -a

Jlo

Two Models of Technical Change with Fixed and Semi-fixed Production Coefficients

L

prise even though initially the managers had no previous experience and foremen were selected on such basis as some command of English. Other inefficient

practices were also common. The remainder of this study will attempt to provide evidence consistent

with the hypothesis. The following chapter will present evidence concerning the reactions of entrepreneurs to changing wage rates. The data suggest that the coefficient measuring the elasticity of substitution in manufacturing in Puerto Rico is close to unity, not zero. A comparison with a low wage area of the U.S. shows that Puerto Rico is more capital-intensive despite lower relative wages. This chapter also throws some light on the nature of the production function for Puerto Rico's manufacturing sector (although no attempt is made to estimate a production function).

In the Appendix to Chapter I, a theoretical structure is developed, which describes the process of growth with transmission of technology. Simple estimation of the most important structural equations of the system is attempted.

The second Chapter presents an outline of a strategy which would attempt to provide an alternative source of employment integrating the industrial and agricultural sectors.

The third Chapter of the paper summarizes the main results and conclusions. Some policy considerations are discussed in rather general terms due to the tentative nature of the results obtained in the empirical and analytical sections.

25

CHAPTER I

CAPITAL-LABOR SUBSTITUTION IN MANUFACTURING:

PUERTO RICO

1.1.0 INTRODUCTION

The Introduction to this dissertation provides a descriptive picture of some of the most important characteristics of Puerto Rican development and its chronic unemployment during the past two decades. Its purpose has been to provide a general background and to emphasize the need to evaluate programs of industrialization on the island in terms of their impact on employment. It does not present a complete picture of the economic history or of the various economic interrelationships characteristic of that island; it does provide a frame of reference for this study.

The present chapter is divided into two parts: the first describes the investment decision process in the manufacturing sector of Puerto Rico - and specifically within that sector sponsored by the promotional activities of the Commonwealth government; and the second subjects the fundamental assump­tion made in the first section to statistical testing - an appendix to the chapter gives a more vigorous treatment to the topic of technological unemployment.

Specifically, the first part presents a tentative model of entrepreneurial behavior in the manufacturing sector of the island with special emphasis on the choice of techniques resulting from the special conditions postulated by the model. The basic assumption regarding the sensitivity of firms in that sector with respect to changing factor prices is then tested. The empirical section has the dual value of testing the hypothesis suggested by the theoretical analysis and of

27

being of interest per se given the relevance of the estimated substitution parameter for distribution theory .1

1.2.0 COMMENTS ON STRUCTURE AND TENDENCIES

At the risk of repetition it may be worth while to stress several points which may have been touched in the Introduction. These are: the special structure of the FOMENTO (Economic Development Administration) sector; and the tendencies observed during the period 1947-1967 with respect to such important variables as wages, the capital-labor mix and the industry mix within EDA. All of these have had an effect upon the investment decision pattern of the typical firm operating, or considering operations, within Puerto Rico's manufacturing complex.

The importance of this sector cannot be overemphasized. It constituted, since 1947-49 the most important tool of development for the island. Its presence and growth has had unbounded influence on the growth of the GDP and on employment and population distribution within the island. It acts like a magnet on the labor force and sets the wage standard for the local sector.

In fiscal year 1968, EDA consisted of 1,666 plants in operation. it employed 99,423 workers and generated 70.7 per cent of net income in manufacturing. This represents 16.8 per cent of total net income generated by the island in that year. The largest single-year increase in employment absorption by that sector, i.e., 13,800 workers, occurred in 1968.

Simultaneously with these developments the extraordinary upward trend in wage rates continued under the stimulus of upward revisions of Federal

1. Knowledge of these parameters is also convenient for industrial development planning purposes due to the implications regarding changes in capital intensities among industries. If the amounts of capital and labor employed per unit of their respective outputs were technologically fixed, the ranking of different industries in accordance with the relative magnitudes of the two coefficients would certainly be valid. It would be meaningful even if the elasticity of substitution were larger than zero, provided the changes in the capital-labor ratios were so uniform as not to disturb to a significant degree the relative positions of individual industries in their (capital) labor intensity, i.e., if no reversals occur so that a capital intensive industry would become labor intensive with respect to another. On the other hand, if the elasticities of substitution of different industries were to be significantly different from each other, reversals would be unavoidable. The distinction - or ranking - of industries according to the factor intensity would no longer be given data for purposes of economic planning. This is the point brought forth by Bagisha Sing Minhas, "An International Comparison of Factor Costs and Factor Use," Contributions to Economic Analysis, No. 31, Amsterdam: North Holland Pub. Co., 1963. For a rebuttal of this thesis see The Review article of the book by Wassily Leontief, in the American Economic Review, Vol. LIV, No. 4, 1064, p.335. Leontief argues that crossovers, i.e., reversals of ranking, are not likely to occur within the relevant ranges. In fact, he argues that Minhas' data gives evidence of this. Notice should be made at this point of the fact that a Cobb-Douglas production function operating in industries would exclude crossovers - this is one of the reasons Minhas places such an emphasis in the Constant Elasticity of Substitution class of production functions.

28

minimum wage rates. From a level of $1.34 per hour in 1967, the average hourly rate paid in manufacturing rose to $1.47 in 1968. By June 1968 it had reached $1.56. an d in October 1968 the level was at $1.58 per hour. It is expected that the minimum will reach $1.69 per hour by May 1969. These continuous increases in average hourly earnings inflated wage bills for the entire manufactur­ing sector during 1967-68 by 16 per cent. The greatest increase was felt by firms in [ D/\. This sector experienced a rise in the wage bill of more than 20 per cent.

on-EDA firms reduced employment.2 See Table 1.1

TABLE 1.1

WAGE BILLS, HOURLY WAGE RATES, AND EMPLOYMENT IN EDA 1966-67 AND 1967-68

1966-67 1967-68 %Change

Wage Bill ($'000) 264.2 306.2 15.9

Hourly wage rate

($/hour) 1.34 1.42 9.7

Employment (annual

average '000) 120.9 128.3 6.1

Source: Puerto Rico Planning Board, Division of Social Accounts

It is our hypothesis that in response to this steady increase in labor costs the firms operating in EDA have altered their capital. If we limit ourselves to the available data for EDA, Table 1.1 at the statistical appendix shows a clear long run tendency for this ratio to increase. Although year-to-year changes are drastically affected by new entries, the evidence is all too clear. For the period 1954-1961 the weighted average for all industries shows a 129.0 per cent rise. For the entire period 1954-1964 the percentage change is 288.1 per cent, thus indicating acceleration over time.

These findings will receive further elaboration in the empirical section of this chapter. However, an important observation should be made at this point. The capital-labor mix in the EDA sector seems to have been the result of labor

2. Economic Report to the Governor, Puerto Rico Planning Board, 1968, p.22.

29

shrinkage rather than capital deepening in the period 1954-61. As explained in

the Introduction, L. Reynolds and P. Gregory3 make this point and call attention to the relative stability of the capital-output ratios within the various sectors to support this claim.4

If attention is focused on the employment per establishment for EDA during the period, a striking fact emerges. The first five factories to open under the FOMENTO program in the 1940's had an average employment of 238 workers per plant. The average number of workers per plant for the 125 establislunents which began operations in 1961-62 fiscal year was 44. In fiscal 1966-67, 264 plants started operations. By 1 une 30, 1968, these factories were employing 8,800 workers.s This represents an average employment per plant of 33 workers, and suggests continuing decline in the average size of plant in term of average employment.

These trends reflect changes in the type of investment within the sector. They correspond to the general secular trends for U.S. manufacturing with respect to capital-labor ratios.6 The steady increase in wages has forced local, more traditional enterprises, e.g., tobacco, to modernize their plants in favor of labor-saving capital equipment. Non-local plants have been able to introduce management improvements which have had the effect of outright reductions in "unnecessary" employment and in mechanization of material handlings. These firms apparently have adopted patterns of production not very different from their mother firms in the U.S. despite the fact that relative price differentials seemingly would imply that more labor intensive methods would minimize costs.7 However, past experience suggests that plants will confront rising wage costs. Our hypothesis is that under these circumstances plants will choose more capital intensive techniques than the factor endowments and factor-price levels, in comparison to U.S. levels, would suggest.

The tendency toward capital-deepening is reinforced by the changing industry mix in the EDA sector. Whereas the bulk of the original firms were engaged in textile, apparel and food processing. now. petroleum refining, light

3. Wages, Industrialization, a nd Prod uctivity in Puerto Rico. Yale Center for Economic Growth, (Homewood, Ill., Richard D. !min. Inc .. 1965) pp.90-96.

4. It is interesting to note at this point that the long run tendency for capital-output ratios has been to decline in U.S. manufacturing. &e for inqance Thomas H. Mavor, "The Decline in ti1e United States. Capital-O

-utput Ratios." Quarterly Journal of

Economics, Vol. 75, Nov. 1961, pp.615-34. Also see Benton Massell, Capital Formation and Technological Change in U.S.

Manufacturing, R E & S, Vol. XLII, No. 2 May 1960, p. 185. 5. Economic Report to the Governor, op. cit . . p.l5.

6. For tile period 1919-1958 the secular trend tor this ratio in U.S. manufacturing has had a definite upward trend although with sharp c yclical instability. For the period 1944-58 the trend has been clearly and strongly upward. Sec especially Benton F. MasseU, "Determinants of Productivity Change in United States Manufacturing," Yale Economic Studies, Vol. 2, No. 2, 1962, p.303.

7. This is subjected to statistical test later in the chapter. Altiwgh this paper deals almost exclusively with the nonlocal sector of ti1e P.R. economy it would be desirable indeed that some analogous study be made for the local sector.

30

machinery and chemicals are increasingly important. These groups employ more capital intensive techniques.s

The ease with which the manufacturing sector - and especially the EDA

porti'Jn - is able to substitute capital for labor under the influence of wage pressure shall be the subject of the empirical section.

1.3.0 INVESTMENT DECISIONS IN PUERTO RICO EDA MANUFACTURING

The typical "promoted" firm that starts operation in Puerto Rico under EDA sponsorship is a branch of a U.S. mainland corporation.lt usually produces parts and/or assembles parts. It contributes to a process which usually starts, and sometimes ends, in other mainland plants. Puerto Rican plants start operations on subcontracts of two to three years duration. In the first 12 months, a typical establishment increases initial employment by I 0 per cent on the average. The firms are granted tax exemption for periods ranging from I 0 to 20 years depending on the site location. Financial assistance and generous tax deprecia­tion allowances are provided.9

8. Little has been said about the local sector of Puerto Rico's manufacturing, except by contrast to EDA. In fact there is a growing number of local firms being sponsored by EDA. Of the 337 firms promoted in 1966-67, 137 were local and of the 309 promoted in 1967-68, 144 were local Thus there is a growing representation of local entrepreneurs in the EDA sample. It is, nevertheless, of smaller importance when compared to predominantly American enterprises. In 1964 the local firms employed 6,865 workers compared to 58,948 workers for the non-local firms. The local su bscctor of EDA represented a total investment of S 130 million in 1964 compared to $920 million for the non-local su bsector.

9. The EDA Statistical Report of 1964-65 describes these incentives as follows: Cash concessions are granted to be used on such items as: a) training of supervisory personnel; b) salaries of supervisory personnel; c) payment of rent on building; d) payments of freight on machinery and equipment from point of origin to the plant site; e) interest on mortgage for the purchase of building; f) costs of additional facilities required to carry on tlJC operation such as power stations, transformers, electrical installations, costs of installing equipment and machinery, etc. In addition to locational incentives, special grants arc provided to projects of extraordinary importance, e.g., core industries, highly-skilled operations, and projects which use local raw materials. The Government Development Bank can provide loans through mortgages on building or chattel mortgages on cquipmt>nt. Under a new U.S. Dept. of Commerce policy, financing up to 25 years is provided to eligible industries locating in underdeveloped areas. As much as 90 per cent of the total value of fixed assets may be obtained from the following sources;

65 per cent from EDA (previously ARA) at 4 1/2 per cent interest on a second-mortgage basis:

5 per cent from local government as equity capital or on a third-mortgage loan; 20 per cent from the Government Development Bank or from private lending

institutions on first-morgage basis: 10 per cent is expected to be contributed by the applicant. This Agency can also

guarantee up to 90 per cent of a working capital loan made by a private lending institution to a borrower establishing or expanding an industrial plant provided he is also an applicant for a fixed capital loan. Grants for feasibility studies, and long-term loans and grants for public facilities related to the industrial projects, are also available.

31

Minimum wages are determined on the basis of productivity growth of the industry. Committees (appointed under federal and insular statutes) determine whether the minimums fixed by the U.S. Congress should rule within the industry. The policy of these committees has been to increase wages to the highest levels, in accordance with the Fair Labor Standard Acts, that would not produce actual declines in employment for that particular industry.

If we assume a firm operating under these conditions and behaving according to maximizing principles, a simple, and incomplete, but nevertheless useful, model of entrepreneurial behavior can be constructed.

1.3.1 A Model of Entrepreneurial Behavior.1 o

Let the following vectors be

C = (K L M) = vector of existing resources - its elements representing stocks to the firm�

S = vector of services yielded by the elements of C;

w = the "wages" received by s�

I = vector of gross investment rates at which resources included in C are purchased;

G = vector of payments per unit necessary in the purchase of C through I.

Then the accounting costs. i.e., competitive prices. are:

w·s + G'I(the (')indicates the transposed vector)� Q is the product sold by the firm at a price P.

Thus PQ is gross revenue. Assume that all prices are fixed. Let r be the rate of interest at which the firm can lend or borrow.

The present value of the firm is given by 11

(1) / V= j [P'Q(t)_w·s(t)_G'I(t)]e-rtdy.

10. This theoretical structure rests heavily on the previous work by Arthur B. Tread\\·ay, "What is Output? ;" in Productivity and Productivity in the Service Industries, Victor R. Fuchs, editor, Studies in Income and Wealth. \'BER. 1969, pp.53 ff. and Jose A. Herrero, The Effects of Minimum Wage Legis/arion on rhe Rate of Growrh and Em­ployment of the Puerto Rican Economy, College of Social Sciences, University of Puerto Rico (Mimeograph) 1968.

11 Q(t), S(t), I(t), C(t) are time variables.

32

For a given vector of resources such as

C =dC/dt =Co

If it were possible to speak of an "equilibrium" state for the firm's technical processes we could say that under that state

Co =0

And thus, the technical constraints to the firm in its endeavor to maximize (1) would be precisely the production function

(2) F(Q, C, S) = 0

Now the value of the generalization presented by Treadway stems from the fact that this production relation explicitly allows a dependency between the production and expansion activities of the firm. Further, the different elements of C, i.e. the set of resources available and/or necessary to the firm, can have different rates of accumulation (or depletion). Some of the elements in C may be perfectly variable. In which case 8F/8Ci = 0, i.e., Ci does not enter the technical relationship F. Gi, the payments per unit acquired of Ci, may be 0 or positive, e.g., purchases of raw materials used up during the accounting period, some special kinds of labor, some rental equipment such as those not involving contractual arrangements that extend outside the accounting period.

Some of the elements in C may be perfectly fixed. In such an instance if Cj is perfectly fixed it can be ignored in the vector C and provided all other non-fixed resources are contained in C, either increasing, decreasing (or .both) returns to scale will set in.l2 In this case the price Gj of Cj is i�r�levant as Cj = 0, i.e., there is no rate of accumulation, but Wj i.e., the rent to Cj, may be positive.

In general C1 will not be either perfectly fixed or perfectly variable; this will depend on the time period considered in the analysis. In this more general case, the accumulation of some resource C1 will have an impact on production activities of the firm and thus cl will appear in the production function (2). Again G1 and W1 may not be zero.l3

It is important to point out now that C and I are linked by depreciation and "appreciation" rates d and 1 respectively. If both d and I happen to be nil and assuming that the services rendered by a given resource are proportional to its quantity, so that

12 If C contains all resources available to the firm, constant returns to scale are required so that

F(A.Q,A.c,A.C) = 0 for all A.> 0 where CA.= 0. 13. Notice that those resources extern al to the firm but relevant to a given process F and

entering in (2) as stocks or flows will not enter the revenue function (1). Their prices will usually be zero. Such are for instance the technical knowledge produced by government research on marketing or development operations.

33

S=C; and

C=I.

At any moment in time, t = 0, then, the firm inherits a set of resources from the past such that C(O) = C0. The problem of the firm is then to maximize the present value subject to the production constraints imposed by (2).

·

Max. j [(P'Q(t)- W'C(t)- G'C)]e-rt dt

Sub. to: a. F(Q,C,C) = 0

b. C(O) =Co = Ii

Where Ii is the initial investment. Maximization is carried on by the achievement of a path C(t) for the firm's resources. The expansion rates are included explicitly in the production function.l4

Let us now visualize a firm operating in the EDA sector of Puerto Rico's. manufacturing.

This firm will strive to maximize its revenue function subject to the technical constraints of its production function

Max. V = P'Q - W'S - G'I

Sub. to: Q- F(C,C,X)

Where: C has elements K, Capital; L, labor; and M. raw materials. W has elements

w, wage rate; C includes the rate of depreciation of capital dl5 and the rate of appreciation of labor 1. The rate of appreciation of labor is given by some learning function through which labor productivity is expected to increase at that annual rate 1. G contains pk, the price of capital goods purchased through I; pill, and the price of intermediate inputs to be consumed during the accounting period. These prices, along with P, the price of output Q, are asrumed to remain fixed during the period. X is a technological factor determined outside the

14. Notice that the firm is viewed in this curious approach as producing two "outputs": (a) Q, the vector of those outputs sold (including externalities sold at zero prices) and; (b) a set of rates of accumulation (not the assets per se) to be used in the future. The purchase of these rates of accumulation involve a purchase price G and an internal cost in forgone sales.

15. We adopt from now on the discontinuous form which is more realistic. See R.G.D. Allen, Mathematical Analysis for Economists, (London: MacMillan, 1966), p.534 f.n. Here we have relied heavily on Herrero, J .A., op. cit.

34

system. New investments 11, 12, ...... are assumed to contain· embodied technical progress. The set of prices are given to the firm - the price of capital and raw materials is determined in the U.S. and the wage rate is set by government authorities. The wage rate is assumed to have an expected rate of growth per year of s.

The augmented Lagrangian version of the objective function becomes l6

Max. II jli = P'Q-wL-dK-pmM (l+r)Ii

+ P'Q - W(l+s)L (1+1)-l -dL-pmM + (1+r)2Ii

... + P'Q-w(l +s)t-1 L(1 +1)-t-1)-dK-pmM +A Q-F(L,K,M:X)

(i)

(ii)

(1 +r)tii 1

The first order conditions for maximization are

b (IIJii] =- w bi ( l +r)li

-w(l +s)t-1(i+I)-(t-i)

( 1fr )tri

b [rr/ti]� - _d bK (1 +r)li

w(1+s)(1+1)-1 - ... (1 +r)2li

+ t..gL=O

d (1 +r)2Ii

d + (1+r)tii

where IIjli is profits per dollar of initial investment. We disregard b(IIjli) /b/1 ; and b(II/Ii) /bf.. is zero by definition.l7

16. Notice that 1 is in fact a rate of improvement of those services obtained from L and that capital suffers no such transformation during the accounting period. Capital, thus, can only be modified through the introduction of new vintage capital in the next period. The underlying assumption here is that K is a fixed factor, i.e., we deal in the short run. The inadequacy of static analysis is most evident in this case. Nevertheless we take it to be a relatively good approximation mainly because our interest lies in the response which the firms may be expected to show in the next period to a condition of disequilibrium brought forth in the initial period by less than optimal conditions.

17. We are using the Lagrange multiplier method of the general type: Max. (1) z = f(x,y) s.t.: (2) g(x,y) = 0

which is always expressed as some function set to zero. The augmented objective function is written as follows:

(3) Z = f(x,y) + Ag(x,y) For critical values of Z, regarded as a function of three variables x, y, and the necessary conditions are

(i) Zx = fx + Ags = 0 (ii) Zy = fy + Agy = 0

(iii) Zf.. = g(x,y) = 0 where (iii) restates Z. The critical values of the augmented function Z will

35

Notice that (i) and (ii) are independent of the price of capital. (The inclusion of pk would not affect the analysis as the rate of increase of wages has been much greater than the increase in capital goods prices by an order of magnitude of something like 45 per cent for pk vs. 245 per cent for w during the period 1950 to 1966.)18 Maximizing profits per dollar of initial investment makes the rate of capital consumption, and not the continuing changing price of capital goods, relevant. Again, it must be stressed, that this is a result of the chosen time horizon.

In a competitive situation the marginal productivities will be equated to factor prices, thus by substituting (i) in (ii) we obtain

w

+

or

1 + ... + 1 J (1 +r)2Ii (1 +r)tll

1 ... + 1 J (1 +r)2Ii (1 +r)tii +A.

w

+A. = [:K (l+r)II

which implies that (1 +s) = (1 +1). For the case where s f 1 we obtain

w

or

where t=T

+ (l+s)(l+1)-1 + ... +] A.+=

_i_ [ 1 (1 +r)2Ii gK (1 +r)Ii

.u= I. (i+l) (1 +s )t t=1

automatically fulfill the constraint of the original function z. And since Ag(x,y) is now assuredly zero, the critical value of Z in (iii) must be identical with those in (i) subject to (ii).

18. Based on the comparison of the price mdex for capital goods with 195 0 = 100, 1966 =

154. Herrero, op. cit., p. 3 and Table 2 of Statistical Appendix.

36

Transposing terms and setting J1 aside

(d/w).

Thus, we see that the relative factor productivity ratio is smaller than the relative factor cost ratio. Assuming maximizing behavior, the entrepreneur will move to intensify the use of capital in the next period or to decrease in an absolute sense the use of labor or both -whichever is easiest from the technical production constraint's side.

In figure 1.1 we illustrate this situation. At point A on the production contour I the marginal rate of technical substitution (MRS) of capital for labor is less than !he factor price ratio given by the slope of the straight line ko1o. The optimum position would be at B where the MRS equals the factor price ratio. This represents a decrease in the use of labor and an increase in the use of capital. The expectations regarding the price of capital goods become important when a decision is weighted regarding replacement of existing stocks within the firm. At that point, the behavior of the (w/pk) (t) ratio determines which factor will be most intensely utilized in future periods - and this also determines to some extent the labor-saving characteristics to be sought in the new equipment. The growth rate of wages during the period 1950-1968 has been almost three times that of the index of capital goods. Since wage increases have exceeded productivity increases, and since government provides considerable financial assistance (at subsidized rates) for the acquisition of capital, firms might choose capital intensive techniques, notwithstanding a value for a (elasticity of substitution) close to unity.

This is to be expected given the financial assistance described above. The main effect of the promotional efforts of FOMENTO (EDA) has been directed towards stimulating investments. Thus, the instruments utilized to facilitate firms to invest in the island are almost exclusively directed at lowering the opportunity cost of capital. As a result it should not be at all surprising to find that the real price of capital goods to a firm locating in Puerto Rico may be lower than the same for a firm locating, say, in the South of the U.S. This point will be recalled below and will serve to explain some of the empirical results in section 4.3.

37

K

I

I

________ _l __

I

f 0�--------------�--��----------�------------L

Figure 1.1. Elasticity of Substitution Along Isoquant

38

1.3.2 The Rule of the Elasticity of Substitution

The influence of wage rates on factor proportions is illustrated in Figure 1.2.

log(w/r)

e .

I I I I I I

B

(w/r)l _____ -, _

I I

Figure 1.2. Illustration of Alternative Constant Values for the Elasticity of Substitution

39

The straight solid line aBb is a constant elasticity of substitution schedule (the axis represents log values) with a value of unity. Any movement along that schedule such as one brought about by a change in the factor price ratio from (w/r)1 to (w/r)0 will be followed by a corresponding rise in the labor-capital ratio (L/K) from (L/Kh to (L/K)0. When the areas under the curve remain constant the ratio of income shares also remains constant. The economic inter­pretation is that a unit percentage change in the factor price ratio will be equally compensated by a unit.

percentage change in the ratio of labor to capital. And that a rise in wages, say, will be compensated with a countervailing drop in employment so as to leave the share of labor (or wage bill) unchanged. The "wage fund" doctrine in fact rests on this premise.l9

Line cBd shows a slope with a value of less than unity. Thus, here the change in the factor-price ratio from (w/r)0 to (w/rh brings a concomitant change in the ratio of labor to capital from (L1 K)0 to (L/Kh. Hence, the areas

Thus, albeit the wage share has increased in relation to the profit share, the response in factor utilization has been unable to maintain constant relative shares. Capital is not perfectly substitutable for labor.

The third case illustrated by the diagram is that of line eBf. This line has a slope with a value greater than unity. Following the same approach as used above for the two previous cases it can be seen that in such instance the areas

19 Cf. Mark Blaug, Economic Theory in Retrospect. (Home\\OOd, lll.: Richard D. lm·in. Inc., 1968), pp. 46, 60, 93, and especially pp. 186-188. The theory emphasizes the complementary relationship between capital and labor. In the absence of an increase in the rate of capital accum ulation. aggregate \\'ages cannot be permanently raised. The wage rate is a function of past i nvestments.

40

where a change in factor-price ratio from (w/r)0 to (w/rh brings a change in factor utilization from (L/Kh to (L/K)0. Substitution of capital for labor more than outweighs the change in factor prices so as to decrease the share of labor with respect to profits.

If the absolute value of the elasticity of substitution obtained for the puertorican manufacturing sector lies close to unity, the model of entrepreneur­ial behavior postulated in this chapter might be taken as a good approximation to the actual conditions prevailing in Puerto Rico. In the next section we proceed to the estimation of the substitution parameter with that object in mind.

1.4.0 EMPIRICAL EVIDENCE

The class of production functions developed by Arrow, Chenery, Minhas, and Solow (from now on to be referred to as Arrow, et a/. )20 will be

Eed here

to obtain estimates of the substitution elasticity between capital and bor for the EDA sector of Puerto Rico. This approach is advantageous on sever I counts. In the first place the Constant Elasticity of Substitution Production Function (CES) has the particular quality of yielding values for a which can range from 0 to 00 (although values for ac:::o are not usually considered) . Thus, it includes as special cases many production functions which are commonly used in economic analysis, in particular, the Leontief type with a = 0, (i.e. fix coefficients or perfect complementarity) and the Cobb-Douglas type (with a= 1). The CES has the additional advantage of providing a methodology for estimation of a independently of efficiency considerations. This enables a partial analysis of the technical problem of substitution without forcing upon the investigator the arduous task of estimating complete production functions. This in fact results from the difficulty involved in the estimation of CES due to the non-linearity in which the substitution parameter enters the function. Furthermore it should be stressed at this early point that when estimates for a are obtained across countries, regions or industries, the implicit assumption will be that the parameter is identical in those countries, regions or industrial classifications. This

does not equally imply that the production functions are identical. The CES

function includes three parameters of which a is only one. These parameters are the distribution parameter o, the efficiency parameter 'Y, and the substitution parameter p whose transformation is a. 21 Hence, even if a is identical across the sample members, the other two parameters may be different in value.

20. Arrow, ct al., "Capital-Labor Substitution and Economic Efficiency," Review of Economics and Statistics, Vol. 43, No.2, A ugust 1<)61 ,)Jp.225-50. {3

21. The CES and be written as V = 'Y[oK:p + (i-o)L-Pj-jp; where o = A and is the distribution parameter. (Sec p.69 note 48.) While the constant (scale f:i�or) 'Y is seen a� the efficiency parameter and equals (a+(3)-l!P. Thus under certain competitive characteristic assumptions and provided Log V /L = Log a + b log w + e exists, for any p the functional distribution of income is determined by o in

41

Casual empiricism suggests that: (1) the elasticity of substitution for firms within the EDA sector lies typically between zero and unity - but close to unity; that we should expect the elasticity of substitution in the typical firm within the manufacturing sector of Puerto Rico but not in EDA to have an elasticity parameter lower in value than the typical firm in EDA. The logic of (2) stems from our belief that capital is more readily available for firms in EDA which is in fact an appendage of the capital surplus sector of the U.S. economy and because firms in this sector are in many cases branches of U.S. corporations.

Three alternative methods were used to obtain the estimates. One consists of the application of regression analysis to a cross section of groups for the year 1964, thus obtaining an average estimate for the value of a for the EDA sector as a whole. The second approach is to obtain estimates of a from observations at points in time for a number of two-digit industry levels in EDA. A third approach consists of estimating a from observations for two-digit industries at the same point in time but in different locations - in this particular case EDA Puerto Rico and a sample of 14 states in the South Atlantic United States where those industries were of some significance. This region of the U.S. was chosen for the primary reason that because of its relative geographical proximity to Puerto Rico and to the East Coast ports plus its lower wage levels relative to northern areas of the mainland, it is probably a stronger competitor to Puerto Rico regarding plant location.2 2 Other areas could have probably been more advisable from the purely statistical point of view; maximum differences in relative prices would have reduced the errors of estimation to a greater extent.

1.4.1 Estimates: Methodology and Results

The method of estimation proposed by Arrow, et al. {from now on Arrow model)23 consists primarily of fitting the regression equation

(3)

wL

rK

log V /L =a Jog W + u

+\5° (�Y and o could be estimated from data on K. Land r (the rate of return) together with an

estimate of a such as b, from the relationship

1-� - � (:)l+p: o and a seem to be fairly stable among countries. while -y varies.

22. In fact there has been a strong Congressional lobby whose aim has been protection for South Eastern states for what has been called unfair competition by Puerto Rico.

23. Assumptions of the CES (1) that perfect competition exists both in the product and the factor markets; (2) that the data represents situations of equilibrium; (3) that constant returns to scale prevail and (4) prices of products and material inputs did not systematically vary with the wage rate. If this is true the following d ifferential equation holds

42

or some variant or transformation thereof. It can be shown that a will be approximated by the estimate of b in24

(4) log V /L =log a + b log W+ u

lg (Y/L) = log a+ b log { (Y/L - [CK/L) • d(V/L)] } d/K/L)

The solution to this differential equation is V = (j)K-P + aL-P)-1/ p

where p = (1/b)- 1 a = a -1/b

�is a constant and b =a, i.e., the elasticity of substitution. The actual derivation of the CES function is complicated from the mathematical

point of view. We refer the reader to Arrow e t a/, op. cit. and for an interesting derivation based on economic properties to V. Kerry Smith, "The CES Production Function: A derivation." 17le American Economist, Vol. xiii, No. 1, 1969, pp. 72-79.

24 Note that the independence of the relationship from capital is obvious from footnote 23 and that it is in fact a necessary condition for the existence of a CES production function. It is this condition which permits the solution of the differential equation mentioned in footnote 23 which is the CES. Hildebrand and Liu have tested this hypothesis for 17 two digit industries. in U.S. manufacturing for 1957 in Hildebrand and Liu, Manufacturing Production Functions in the United States, 1957: and Interindustry and Interstate Comparison of Productivity, Cornell University Press, Ithaca 1965. pp. 34-35. Their results cast "serious doubts upon the probability that the regression coefficient b obtained by Arrow, e t a/. is in fact the elasticity of substitution as claimed. This is so because the relationship between V /L and w is inferior, in statistical terms, to a fit which \\·ould include K/L as an explanatory variable. The evidence provided by Liu and Hildebrand is so important that a similar test was made in this research for the EDA sector 1964. The results of that test appear below.

Dummy to accoun for scales of Coefficient Coefficient assets of 1 min. of log w of log K/L

ll!odel and more (b) (c) R2

(1) Yes 0.838 0.3707 0.535 (t=6.31) (t=3.71)

(2) yes (but no 0.777 0.275 0.569 constant) (t=5.95) (t=3.48) term, i.e., log a=i

(3) Is is clear than an improvement in the fit is observable and that the coefficient for K/L is significantly different from zero at any acceptable level of confidence. The solution to an equation which would include capital explicitly is very complicated. The question of whether it exists must be explored at an early date and seems to have b een set aside by economists. Of course it is very possible (although Liu and Hildebrand argue against it) that the K/L and V /L are always correlated anyway, whether the assumptions of tl1e CES are given or not, and that the correlation is spurious. This, however, does not seem to be a strong defense of a theoretical model which is based on an empirical test and on its goodness of fit.

43

and that it will be equal to a when a = 1 . At any rate when a > 1 , b will include an upward bias and a fortiriori the "true" a will be smaller than b. The relation between b and a will be given by

b-e (5) a =

--

1-e

where e is the elasticity of variations in efficiency with respect to variations in the wage rates across the sample. In other words, if there is a systematic variation in efficiency levels with wage rate b will be a biased estimator of a by (5). Thus if a value is obtained for b which lies lower than unity, a will have to be less than b and hence less than 1 .

We shall not be concerned here with this correction -although allowance is made at an early stage to account for some differences in scale in the EDA sample:

Equation ( 4) was fitted to 96 observations at the three and four-digit levels of SIC for the EDA-promoted sector in Puerto Rico. The data was obtained from the EDA Statistical Report of Manufacturing Plants, 1964-65 edition, which is the latest publication (dated October 1967). The results obtained are summarized in Table 1 .2. The data is presented in the Statistical Appendix to this paper.

Considering the level of aggregation, the results are not unsatisfactory. The estimates for the EDA sector as a whole proved to be insignificantly

different from unity. When allowance was made for the scale factor - by introducing an intercept shift parameter. i.e., dummy variable - the adjusted coefficient of determination was improved. In addition the value obtained for the textile and apparel sectors combined. where enough observations made separate estimation possible, did not suggest that the results depended upon

aggregation across industries. Table 1 .3 presents the results obtained for the method employing two

points in time, and compares these estimates with those for two-digit industries on the U.S. mainland.

The most striking finding, as can be seen from Table 1 .3, is the predominance of values for a which lie above unity. This is true for the longer period 1959-1963 and for the overlapping shorter period 1961 -1963. This is important in the light of past studies for the U.S. It has been observed that studies based on cross-sectional data usually yield estimates which are on the whole not significantly different from unity. Time series estimates are obtained

At any rate, for the purposes of this '>tudy b prm·ides evidence that productivity increases under the pressure of wage r evisions. The fact that K/L adds to the explanation of variations in V/L would be another argument to reassure that the

increasing wage rates act through increasing K 'L\ on V /L. In fact it ,,·as found from the correlation matrix obtained for the estimation of the above equations (as a byproduct) that capital per production "orker is correlated to the hourtv wage rate with a simple correlation coefficient of 0. 715.

- �

44

TABLE 1.2

ESTIMATES FOR 'b' COEFFICIENT: EDA- 1964

highest F-signifi-

Sample cance Period Model Sector Size b sb R2 level

1964 log V/L=log a -f b log W + u EDA 96 1.11 0.13 0.45 5%

1964 log V/L=log a + b log W + u EDA 28 0.92 0.13 0.65 1%

Textile """ & Apparel Vl

1964 (*)log V/L=Iog a + log a' + log W + v EDA 96 0.94 0.13 0.50 1%

*a' =

� J when total assets per firm in that group exceeds (or equals) $1 million.

0 when total assets per firm in that group is less than $1 million.

A bar over the R 2 signifies it has been adjusted for degrees of freedom.

TABLE 1.3

ESTIMATES FOR THE ELASTICITY OF SUBSTITUTION

PUERTO RICO-EDA AND U.S. MANUFACTURING

Industry Group Estimates

EDA (1) EDA (2) Griliches Kendrick Arrow, et al. Daniels

Food 1.079 1.062 0.908 0.25 0.93 0.7506 (1.3517)*

Tobacco 1.212 -0.004 1.4956 Textile Mill Products 1.128 0.991 0.938 0.59 0.83 1.0151

�

Apparel 0\ 1.195 1.040 1.055 0.09 0.42 0.7883 Lumber 1.069 0.40 0.84 0.8640 Furniture 1.284 -0.002 1.039 1.86 0.8025 Paper & Pulp 1.667 0.55 1.14 1.3394 Printing & Publishing 1.145 1.103 0.827 0.8209 Chemicals -10.951 0.948 0.714 0.65 0.90 1.0918 Petroleum -0.063 1.077 0.51 1.04 Rubber Products 1.257 -60.478 1.281 0.35 0.98 1.3074 Leather 1.183 0.929 0.039 0.72 0.5334 Stone & Clay 1.208 -4.249 0.908 0.47 1.08 1.1151 Primary Metals 1.541 -37.512 1.407 0.89 1.8023 Fabricated Metals 1.164 1.003 0.849 0.81 0.9708 Non-Electric Machinery 1.144 0.983 1.240 0.78

Electric Machinery 1.221 0.988 0.664 0.50 0.93 0.3826

� -..1

Transportation Equipment

Instruments

EDA (1) Period 1956-1963. EDA (2) Period 1961-1964.

(*) Beverages industries.

0.917

(**) Includes miscellaneous manufactures.

Sources:

-11.116

0.000

0.961

0.752

0.4695

0.65**

Z. Griliches, "Production Functions in Manufacturing: Some Preliminary Results." in The Theory and Empirical Analysis of Production, Studies in Income and Wealth, NBER, Vol. 31 (New York: Columbia University Press, 1967), p. 292.

Kendrick, given by z. Griliches, I hid., p. 292. Arrow, et al., op. cit., p. 240. Daniels, "Differences in Efficiency Among Industries in Developing Countries," American Economic Review, Vol. LIV,

No. 2, 1969, p. 165.

by fitting variants of equation ( 4) to time series, usually for two-digit industries, and thus cannot be compared rigorously with our results. Nevertheless our procedure (explained below) yielded values greater than unity in general.25 On the whole, our estimates agree quite well with those obtained by Griliches and by Daniels.26

The method used here for the estimates based on observation taken at two points in time is also suggested in Arrow et al. It consists of obtaining a value of a from

(6) i!ill2o log (K/L)l =

(w/r)0. a log (w/r)l'

where the subscripts o and 1 refer to the original point in time and to the second point in time respectively. The advantage here lies in that a is estimated from direct observations on capital and the rates of return. We must point out that the rates of return have been used as analogous to the price of capital for statistical convenience only. It must be recognized, however, that they are two different concepts.2 7 As mentioned above, for the 17 industries analyzed, 14 yielded values greater than one.

It should be pointed out here that the long run value of a will generally be greater than the short run value. This stems from the fact that in the short run, with given plant and equipment, the scope of substitutability between any two factors (capital and labor in this case) is limited to variations in time of utilization (e.g. machine time) and possible variations in labor intensity of material handlings (or by the use of multiple shifts). In the long run, however, new plant and equipment can be installed and a approaches its maximum value as determined by the whole range of technical alternatives available, i.e., "state of the arts" at any moment in time.

The fact that the concept of substitution sensitivity, as taken from the theoretical body of economic thought, is static and short run in nature, weakens

25. Chemicals is an exception in the longer period 1956-63 which seems more reliable. But great expansion in this industry during the period (as well as in petroleum products and refming) may explain the small (negative) values found there. The highly capital intensive nature of petroleum industries and its relatively fix production coefficients are well reflected in the value for the parameter in the longer period 1956-63. The large value obtained for the shorter period 1961-64 is probably explained by the construction phases of new plants-- which em ploy much more labor than regular operation activities. Zui Griliches, "Production Functions in Manufacturing: Some Preliminary Results," in The Theory and Empirical Analysis of Production, Studies in Incomes and Wealth,· NBER, Vol. 31 (New York: Columbia Univ. P·ess, 1967), p.292.

26. It remains to be seen whether this results from inherent biases to the estimation procedure. In fact such biases have been suggested for the regression estimates of time series. (See Z. Griliches, op. cit. pp.287 ff.) It is our intuitive impression that this is not the case in our study: (at least) no re!!ression has been fitted to the data for the two-digit industries across time. It may b� that the advantage of the methodology used here is precisely the avoidance of such biases.

27. The data used and the computational steps appear in the Statistical Appendix.

48

it when applied to broader time spans. Nevertheless our evidence on the historical indices of substitution is consistent with the hypothesis tested, i.e., that a is very close to unity.

1.4.2 A Digression

At this point it seems desirable to turn to an interesting finding which tends to strengthen our results. As mentioned repeatedly above, the analysis is performed on data for the EDA sector only and for a relatively recent decade, i.e. 1954-1964. Reynolds and Gregory provide some evidence on the value of a for the whole manufacturing sector of Puerto Rico and for 1949-1958.28 Perhaps inadvertently, Reynolds and Gregory estimated the substitution para­meter for that period for the whole manufacturing sector.

Reynolds and Gregory estimated what they call the elasticity of demand

for labor, but they did it in the following way: they assumed that relative factor prices are constant and that the production function relevant to manufacturing is homogeneous of degree one; they postulated that the increase in output during a period should have been accompanied by a similar increase in employment (if relative factor prices remain constant). Failure of employment to expand by the same amount as output could then be attributed to a change in the relative price of labor. The following relationship should stand

(7) V =a+ b* (wL/L)

where V is value added less wage payments to home needlework employees; and wL/L is the annual wage payments- assuming equal working hours.

Reynolds and Gregory break the data into two subperiods, 1949-54 and 1954-58. They then recognize the identification problem brought forth by shifting demand schedule. However, the method used to cancel out the scale effect introduced by the shifting schedule causes their estimate of the elasticity of demand for labor in manufacturing to be equal to our estimates for the elasticity of substitution. Tllis is easily shown.

Their estimate for the arc elasticity of the so called demand for labor is given according to the slope parameter obtained by fitting the equation

(8) dV dL 1/2(L0+L1)

a*+b* dW +u 1/2(Wo+W1)

where V is value added as before and L employment of production workers. Hence employment forgone - given by the difference between the rate of change in output and the rate of change in employment - is held to be a

28. Reynolds and Gregory, Wages, Productivity, and Industrialization in Puerto Rico, pp.96-106.

49

function of the wage rate. The term, (-)b*, then represents, for Gregory, a measure of the elasticity of demand "or labor.

However, if we let

and

for simplicity, (8) becomes

dV dL (8a)

V L = a*+b* dW •

w

Now the relationship which gives rise to the family of CES and which has been used here to obtain estimates of a is

(4) log V/L =log a+ b log W.

But it can be shown that b* = b.29 This b. we have shown, is an estimator of a.

Given this fact, what was in fact "measured" by Reynolds and Gregory was the elasticity of substitution. The question of the intercept parameter a* loses

29. Let (Sa) be written as

....:!.= a*+b*W L

where a dot means the rate of growth of the variable.

Then b* = V - a* and T ,

assuming a* = o,

b*= [ CV IL I W] =[d (V IL) I d\\ ]= d(log \' L) = b.

(VIL) W d(long W)

by the log derivate rule d log x = l dx. The value of b will be the same in both dt x dT

functions, provided a*=O. In this case the average relationship in (Sa) equals the marginal. And, thus, b which is a slope in (Sa) becomes a constant elasticity. This in turn implies a Cobb-Douglas production function which Reynolds and Gregory assume to begin with.

50

importance by Reynold's and Gregory's own findings. They conclude that their a* is not significantly different from zero. Their estimates for b* proved to be insignificantly different from unity for the years 1949 to 1958. In fact, their results - b*=1.1 for the period 1949-54 and 0.94 for the period 1954-58- are identical to those obtained in this study for the year 1964. As seen from table 1.2, and explained above, a value of 1.11 was obtained for b. This value was modified to 0.94 when allowance was made for scale. It should be remembered that their sample was more inclusive - all manufacturing firms reporting to the Census - and covered a decade. Our sample includes only EDA and is limited to a single year.

If was loosely interpreted a* as being an autonomous demand for labor, this evidence would suggest an overwhelming effect upon firms to increase productivity in response to wage increases.Jo Moreover, the learning function effects upon firms seem to be quite weak in the absence of a cost-push factor on the side of labor.

This discussion, hopefully, should lend some support to our hypothesis that a lies close to unity for the typical industry in Puerto Rican manufacturing sectors. Notice that we say "very close to unity" even when statistically we cannot reject the unitary value hypothesis. The reluctance to accept the unit value stems from the findings made by Arrow et al. and C. Clague31 which tend to indicate that when the same industry is observed across countries there seems to be a variation of effiCiency with the wage· rates. The facts (a) that an improvement in the estimation of a was observed when scale considerations were explicitly brought to bear in our model, and (b) that the value for the parameter was smaller than previously obtained although still not significantly different from unity, reinforce our belief that a correction of the type of (5) is called for.3 2

1.4.3 Locational Elasticities of Substitution

Still another attempt to measure the sensitivity of capital-labor ratios in manufacturing with respect to changes in factor price ratios was made. Here the assumption made consists of equality of for similar industrial groups in two areas at approximately the same point in time. As it was pinted out previously

30. For the economy as a whole it would be appropriate to assume the level of wages to be a function of productivity; but for the individual firm wages correspond to a sting spurring the management to increase value added per worker. This premise is behind all the analysis pre sen ted in the early part of this chapter.

31. Christopher Clague, "An International Comparison of Industrial Efficiency: Peru and the U.S.," RES, Vol. 2, Nov. 1966.

32. That test has not been performed in this study but there is strong evidence that as wages have increased, a process of inducement has been generated by which management has been able to increase productivity of all inputs by "process" innovations, thus cutting on waste and increasing efficiency on the entire plants. See especially Reynolds , op. cit. p.l 01.

51

log W/d I I

4

31 I I

2

1 9 8 i 6

Vl 10 5

4

31

2

II I I 3 4

I I I I I I

I I I I I I

� f\

� � � \ \

\ \

I I I II I

I I I I I I 5 6 7 8 9 I

I I I I

I I � 1\

b."" f\ I\\ \ \ � \

.n 0

"" � '?2 \ g: \\ � \ ' \ \\

I I I I lA EDA-PR

I I I I It:'\ SAUS >I Factor Proportions

\ �\ '0 1\ �� g :? &. � """"'\"\

...,... \ \\ r--... \ -,

� 1\ \ \ 1\ \ ��" � \ . \ " \ ' "'<�., \J\ 1\� ;; vr� - � � � v· oo: 1\

r-- �;Kt\ \ I"'� \� I 1\ \1\\ \�� \ �� log

2 3 4 5 6 7 8 9 1 2 3 4 5 6 �/L Figure 1.3. Factor Costs and Factor Proportions: EDA-PR and SAUS

the assumption is not too stringent given the fact that the production function contains other parameters which are not assumed to be equal for industries in both areas.33

The relationship

(9) [(K/L)eda J=[(w/r)eda ]a (K/L) saus (w/r) saus

is used for the purpose of yielding values of a for two-digit industries from observations at the same point in time (1956-57) but in two different regions­Puerto Rico (EDA) and South Atlantic United States. The data was obtained from Hildebrand and Liu. The results obtained are summarized in Table 1.4 and illustrated in figure 1.3.

The most striking element of these results is the sign of the parameters. All the elasticities are found to be negative! This finding may not be so surprising if it is remembered that the comparisons are not between EDA and the U.S. averages, but with a region of the United States. This region was selected on the basis of its geographical proximity to East Coast ports and its comparatively lower wages.

33. In this hstance the condition is more restrictive though as only 'Y (efficiency para­meter is free to vary across regions); (6/1 - 6) is assumed constant for the same industry across areas (regions) but not across industries.

53

TABLE 1.4

ELASTICITY OF SUBSTITUTION EDA AND SA USA* 1957

SIC

Food Textile Mill Products Apparel Lumber and wood products Furniture Paper Chemicals Petroleum Rubber products Leather and products Stone Clay and glass Primary Metals Fabricated Metals Non-electrical Machinery Electrical Machinery Instruments

o I a

-0.3251 -0.0503 -0.5221 -1.9096 -0.3517

-0.2194 -0.7478 -0.4492 -0.1865 -0.3578 -0.3440 -1.2667 -0.2153 -0.5305 -0.4015 -0.3448

/a The data and computational steps for the estimation of a appear in the Appendix to this dissertation.

What the results show is that the typical establishment in any industrial category becomes more capital intensive in a Puerto Rican location that on the average in the U.S. South Atlantic region. This occurs despite the lower wages prevailing in Puerto Rico relative to the SAUS. This is to be expected given the fmancial assistance described above. The main effect of the promotional efforts of FOMENTO has been directed towards stimulating investments. Thus, the instruments utilized to facilitate firms to invest in the island are almost exclusively directed at lowering the opportunity cost of capital. As a result it should not be at all surprising to find that the real price of capital goods to a firm locating in Puerto Rico may be lower than the same for a firm locating, say, in the South of the U.S. This point will be recalled below and will serve to explain some of the empirical results in section 5 of this chapter.

Several observations are necessary to complete this picture. First, the ration (w/r) in SAUS does not show as wide variations among sectors as it does in Puerto Rico. Differences in capit�l intensity among industries in that region

54

can perhaps be explained in greater degree by differences in a or o (the distribution parameters).34 In Puerto Rico differences in capital intensity among sectors appear to be influenced to a higher degree by differences in the factor-price ratios.

In general the EDA sector is more capital intensive in all industries than the industry averages for the SAUS. Of special importance here is the difference in the rates of return between both areas. And it is this factor that accounts for the high capital intensity of the EDA factor in comparison to the U.S.A. As is shown in tables A-3 and A-4 of the Statistical Appendix the rates of return for EDA have been about double the U.S. average.35 Lower wages, and wage rates close to the federal minimum, also influence the high rates of return. The high rates of return to capital coupled with the willingness of the government to provide capital at subsidized rates of interest may explain why firms adopt, if not more capital intensive processes than their mainland "mother" corporations, at least, more capital intensive ones than the average fum for the low-wage area of the SAUS.

Another factor that may contribute to the explanation is the expected rise in wage rates and the expected lower productivity of Puerto Rican labor force.36

Up to now the factor price ratios have been seen from the return side. If, on the other hand, the price of capital is seen from the cost side, then the conclusion may very well be that capital equipment is of a lower price for a Puerto Rican located firm than for a firm operating in the Southern Atlantic Region. This is a result of the subsidization of capital which is implied by most of the promotional efforts undergone by the Commonwealth government agencies, i.e., lower interest rates on loans, lower plan rental rates, liberal depreciation allowances, and training of personnel (augmentation of "human capital"). Thus the incentives for higher capital intensity are not altogether reflected by the internal rates of return alone. This, fact, would help to explain why, in spite of lower factor price ratios, most industries are found to be operating at higher capital intensive regions of the production functions in EDA than in the SAUS.

On the other hand, if Japan and Puerto Rico were to be considered, the picture would be quite different.37 These two countries show less drastic differences in respect to factor price ratios; but very great differences with respect to capital-labor ratios. The data are not strictly comparable, but only for purposes of illustration one could compare apparel. The resulting slope would be positive and very flat - indicating a large degree of sensitivity to factor price changes in the capital intensity of that industry. But, again, the fact that factor

34. o enters the relationship between K/L and w/r in a linear fashion such as log (K/L) = a log (Of 1-o) + a log (w/r)

35. Three to four times after taxes and about twice before taxes. See Reynolds, op. cit., p.28.

36. Ibid., p.20. 37. Cf. Arrow, et al., p. 239. fig. 1.4 reproduces Chart 2 from Arrow, et al.

55

Vl 0\

)g I 1/r

2 )

I

j

1 v /

/I 1/

l.t:_ /

� v lf �

/ �v

, v I � /

� v +

� � Vi

0

/ � �I � / / v / "'

& / / / v / "'I / / b7' /

/ F�,// / I / h��/ v /

v �v v / �� /

I � v v

�v/ v v f- -,_ --· lf

b?v v

v / v

yc - / \ v v / �u.s. /v v v / Factor Proportions

v vv / 0 Japan

/ ) L /

/ / v /

v / 1.0 2 25

Figure 1.4. Factor Costs and Optimum Factor Costs: U.S. and Japan

og k/L

price relations are not very different in both countries makes any conclusions risky as the errors of estimation become very important when these differences are small. 38

Furthermore, if firms coming to Puerto Rico from the mainland adopt similar techniques as those establishments in the U.S. - already very close to maximum capital intensity given the stock of technical knowledge - the adjustment required by the managerial personnel is minimized and the efficiency of management maximized. The introduction of a third factor, management, coul� explain the concavity of the production contours implied by negative elasticities of substitution. Concavity on the production surface is not surprising in instances where explicit account is taken only of two factors of production when in fact three or more are being used. Utilization of a third factor in increasing intensity can prevent the marginal productivities of the other factors from declining as more units of them are introduced into the production process. In fact, Reynolds and Gregory have clearly shown that improvements in management areas have been introduced by EDA sponsored firms, in an effort to offset declining profitability. 3 9

1.5.0 HISTORICAL CHANGES IN THE LABOR'S SHARE

Arrow et a!. have shown that for the economy as a whole the existence of a CES production function has certain implications regarding labor's share. In particular they show that it is governed by the relationship·

(10) �L =(1-8) { � } I-a

As usual 8 is the distribution parameter, (wL/V) is the wage share and 'Y is the efficiency parameter. a is the elasticity of substitution. Under the assumption of neutral technological change 'Y only will change through time. From (IO) it is seen that for a value of a :»I the labor share will increase when the wage rate rises more rapidly than technological progress. For a >I this is reversed and for a=I (10) is a Cobb-Douglas case labor's share is independent of technological progress and the wage rate.

What can be said about the behavior of the wage share in Puerto Rico's manufacturing sector whose contribution to gross product has risen from 16.5 per cent in I94 7-50 to 24.0 per cent in I967 -68? The series for the wage share in manufacturing show a moderate increase since I947. If a were close to one the share will show a relative insensibility to changes in efficiency or in the elasticity of output with respect to capital, i.e. , (1-a) �o. Following Arrow et

al. we have added the assumption of constant rate of advance in technological progress. This is justified if it is kept in mind that Puerto Rico has almost immediate access to American technology pool. (1 0)

38. Arrow, et al. p.239. 39. Ibid., p.95.

57

(11) log (wL/V) = a log (1-6)-+{a-1) log ')'0-+{1-a)log w+A(a-1)t

Where ')'(t) ='Yo IQAt this will yield estimates of a and Let

a0 =alog(l-6)-+{a-1)log 'Yo a1 = 1-a a2 = - A(l-a)

and we obtain (12) log (wL/V910 +a1log w +a2t.

Fitting (12) by ordinary least squares to data4o for manufacturing sector of Puerto Rico for the period 1947 to 1967 we obtain the following estimate

log (wL/V)= -0.2564 -0.1887log w + (0.025) (0.095) t =-10.2 t = -1.99

R2 =0.3854

F2,1s=5.644>3.55 l

0.0083 t+w (0.003) t=2.54

5.0%

Hence, we calculate a = 1 - a2 = 1.1887; A =-(a2/1-a) = 0.04435 which corresponds to an annual rate of increase in productivity for the sector of 10.212 per cent.41 This agrees closely with our estimates of annual percentage changes in gross product per employee for the manufacturing sector which on the average is 9.54 per cent per year (for the period 1948 to 1968).

To test the significance of the difference of the elasticity of substitution from the hypothetical value of one, which is implicit in the Cobb-Douglas formulation, requires that a1 and a2 be both zero. the F-test was applied. For 20 observations it is significant at the 5 per cent level of confidence (not significant at the 1 per cent level.)4 2

40. Data consisted of time series for manufacturing employment; net income generated in manufacturing deflated by the implicit price index for GDP 1954 prices, compensation to employees deflated by the price index of personal consumption expenditures, 1954 base. Net income is used as an approximation to value added.

41. From _!_ !!_V = � 1n v; where v = 'Yo1o At v dt dt

ln v = 1n')'o +At 1n 10 1n v = 1n')'o +At 2.3026 Ji [1n')'0 +At 2.3026] =A 2.3026=(0.4435)(2.3026)=.10212. dt

42. Another test was performed designed to test the statistical significance of the alternative hypothesis a 1 =1, i.e., a=O or the Leon lief model. Given a standard error for a1 of 0.947, the hypothesis is rejectt:d.

58

On the other hand a1 has a relatively high standard error and the 't' value lies at the boundary between acceptance or rejection (at a 1 per cent level of confidence).43 A zero value for a1 produces a Cobb-Douglas formation. But whether we accept or reject these estimates, once again the estimated value of a

is seen to be very close to unity, if not larger. Although we feel reluctant to place much meaning on this test, it

nevertheless fails to provide any concrete evidence contrary to the previous estimates presented in the chapter. Attention must center on the fact that for a

close to one, the wage share is relatively insensitive to changes in the efficiency parameter. This is supported by the low value of the R2 _

1.6.0. SUMMARY

The elasticity of substitution for the manufacturing sector of Puerto Rico seems to lie very close to unity. If so, further increases in the wage level must be accompanied by increases in employment forgone in that sector. Percentage increases in forgone employment will be of a proportional magnitude close but less that of the increase in wages. Assuming that imported modern technology will continue to be increasingly capital intensive, a continuation of past practices will make it difficult to solve Puerto Rico's employment problem through expansion of the manufacturing sector.

43. The sign of a 1 (-) fits well with a value for a 1, means that an upward movement in w

will hurt the wage share.

59

APPENDIX TO CHAPTER I

A MODEL OF GROWTH WITH INTERNATIONAL TECHNOLOGY

TRANSMISSION: AN APPLICATION TO PUERTO RICO

A.l.O INTRODUCTION

In Chapter I a series of tests were undertaken to subject to verification the hypothesis that the sluggishness in employment creation by the manufacturing sector of Puerto Rico is due to the high sensitivity of that sector to increasing wage rates. The evidence suggests that this is true of the most dynamic sub-sector of manufacturing, i.e., EDA,- practically an 'appendix' of the United States manufacturing sector. This sector would have to grow at progressively more rapid rates to provide the amount of employment required to reduce chronic unemployment in Puerto Rico. Low employment creation, characteristic of industrial growth in Puerto Rico, is then the result of two mutually reinforcing trends: (a) the wage pressure on enterprises; and (b) the labor economizing qualities of modern technology. Hence, the problem of employ­ment augmentation and output growth are inseparable from the technological change factor.

This study is concerned primarily with employment creation. We lack a theory of unemployment for less developed countries. The available theory focussed on problems related to increasing output rather than on increasing employment. Only intuitive ideas are generally found in the literature of development planning. Distinguished examples are the Eckausl thesis of

1. Richard S. Eckaus, "1l1e Factor-Proportions Problem in Underdeveloped Areas," The American Economic Review, Vol. 54, No.3, Sept., 1955. pp.539-565.

61

technological unemployment due to factor disequilibrium and Schult's2 empha­sis on education as a "provider of augmented human resources" - even then as a primary force for growth, not employment.

From Schultz's efforts, a recognition of the importance of changes in the

quality of labor has emerged. No longer is labor viewed as a homogeneous factor of production. Skills and education in general constitute important variables when dealing with problems of unemployment. The problem for underdeveloped areas is viewed as one of inssuficient supply of skilled labor while unskilled labor

is relatively abundant. (and in fact redundant in the A. Lewis sense). An approach, which to a certain extent recognizes both Eckaus' and

Schultz's propositions, is based on the fact that 'importable' technology is available to less developed countries. The international transmission of technol­ogy is likely to be the most important fact in our time. Puerto Rico represents, perhaps, a polar case in the sense that U.S. mainland technology has been transmitted and absorbed almost intact (or so we believe). This is equally true of consumption patterns, salesmanship, management, etc.

The question that immediately arises concerns the appropriateness of the transmited technology. Importation of technology during the early stage of Japanese development (last decade of the 19th century and first two decades of the 20th century) was accompanied by a process of adaptation and assimilation of that technology to a labor redundant economy. The success of the Japanese effort is demonstrated by the fact that unemployment represented only 0.9 per cent of the labor force in 1961.3

Puerto Rico has not been able to reproduce the Japanese experience. Table A.I.1 shows that from an employment total of 596,000 in 1950 a drop occurs to a level of 543,000 in 1960. And although the percentage of the labor force unemployed dropped from 13.2 in 1950 to 12.0 in 1968, unemployment in absolute numbers increased as a result of increases in the labor force. Thus, the huge capital expenditure in Puerto Rico during the decade of the 1950's did not even maintain the level of employment. much less absorb an utilize the labor force increases associated with a rising population.4

A worse situation has been prevented only by accelerated "exportation" of "human capital" to the United States during the period. Net emigration

during the 194 7-1960 period was estimated to be 581,000 - a number greater than total employment in Puerto Rico in the year 1960.5

2. Theodore W. Schultz, "Investment in Human Capital," American Economic Review,

Vol. 51, No.1, March 1961, pp.2-17. 3. United Nations Statistical Yearbook, 1961, Table 9. pp.59-60. 4. Puerto Rico has been able to finance its investment effort almost entirely from abroad.

The deficit on current account in the Balance of Payments has been almost equal in magnitude to the gross domestic investment for the period 1947-1960. For the entire period 194 7 to 1960, net capital inflow amounted to over S 1,000 per head.

5. In a perfectly mobile situation - international trade theory states - factors of production will move in those directions where their marginal productivities are higher. Puerto Rico seems to be an example.

62

TABLA A.I.l

EMPLOYMENT AND UNEMPLOYMENT IN PUERTO RICO

Year

1950 1960

1968*

Population (min)

2.21 2.34 2.73

Labor force (000)

684 625

797

*Means 1st of January, 1968.

Employed (000)

596 543

701

Unemployed {000)

88 82

96

%

Unemployed

12.9 13.2

12.0

Source: Economic Report to the Governor, 1968, Planning Board.

The purpose of the present appendix is to throw some light on the way

Puerto Rico has been assimilating U.S. technology. The problem will be

presented in a formalized manner based on an as yet unpublished work by John

C. H. Fei.6 A rather detailed presentation will be made of the theoretical

structure as the model is not readily available to the reader. In the second part of

this appendix, some simple statistical results obtained from the estimation of the

most fundamental equations of that model will be presented. The results

obtained in the previous chapter regarding the apparent nature of the production

function operating in Puerto Rico's manufacturing sector provides some support

to the assumptions relevant to the present analysis, especially for that assump­

tion that a function of the Cobb-Douglas7 type adequately describes the tech­

nical relationship in production for the aggregate economy.

6. We are indebted to Prof. Fei for his permission to use his mode! here. The reader must be warned that the model is still in the process of completion and that our interpretation as presented here should not be taken as final. Lastly, we should point to the fact that this material became available to us from the lecture notes taken by us for the Course 679, Spring 1967 (and Spring 1968. which we audited) at Cornell University.

7. It will be seen that this is not a stringent requirement as the production function derived and tested includes, but is not necessarily equcl to a Cobb-Douglas, as a special case.

63

A.2.0 PRESENTATION OF THE MODEL

A. 2.1 Some Concepts and Definitions

In a brief mathematical note to this appendix it is shown that an underdeveloped country whose production possibilities are described by a Cobb-Douglas function, will suffer at least a retardation of its growth path due to the fact that t}le elasticity of output with respect to capital is at most equal to one. It is shown also that the growth of the capital stock will descelerate at a constant rate through time. Further, it is suggested that no matter how strong the resource augmentation effort may be in such a country, or how low the rate of growth of population, a similar result will occur.

It will be apparent that such predictions are simply theoretical derivations from certain assumptions. They are interesting in the sense that they illuminate a basic technological problem that arises in the process of development. But the solution to this problem requires changes in the labor force (raising its quality) and in the imported capital goods (raising its efficiency, thus lowering its required quantum per unit of output, and twisting the technological organi­zation ingrained in that capital). Whether such adaptations are at all possible (or in the real world even necessary8) must remain unanswered.

Diagram A.l will serve as a useful illustration to set up some definitions. Let aa

' be a 'unit contour' so that if Q = KU.:\1-a, then the contour on the production surface where one unit of output is obtained will be 1 =_K<l Jll -a. Let ko and Jlo be the initial factor quantities per unit of output in use due to a given technology level A0. Under these definitions aa 'is an "envelope contour" which encompasses a series of "technological alternatives" which would produce one unit of output Q. Following Eckaus, we have thus postulated a "putty-clay" situation in which one can speak of changes from one 'local' non-substitutability situation, B or C, to another 'local' non-substitutability situation, A0, where that movement is not smooth, but in 'jumps.' An innovation will be defined as consisting of such changes in the technical conditions of productions that the unit contour shifts toward the origin (to a position��). Thus an innovation, by definition, will necessarily reduce ko, Jlo or both.

If a point E0 were to describe an initial endowment combination, while the line OT represents the actual employment combination (given the technology level) at a point in time t=O, then the distance u0(=N0L0) measured on the labor axis, denotes the actual initial level of technological unemployment produced by the difference between the technically desirable combination of

8. There is some evidence that the capital output ratios in the U.S. follow a downward long run trend since a peak value was reached in the year 1920. If this is so, then importable technology may in fact be of a capital saving nature.

64

K 13 a

III

Qi I

I

I

L: .. I I

I I

�-----113'

�------------------�----------�----------._--1

Diagram A.l. Alternative Technology Regions on the Production Space

65

factors of production and the "socially" (or those determined by existing factor

proportions and their respective opportunity costs) desirable combinations.

Four regions can be identified in the diagram stemming from the requirement necessary for an innovation to occur, i.e., reduction of one or more

of the technical coefficients. Region I is irrelevant for it will always result in the

increased value of at least one coefficient while the other remains, at most,

constant. Region II will be denoted as being capital-saving in nature -there, the

capital coefficient will always be reduced by an innovation or technical change.

Region III represents savings in both factors - but that part above the

technology line T will save proportionately more labor and the portion below T

will save proportionately more capital. Region IV is one in which capital saving

occurs accompanied by more intensive labor utilization.

For a country with labor surplus characteristics, Region IV is desirable on

both counts. Movements in that region are nonetheless very difficult (if not

impossible, or at least traumatic) e.g., capital shallowing due to natural disaster

or warfare. Region III is a second best with reductions on both coefficients

(except when movements are made so that k0 remains constant, but in general

this will not be the case). Region II is to be avoided for its intensive use of the

scarce factor capital and its lack of need for the abundant factor labor. The

inefficient portion of II is the one lying above aa '. Any movement of aa 'away

from the origin only increases the factor requirements per unit of output - at

least one coefficient increases.

Region IV, on the other hand, has the additional property of providing an increased output throughout. There, the labor coefficient is increased concom­

itantly with downward changes in the capital coefficient. Higher outputs per

unit of input are obtained while technical unemployment (u) diminishes. This

happens because under conditions of unlimited supplies of labor -unless labor

productivity increases - higher levels of output are possible only by the release

of capital, i.e., increases in the productivity of capital.

Technical unemployment diminishes under these conditions only if the

technology ratio (T) is lowered towards the labor axis, i.e., if the capital-labor ratio is decreased.

If a classification of countries were to be undertaken - based on the scheme presented above - it would be expected that, given that aa ' is

considered a "shell" of importable unit technologies, the underdeveloped areas

should lie to the southeast while the technically advanced areas would be located

to the north-east.9 The importation of technology can be viewed, then, as a

movement along aa 'towards its upper left tail.

9'. It must be noted that the analysis above does not consider factor-price ratios explicitly, but that the fact that labor becomes more costly in terms of capital is a formidable inducement for the K/L ratio increase in developed countries - as well as in those

66

A.2.2 Existence of a 'Learning Function' for Labor

If !J.o is the amount of labor necessary for the production of one unit of output in conjunction with k0 units of capital (per unit of output), under the classical assumptions (diminishing marginal returns) this parameter (the recip­

rocal of the labor productivity) will decrease only as "homogeneous labor" is

equipped with more units of capital. This concept does not allow for a growth of

labor productivity independently of capital accumulation.l o Intuitively, it would seem that a worker becomes more skilled in the performance of an

activity by mere repetition over time, as well as a consequence of training programs and other educational activities.

An operational way of including the labor improvement phenomenon in

the model is to assume that labor productivity increases through time at a constant rate. The causative variables of such quality changes in labor are

considered exogeneous to the system.

Diagram A.2 describes the causal order through which autonomous improvements in labor productivity, and therefore concomitant decreases in its reciprocal JJ. enable movements along the unit contour shelf in the labor saving direction of the north-west. Activities A0 to An become more capital intensive,

so that the typical worker (operating for one hour, say) can be engaged in activities of higher technical ability, as his level of efficiency increases through time. Thus, if the labor improvement function is thought to depend on education, then education becomes a mechanism for generating technical progress.

A new aspect should have become evident from the above paragraph. That is: that capital-using technologies can be imported and utilized in the receiving

country, but, unless labor has attained the quality levels necessary for the operations which must be undertaken under the new techniques, the unit contour will shift away from the origin. That is, the new technologies, and the capital equipment that embodies them will not be efficiently utilized and thus their adoption may result in lower productivity levels. On the other hand,

improvements of the labor force, which result in increased labor productivity, will result in greater technical unemployment unless something is done with capital in the way of adaptation. This will be more fully discussed in Section 2.4 of this appendix.

countries like Puerto Rico where pressures, induced by government action, unions, or other such forces take place.

10. In the preceding chapter it has been indicated that under intensive wage pressure a learning function for the establishment as a whole may be difficult to detect by aggregated analysis; or, at least, with the analysis used in that section of this study, the s tatistical importance of wage pressu�es makes it difficult to be identified.

67

K

a

J.lo \ L

\ c

\

\ "'

Diagram A.2. The Complete Model

6S

A.2.3 The Contributions of Resource Augmentation to Growth

In the preceding sections it has been illustrated how quality improvements

of the labor force can result in higher levels of output per unit of l abor employed, if a steady rate of growth of the labor force and a constant rate of

capital accumulation are introduced (Diagram A.2 (d) and (f)). Capital is

assumed to approach a maximum value accordingly with the results obtained in

the Appendix to this chapter.ll As the labor force and the capital stock increase

through time, together with the labor productivity, the endowment path (E0En)

will extend toward the north-east; the employment path (F0Fn), on the other

hand, will extend towards the north-west. The corresponding movements along

aa' enabled by the labor improvement phenomenon dictate the locus of point

A0An. These technology levels, together with the available capital stock,

determine the employment (full-capacity) path. Both paths continuously diverge

from each other. Hence, technological unemployment increases steadily.

A.2.4 The Concept of Capital Stretching

The movement from A0 to A4 in Diagram A.2 (a) represents a change in technology of the capital-using labor saving type, i.e., a movement in the II

quadrant as described in Diagram A.2. This movement entails a labor

improvement and a change in the capital-output ratio. The change in the labor input ratio from JJ.o to JJ.4 enables the country to fully utilize the stock of capital

in accordance with the technological level imported from abroad. The capital-output ratio moves from k0 to k4 so that, as more units of capital are

employed by fewer (although better qualified) workers. the average productivity

of capital decreases. The net result of the movements is increased technological

unemployment (from u0 to u4). Suppose some sort of innovation occurs within the importing country so

that the modern vintage capital imported from abroad embodying the technological level A4 can be modified in such a way that the capital coefficient

k4 is reduced to a lower level, say k' 1. Then, a completely different situation

will emerge. The technology employed following the adaptation is represented

by B0. The stock of capital in the year t=4 is at a level K 4. Under full capacity utilization conditions, due to surplus labor (and increased labor efficiency),

11. The additional assumption is made regarding the savings ratio that it will be a constant porportion of output (income) in real terms. This assumption is not essential. Although not attempted here it can be shown that even if the saving ratio were to gro11· at a steady rate per annum (or if the rate of growth of population were zero), still a negative rate of acceleration could be obtained for the capital stock. At least tllis is obvious if the rate of growth of the savings ratio is less than the rate of growth of the capital-output ratio. See Mathematical note to this appendix.

69

employment falls almost on the endowment path at E4. Technological unemployment has been eliminated. This has become a possibility because the difference between k 0 and k' 1 was large enough.

Capital stretching can now be defined as k'<k.

And if that phenomenon is possible then the "degree of capital stretching" can be measured as

(k/k') =m. A value of m > 1 woufd indicate that capital stretching is taking place. But as m is then the result of some activity generated indigenously in the capital importing country, it can be said to be a function of the overall improvement of labor. Hence, a function of the labor productivity through time such as

m = (pfp0) c. where the behavioristic parameter c is the elasticity of the degree of indigenous capital-stretching with respect to a unit percentage change in labor productivity.

Diagram A.3 illustrates the function m with alternative values for c. A

zero value will indicate that m = 1, i.e., no capital stretching is taking place. In other words m is independent of p/p0. Under this theoretical construct, it becomes evident that the ability to change the character of imported capital is of greater importance than just the ability to import that capital, if the policy is to eliminate technical unemployment.

A.2.5 Structural Equations

In order to determine to which extent a phenomenon of adaptation can be detected from studying the relevant aggregates in Puerto Rico, some testable relationships are now derived.

If it is assumed that 'importable' technology is available to a country, i.e., that the country confronts an envelope such as aa '; and if that envelope is described by a Cobb-Douglas production function with unitary elasticity of substitution, then

(1) Q=KaN1-a; (2) K = p [(1-a)/a]

If capital stretching takes place (k/k') = m > 1 and (3) m = (pfp0)C .

The COR after indigenous innovation has occurred can then be expressed in terms of the imported COR and current average productivity through

k' = k/m = k(p/p0)C = pC (KfpC) 0

70

m c >1

C=l

--�----------------------�-------------------P/P 0 0

Diagram A.3. Alternative Paths for the 'c' Coefficient

71

given (2) and (3) k' can now be written as

k' =pC 0

p (1-a)/a

pC

Let a= pC; and b = [(1-a)/a]- [c) then 0

k' =pgp [(1-a)/a] -[c]

(4) k' =a pb

By ( 4) it can now be said that the ratio of the labor elasticity of output to the capital elasticity of output (i.e., how much more sensitive output is to an increase or decrease in one unit of labor than to an increase or decrease in one unit of capital) (1-a)/a entailed by the envelope contour aa' - and thus, represents the "availability of importable technology" - is involved, together with c, which represents indigenous adaptation in the determination of b and hence ofk'.

Given the definition of k' = K/Q after innovation and the definition of p = Q/N (N is employment) an "effective production function" can be expressed. Substituting these defmitions in ( 4)

Rearranging terms,

K/Q = a(Q/ )b:

K=a(Q/ ) bQ

aQl+b """NlJ

Q1+b =(1/a)KNb; and

Q = (1/a)l/(1 +b)K1/(l +b)Nb/(1 +b).

Let Q0 = (1 /a)l /(1 +b); and B = 1/(1 +b); 1-B = b/(1 +b), so that

(5) Q =Q0kBN1-B

(5) is also a Cobb-Douglas· type of production function but B now

72

B

I

I //

�--------------/� /

-

a----

I

I I

I

0�--------------�----�----------------------- c 1 - a

-B

a a

I I I

I

I

I I

/

/

/ /

.... -

Diagram A.4. Relationship Among 'B'

and 'C' Coefficients

73

--·

describes the 'post-capital stretching" capital elasticity of output, and is dependent on c"

1 B=

1 +(I -a)/a- c

The fact that makes (5) different from a regular Cobb-Douglas relation is that the sign of the coefficient B is as yet to be determined. The C-D case happens to be a special case of (5) where 0< B < 1, i.e., B is a positive fraction.

A.2.6 The Impact of the Degree of Capital Stretching on the Adapted Production Function

Diagram A.5 illustrates the relationship between B and C and enables the clear distinction of three possible cases: (a) Case I shows that if c = o, B = a, and for values of c greater than zero but less than ( l -a)/a, B will be a positive fraction; (b) Case II is that in which c :> (1-a)/a, with the result that B will be greater than one; (c) Case III shows that for values of c :> (1/a), B will be less than zero. This should make it clear that the parameter c is of tremendous importance in the determination of the capital elasticity of output after innovation.

A.2.7 Minimum Assimilation Criterion

Let r = (1-a)/a . This parameter can be viewed as a technological barrier which imposes factor employment proportions in underdeveloped areas which are out of balance with the social opportunity costs of the factors of production available to those countries. If, after innovation has taken place, c is still less than r the production function will still be of a Cobb-Douglas type with a capital elasticity of output being a positive fraction. Under such production conditions, and given the labor surplus characteristics exhibited by the country, technical unemployment will not be eliminated or even diminished. The process of adaptation is too weak to prevent the technology ratio T (=K/N) from increasing in an inordinate way given the native factor endowments.

If c:>r, however, production conditions would be changed in sufficient degree so that B would attain levels greater than unity. Only that proviso can prevent long run stagnation and increasing technological unemployment.

The third case, i.e., B Jess than zero, is a capital shallowing region and thus irrelevant for development strategy.

In the mathematical rtote to this appendix is shown that

77T

77k'

7]7] K

i/B

i(I -B) = - e B

74

Where 7Jx represents the rate of growth of a variable (x); i is the rate of annual increase of the labor productivity; and 7J7Jx is the rate of acceleration of a variable (x).

Thus, if the rate of acceleration of the capital stock, B, is to be positive, B must be greater than unity. But B =i [(B-1)/B] =i [(a-l)+ca] =i { [c]- [(1-a)/a] } from which, recalling that 'Y = (1-a)fa ll

(6) B =i(c- r) From (6) it is seen that the rate of capital acceleration is proportional to

the rate of growth of productivity of the employed labor force and to the extent by which c exceeds 'Y· Acceleration will only be positive when c:>r. This condition is then labeled the Minimum Assimilation Criterion (MAC). This only expresses formally what we have repeated over and over, i.e., that the rate of capital stretching must be sufficiently strong so as to overcome the imported technology barrier described by 'Y·

A.3.0 Empirical Evidence

Section 2 of this appendix has presented a detailed exposition of a portion of a model of growth. That portion explicitly takes account of the technological phenomenon confronted by less developed areas. In chapter I of this dissertation certain conclusions were presented regarding the nature of the production conditions operating in the manufacturing sector of Puerto Rico. Based on the evidence presented there, it was suggested that the manufacturing sector of the island did not seem to be significantly different from a Cobb-Douglas case (with unity elasticity of substitution). In this appendix a criterion is presented which when fulfilled enables the country to start diminishing its technological unemployment problem. The present section aims to test the null hypothesis that Puerto Rico has not engaged in such process of indigenous innovation in a sufficiently intensive degree.

A.3.1 Econometric Aspect

The following recursive system of equations has been fitted by least squares:

(1 ') lnp =Po +it+ Uti

(2'} lnk'=ln a+b ln p+ut2

(3') c = ln a I In Po

(4') a= 1/ (1 +b+c)

75

(1 ') and (2') were fitted to data for net output at constant 1954 prices; figures for the capital stock were taken from R. de J. Toro.l2

A.3.2 Finding

The results obtained in the estimation of (1 ') and (2') and the calculation of (3'), ( 4') and (5') are as follows:

(1 'e) 1n p = 0.17 + 0.0524 t + u (0.02) (0.0019)

R2 =0.97

(2'e) 1n k' = 0.67 + 0.17 ln p + u (0.03) (0.03)

(3'c) c =

(4'c)a=

(5'c)i' =

R2 =0.56

0.67/0.17 = 3.94

1/(1 +0.17 + 3.94) = 0.1956

(l-d)/d=4.1

The values derived from these estimates for the parameters of the quasi-Cobb­Douglas production function yield

(6'e) Q = 1.033 K0.858N0.142.

The rate of capital acceleration is then obtained from

(8'e) 777'/K = 8 = i(c- 'Y) = -0.008

A.3.3 Interpretation of the Results

As can be seen from inspectwn, the MAC is not fulfilled. The capital

12. Rafael de Jesus Toro, "El Crecimiento de Capital y el Aumento de Ia Producci6n en Puerto Rico, 1947-61 y 1975," Revista de Estadistica, U.P.R. 1962, Vol. III, No.1, pp.101-115. Figures for the period 1962-1966 were obtained by adding net investment figures at constant 1954 prices (and converted from fiscal to natural years) to the capital figure of 1961. In fact, the model used above is lagged in the sense that the output and employment figures are in fiscal years, while the capital figures are in natural years. Thus, a six-months lag is introduced for the capital figures. The output and employment figures from Puerto Rico Planning Board, Jngreso y Producto, 1966-67, Division of Social Accounts, San Juan, Puerto Rico.

76

acceleration is negative (although probably not significantly different from zero as will be explained below). The production function is a classical Cobb-Douglas with B a fraction close to, but less, than, unity.

The tentative nature of these results is obvious. The aggregativeness of the data, the fact that such refinements as taking annual hours work, and the presence of depreciation in the component of the capital stock for the government sector,l3 bias the raw data. The unreliability of employment figures for the earlier period 1947-50 must also be mentioned.

The fact that the estimators for a, p0 and b all have standard errors (small though they may be) places an unknown bias in the calculated coefficients c, a,

and r . These errors may be reinforced when computations for these parameters are performed (in the best of cases they would cancel out, but this is an unknown factor).

Nevertheless, there are certain signs, independent from the estimated model, that tend to support these findings to a degree.

Standard errors notwithstanding, the most striking finding is revealed by the non-satisfaction of MAC. Puerto Rico would be placed in the region bounded by (1-a)/a and 1/a. This means a situation of increasing techn".ogical unemployment due to insufficient adaptation of imported technology to its endowment realities. The fact that c is large enough to prevent us statistically to reject the hypothesis that c = 0, may have its explanation in the entrepreneurial actions mentioned in Chapter I. There, it was mentioned that "process" innovations designed to economize labor but, not necessarily of a capital deepeni:lg nature, were important in the manufacturing sector of the island during the 19 SO's.

The rate of acceleration of capital is estimated to be negative, but given the standard errors in the coefficients used in its estimation it would probably not be significantly different from zero. Graph A.1 shows figures for the capital stock used in the estimation plotted on semi-log paper. A constant rate of growth of capital is clear, thus a zero acceleration rate is sustained by this evidence.

The estimate for i is quite in accord with the long run value of productivity rate of growth for the employed labor force in Puerto Rico as can be seen from page 94 where the rate of growth of long run productivity is 10.212 per cent.

A more serious objection has to be raised to the analysis presented in the form of the transmission model. This is the fact that increases in labor productivity are seen as resulting from completely exogenous forces. The fact that labor is equipped with more capital in itself will increase labor's productivity. Contact with modern methods of production or of organization within the firms may also constitute a factor influencing labor productivity. The wage pressures on entrepreneurs encourage reorganizations within the extablish­rnent in order to increase productivity. The problem is clearly more complex

13 Rafael de Jesus Toro, op. cit., p.l 05.

77

-...) 00

1950 1955 1960 1965

Graph A.l. Capita] Stock for Puerto Rico 1950-1967

than the model suggests. The forces acting on labor productivity are interrelated with others responsible for capital accumulation and with those acting on factor price ratios (not considered by the model in an explicit form).

Despite all these considerations, it seems evident that Puerto Rico must stretch capital and promote improvements. Since this has already occurred to some degree, it should be easier to intensify the process than to begin from scratch.

A.S.O. SUMMARY

The analysis contained in this chapter has failed to provide sufficient evidence to enable the rejection or acceptance of the null hypothesis stated in Section 3 of this appendix. But when taken in context with the evidence introduced in the first chapter it provides an indication that more emphasis should be placed on employment creation through training of the labor force -providing the skills necessary to operate modem equipment - and stimulating the use of less capital intensive techniques. This implies striking a balance on the product mix of the economy with a view to its effects on employment.

The methodology applied in this chapter would perhaps render better results, and be more useful, if disaggregated. The presence of the service sector, agriculture and manufacturing together with government, transportation, etc., all in the same representative figures of capital stock, has prevented a less aggregative approach.

79

MATHEMATICAL NOTE TO THE APPENDIX OF CHAPTER I

If, Q ::KaNI-a; and if I ::. kapl-a, when a is a positive fraction, and letting

Proof;

(i) (L/N):: T, be the technology ratio; (ii) (Q/N) = p, be the productivity of labor;

(iii) (K/Q) = k, be the capital-output ratio; (iv) S .=. sQ, so that s is a constant savings ratio; (v) I= S, the equilibrium condition that savings equals invest-

ment. Then, p = Ta, and k = p [(1 -a)/a]

p = (Q/N) = KaNI-a= (K/N)a = Ta N

k = _K_ = TI-a = p [(I-a)/a] KaNI-a

The following growth equations must follow:

I ) 1 i (1) 17T = 77p I/a = (� 77p; assume 17p :: i, thus, 77T

=( �) i =;>0. Which means that the technology ratio is increasing.

(2) 77k = 77 P

(I-a)/a = (\1)i > 0. Which means that the COR is increasing.

8I

(3) 1J1)K =1JL= 1li..= 12§_ = 1Js ·T)k; but 1Js is equal to zero by (iv) above, hence, K K K

1JK = · 1Jk =

· Q -g) i < 0. Which expresses a decreasing rate of capital

accumulation. Let -D= ·{I:) i. Then, the following case be written:

( 4) 11J<. = 7J0e·Dt . Where 1Jo is the rate of growth of capital at the initial time period tt=O). Figure 1-B.l, illustrates (3) and ( 4). Where

K = K0 [exp (1)0/-D) (exp-Dt)l ; and, exp (1)0/-D) J

K =1)0 exp(-Dt).

Hence the capital stock grows approaching a constant upper bound. See diagram M.l. This implies that under the production conditions expressed by Q

=KUNI-a with 0 < a< 1, the rate of growth of the capital stock will steadily approach zero. This is so because D< 0 as long as a< 1.

0

Diagram M.l . Bounded Rate of Growth of Capital

82

CHAPTER II

A PROPOSED STRATEGY FOR FUTURE ACTION

The analysis undertaken in this thesis tends to support the hypothesis that industrial growth, based on modem techniques and given a degree of "rational" calculation on the part of investors in a labor surplus economy, will be unable to create the necessary number of jobs to reduce the rate of unemployment to "tolerable" levels. This is the past experience in Puerto Rico, and present programs do not suggest that the future will differ significantly from the past.

An additional source of employment activities has become essential if the societal goal is one of attaining full employment. In the following paragraphs, a strategy designed to provide increasing employment opportunities is proposed. The reader's attention is called at this point to the fact that no "natural" policies stem from the analysis presented in the previous chapters. At best, what can be attempted here is to present an alternative course of action (or strategy) which will take as given, such factors as the impotence of the Puerto Rican government to affect wage policies, the resultant rate of increase in wage rates, exogenously determined technological knowledge, and the impossibility of utilizing (interna­tional) commercial policies due to the political status of the island in relation to the United States.

Subject to these constrains, a major effort (surely more dramatic than the spectacular industrial growth experienced by the Puerto Rican economy in the last twenty years) must be launched.

The main thrust of that effort has to be directed toward the exploitation of the potential productive power of the agricultural sector in conjunction with a new industrial subsector to be vertically integrated with agriculture. As will become clear from the following discussion, this effort is expected to produce a

83

short run effect of increasing unemployment and a long run effect of (hopefully) increasing employment. The strategy must consist of the application of modern techniques of production and management in the agricultural sector with the aim of increasing productivity per man and per acre. The short run effect of this increase in productivity will undoubtedly result in an intensification of the process of labor release from the rural areas. In fact, the recognition of this short run effect has been the overriding consideration in the apparent decision by the government of Puerto Rico to discard such an approach. I

Let us trace the effect of a series of concomitant steps more carefully. As mentioned above, a dramatic increase in agricultural productivity must be achieved. This will enable that sector to pay higher real wages, thereby slowly but steadily decreasing the real income differential between the rural and urban sectors of the economy .2 Only that real income effect will provide an incentive for retention of young workers in the rural sector. This effect can be attained for short periods of time by government subsidization schemes; but for a durable structural change to occur in this area, a complete reorganization of agriculture is required.3 A diversification of the agricultural product mix is to be

1. See The Four Year Economic and Social Plan of Puerto Rico, op. cit., p.l l 9. 2. This same conclusion has been reached through a different approach by Michael P.

Todaro, "An Analysis of Industrialization, Employment and Unemployment in Less Developed Countries," Yale Economic Essays, Vol. 8, No. 2, 1968, pp.337-402. See also Herbert A. Simon, "Productivity and the Urban-Rural Population Balance," Models of Man, Chapter 12 (New York: John Wiley & Sons, Inc., 1957) pp. 207-218; and William J. Baumol, "Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis," American Economic Review. Vol. LVII, No.3, June 1967, pp.415-426.

3. Such economists as R. Prebisch, H. Chenery, Rosenstein-Rodan, among others, advocate a rapid industrialization as the best means towards economic growth. On the other extreme are people like T. Schultz. Johnston and Mellor, and T. Balogh, among others who argue for a complete transformation of the agricultural sector of underdeveloped countries. They ask for modernization and extension of traditional agricultural sectors both for directly raising their own standards 01. consumption and for the intention of forcing exchange. See: Raul Prebisch, "Commercial Policy in the Underdeveloped Countries," American Economic Review: Papers and Proceedings, Vol. 49, No. 7. May 1955, pp.251-273: Hollis B. Chenery, "The Role of Industri­alization in Development Programs," American Economic Review, Vol. 45, No. 2, May 1955, pp.40-57: Paul N. Rosenstein-Rodan. ":'>!otes on the Theory of 'Big Push'," in Howard S. Ellis (ed.), Economic Development for Latin America (New York: St. Martin's Press, 1961 ), pp.5 7-73: Theodore \V. Schultz, Transforming Traditional Agriculture, (New Haven: Yale Univ. Press. 1964), pp.212: Bruce F. Johnston and John \V. Mellor, "The Role of Agriculture in Economic Development," American Economic Review, Vol. 51, No. 3, Sept. 1961, pp.566-593; Thomas Balogh, "Agriculture and Economic Development," Oxford Economic Papers, Vol. 13, No.1, Feb. 1961, pp.24-42.

The middle road is taken by Nurksc: he is of the opinion that the solution lies in a "balanced growth" of industry and agriculture. See Ragnar Nurkse, "The Conflict Between 'Balanced Growth' and International Specialization" in Lectures on Economic Development !I stanbul: 1958), pp.I70-176. The problem is that these writers are all talking about income growth - does agricultural development or industrial growth contribute more towards raising national income (or income per capita) today and in the future? But the equation of maximizing employment is generally disregarded.

84

undertaken. There are great possibilities for this change in Puerto Rico, even with the arable land limitations imposed by nature on a small island. The considerable increases observed since 1960 in the highly income-elastic product categories such as livestock, milk, eggs, beef, and poultry, provide some evidence of the potential in these areas. There is great potential for the production of fruits, legumes, tomatoes, and other vegetables, all of which can be industrially elaborated - in cooked and uncooked forms - preserved, canned, etc.4 It is precisely this potential in agriculture as an input to industry that provides for the second link in the chain which eventually may serve as the solution to the employment goal. A completely new set of directives for planning must be adopted in Puerto Rico. The diversification of agriculture, the substitution of high income-elastic produce for sugar cane, coffee and tobacco, will have to be stimulated heavily. A complete and efficient system of distribution and preservation (refrigeration, slaughter-house facilities, transportation, etc.) has to be developed in order to carry these products to local markets and elaboration centers. This network of supporting services and industrial centers will be source of employment. The availability of a diversified product mix in agriculture will also tend to eliminate seasonal unemployment - especially through multiple crops.

The initial phases of this agro-industrial revolution will displace a large number of workers from agriculture and aggravate the unemployment situation, as pointed out above. Thus, in anticipation of this wave a serious and coordinated program of income insurance and training mu_st be elaborated to revive those displaced workers.s An agency such as the newly founded, but poorly financed, Administracion del Derecho al Trabajo should coordinate all the presently operating programs under the Smith-Hughes, George-Barden Act, Vocational Educational Act of 1963, Manpower Development Act of 1962, and the Area Development Act of 1965.

The importance of retraining and placing workers is well documented by high rates of unemployment observed in Puerto Rico among high school graduates with no training in trade or other industrial skills - 11.6 per cent in 1966 - which is only slightly lower than the island average for that year of 12.8

per cent for the total labor force. This tends to indicate that an academic education is not enough to guarantee an employment. Even a sound educational background accompanied by a demanded occupational skill sometimes is not enough.

As has been shown in the Technology Transmission Model of Fei and Ranis, presented in the appendix to chapter I of this dissertation, the main effect of these programs designed to increase the technical ability of the labor force is the creation of a human capacity to operate at increasingly efficient (in the technical sense of the word) levels and with modem vintage capital equipment.

4. Four Year Plan, op. cit., pp.l20-l31. 5. An excellent source on this subject is George P. Schultz and Arnold Webber, Strategies

for the Displaced Worker Confronting Economic Change (New York: Harper and Row, 1966).

85

But the real question of unemployment is whether the demand for this newly created supply of a trained labor force exists - or from the planni,lg point of view, whether that demand can be stimulated.6 In comparison to the figures given above regarding unemployment rates among high school graduates, unemployed high school graduates with trade courses represent only 5 per cent of those graduated in 1966.7 This undoubtedly reflects the existence of a demand for these skills. Hence, the question of whether training and placing programs contribute to the solution of the unemployment problem rests on whether they contribute to the creation of a demand for such skilled workers. The answer, of course, lies not in the existence of such programs but in the production side of the economic structure of society.s

Further evidence of the need for a demand for any labor quality at a going market price is given by the experience of the MDTA in Puerto Rico.9 As a result of the U.S. Department of Labor Manpower Administration ruling in 1966 that such programs must prepare workers for jobs that pay at least $1.60 per hour or the prevailing wage, whichever is higher - that floor is clearly higher than the prevailing wage in many Puerto Rican industries - severe dislocations occurred in the program. The Manpower Report to the Governor explains that "because of this requirement, for the first time since MDT A became operative in P.R., money appropriated in 1967 for such training remained unused. In each of the three previous fiscal years in which the ... ruling was not in effect, P.R. exceeded its training goals to the extent that the Commonwealth received from the national pool an amount equal to almost twice its appropriations for MDTA training activities .... the wage requirement ... was responsible for the rejection of 28 on-the-job training programs during the 1966-67 fiscal year which could have provided much needed training to over 1,500 workers."l o This drama tical-

6. A recent report by the National Academy of Sciences found that it was "next to impossible" to find employment for an already trained skilled worker in Puerto Rico. See Science and Technology in Support of the Puerto Rican Economy, N.A.S., National Research Council, Wash., D.C., Feb., 1967, p.Sl.

7. Manpower Report to the Governor, op. cit., p. 1 0 1 ; commenting on a follow-up study of Commonwealth vocational and technical school graduates and high school graduates of the 1966-67 class.

8. An example to the point is the case of the petroleum refining plants in Puerto Rico. These projects were able to utilize Puerto Rican labor in the construction phase because of the training activities under MDT A; but the fact is that the oil companies always had the option of importing the needed qualified labor force for that phase. In fact, this was a real factor at the time. Cf. Manpower Report, op. cit., p. 1 16. Thus, the fact that the necessary skills were not present at the moment would have been hardly an obstacle for ·the investment projects. The presence of such skilled labor helped to reduce unemployment only because a demand for it materialized.

9. The Manpower Development and Training Act of 1965 (MDTA) has been instrumental in t raining workers for new factories promoted in Puerto Rico,.' e.g., work force needed for the staffing of the shoe industry factory established in Aguadilla, and the skilled craft men needed for the construction of the petrochemical complex plants throughout the island, as was pointed out in the text above. In fact MDTA is the primary source of training and retraining adult workers on the island. Cf. Ibid., p. 1 07.

10. Ibid., p.116.

86

ly suggests that if the economy happens to be in a state where the need -at the going wage rate -is not present, the workers won't be hired. On the other hand, if the demand is present they will be employed - if they lack the skills, the requirements will be lowered by the employer or supplemented by a period of on-the-job training; or if the workers possess the skills, and those happen to be offered) I This is the real issue of the Puerto Rican case - and that is why so much emphasis has been placed on this point.

These programs of training and unemployment relief must be viewed as temporary - in the sense that no society based upon the western "Protestant ethic" can rely on such measures for the sustenance of significant numbers of its potentially productive population for long periods of time, without injuring human dignity. This kind of program works best on a temporary basis (temporary-in terms of the worker who participates). There is little doubt that the benefits obtained from training and retraining labor exceed costs (at least in social terms). Such "processed" workers will hopefully be able to earn higher incomes and thus contribute to increasing government revenues from taxes, decrease unemployment payments, etc.l2 But they are no substitute for an expanding economy. That is why it is suggested there that a concomitant effort must be undertaken to absorb the labor released from agriculture in a vertically integrated industrial sector. This sector could expand with more labor intensive techniques than the EDA sector. Moreover, before it starts producing for exporting it could be exempted from the Federal minimum wages (as these apply to interstate commerce enterprises). This may prove to be a problem as the demonstration effect from the high-wage EDA sector will attract workers to try to enter that sector or wait (increasing reserve price); thus the export phase should be aimed for at a relatively near future.

Given that the structure of training programs is already well developed, it should not prove to be too difficult to train displaced workers from agriculture in skills which will permit their entry in newly created industries. It is largely a question of funding. These industries should probably be on the food and

11. The following quotations are quite revealing: "Industry can and does, in certain situations, redesign jobs to fit the available workers; during the war we called this 'job dilution'."- Barkin, Solomon. " ... job requirements are flexible and ... employers have upgraded their requirements in recent year. If labor were scarcer employers would hire people with less training and education." - Eckstein, Otto. "Based on my experience managers tend to exaggerate shortages of skilled workers. In West Germany former miners are producing automobiles without any retraining. The percentage of skilled workers within the metal trades industries dropped from 50 per cent in 1951 to 41 per cent in 1963. The fact that workers doing skilled work are very often paid worse than those under incentive systems seems to prove that there is a surplus of skilled worker . " - Gunter Friedrichs, in the discussion of the papers by Hildebrand and Killingsworth in Jack Steiber (ed.), Employment Problems of Automation and Advanced Technology, Proceedings of a Conference held at Geneva by the Inter­national Institute for Labor Studies, 19-24 July 1964 (New York: Macmillan, 1966), pp .156-161.

12. See M. E. Borus, "A Benefit-Cost Analysis of the Economic Effectiveness of Retrainin� the Unemployed, " Yale Economic Essays, Vol. 4, 1964, p.SS.

87

kindred product category of manufacture; which will try to supply the local demand for prepared foodstuffs. (The 'Goya' enterprise is an example of this point.)

The potential market and demand possibilities of these industries is demonstrated by the import figures of foodstuffs. In 1948 personal consump­tion expenditures on food were $256 million of which 41.7 per cent was imported; in 1968 personal consumption expenditures were $682 million and 39.4 per cent of these were imported.

Thus, the three-pronged approach proposed here consists of: (a) the restructuring of agriculture, both in production techniques and in product mix; (b) the creation of a well-balanced and effective program designed to receive and retrain displaced rural workers so that they are able to find jobs and (c) the creation of a new industrial sector designed to elaborate and distribute the new diversified agricultural production.

The important problem of creating agrarian entrepreneurs and facilitating credit (at low interests) for these highly risky enterprises must be tackled. This perhaps is the biggest and most important problem to be solved - its answer may contain the solution to the employment problem of Puerto Rico.

In essence the strategy presented here calls for a new "development within a development" in Puerto Rico. It calls for a new phase which ideally would provide a stronger basis for the whole economy. The government will act as the starter motor which cranks an engine. Once the process begins, agriculture will be able to sustain an industrial sector which in turn will help the economy to become integrated. The dependence on foreign capital will be reduced and a sounder locally financed and locally directed production and consumption could be fomented. And more important, perhaps, job opportunities will become available.

88

CHAPTER III

SUMMARY AND CONCLUSIONS

3.1.0 INTRODUCTION

This chapter will review main findings and summarize interpretation with respect to employment effects of the industrialization process taking place in Puerto Rico. These conclusions should not be regarded as definitive by any means. The problem is too complex and its ramifications too extensive. Our explanation is simply one of many possible interpretations of the problem of employment creation in a country with such special characteristics as Puerto Rico. We do claim, however, that our interpretation is consistent with the data available to us.

3.2.0 Finding I.

The non-local manufacturing sector of Puerto Rico, which generates somewhat more than 70 per cent of domestic manufacturing income in the island, is highly sensitive to changes in the relative factor price ratios. This sensitivity is reflected in the decisions of firms operating in that sector to adopt highly capital-intensive techniques of production, in fact more capital-intensive

techniques than are employed in the Southern U.S. Following the approach suggested by Arrow, Chenery, Minhas & Solow, a

strong relationship was observed between value added per employee and the

yearly wage earnings in the government sponsored sector. The evidence seems to indicate that the value of the elasticity of substitution parameter is not very far from unity in the typical case. For the year 1964 an estimate of 1.1 was

89

obtained for the substitution parameter based on a cross section sample of 96 observations at the two, three and four digit SIC industrial classification. When a shift parameter was introduced to allow for differences in scale of operations, a value for the elasticity of substitution coefficient of 0.94 was obtained. A separate estimate was obtained for a sample of 28 observations in the textile and apparel subsectors combined; that value if 0.92. None of these estimates are significantly different from unity as judged by the standard 't' statistic.

Further estimates were obtained (by industry) for the EDA sector for the period 19 56 to 1964 - this period was divided into two subperiods (19 59 to 1963 and 1961 to 1964) to observe whether the length of period affected the estimates in any significant fashion.! This method has the advantage of using direct observations on capital and rates of return (as a measure of the internal cost of capital). It has the advantage of being independent of changes in efficiency. Seventeen industry groups at the two-digit level (SIC classification) were studied. Of these, fourteen yielded parameters measuring substitution possessing values greater than unity. The instrument industry produced a value of 0.9; chemicals and petroleum - which were undergoing tremendous expansion - not surprisingly exhibited very small (negative) coefficients.

Interpretation I

The statistical results lend strength to the behavioristic micromodel presented in Chapter L-regarding entrepreneurial decisions in the non-local sector of Puerto Rico's manufacturing. That model postulates that entrepreneurs facing a situation of rising wages will attempt to maximize profits per dollar of initial investment in the island's plants. They can adjust the amounts of capital and labo·r utilized to produce a given output. Alternative techniques are made available to them from outside the system and determined by the U.S. technological resources. These firms react to increasing minimum and effective wages by choosing highly capital-intensive techniques. This is done in the expectation that the part of the profit share lost to labor (by the increasing labor costs) will be recuperated in the next period through either an increase in output (and sales)2 or outright decreases in the labor requiremer,t.

Since the coefficients of substitution estimated here simply measure historical changes in capital-labor ratios in response to historical changes in factor-price ratios, the significance of the government's wage policy in restricting the growth of employment is apparent.

1. For the earlier period 1949 to 1958 it was suggested that the estimates for the "elasticity of demand for labor" in total manufacturing perfonned by Reynolds and Gregory cannot be distinguished from the substitution coefficient of capital for labor. This is due to the methodology utilized by the authors to obtain their estimates. The value obtained by them is also insignificantly different from one.

2. Prices are given to these firms in the generality of cases given that their products are destined to the mainland U.S. market where they must compete at the given price.

90

Finding II

In 1957, sixteen two-digit industries in twelve South Atlantic States were subjected to a comparison with the EDA sector in Puerto Rico. The elasticity of substitution as obtained from these two points in space, showed negative values for all industries. The South Atlantic of the U.S. was chosen because it competes with Puerto Rico in the attraction of firms from other regions of the U.S.

The negative values obtained for these coefficients must be understood as follows: unless there are serious errors of measurement, all of these industries located in Puerto Rico were more capital intensive than the average in the South Atlantic U.S. despite the lower effective wage rates prevailing in Puerto Rico. Previously, several observers had asserted that U.S. firms operating in Puerto Rico employed more or less the same production techniques as those of their mother firms or counterparts in the U.S. but adapted these techniques in the direction of being labor using. This contention is not supported by our finding. Instead, what apparently did happen was that firms became more capital intensive than their American counterparts located in low wage areas of the United States, at their arrival to Puerto Rico or very soon thereafter.

Interpretation II

One possible explanation of this is that the rates of return to capital after taxes were so large for Puerto Rican locations, compared to the South Atlantic U.S. locations, that there was little pressure on management to economize on the use of capital. These rates of return were affected favorably by the government tax exemption programs and by the prevailing low wages. _

Conceivably, differences in the quality of labor causes labor services to be more expensive in Puerto Rico than in the South Eastern U.S. despite the lower wage rates in Puerto Rico.

Finally, negative coefficients of substitution may be interpreted to imply that isoquants on the production surface are concave to the origin. The feasibility of the finding can still be defended. The case of concavity on the production surface is not surprising in cases where explicit account is taken of only two factors of production when in fact three or more are being used. The presence of a third factor such as management can prevent the marginal productivities of the other factor (or factors) from declining, as more units are introduced into the production process. This case has special relevance to the EDA sector in Puerto Rico. It has been clearly shown by Reynolds and Gregory that improvement in the management area increasingly characterized that sector as efforts were made to offset declining profitability occasioned by increasing wages.

The high and positive values for the substitution parameter obtained from observations taken on two points in time for seventeen industrial classifications of the EDA sector is strong evidence that the process of substitution described above has continued for those firms which continue to operate on the island ..

These results call into question the utility of the Commonwealth

91

government's policy of striving to approach the mm1mum wage floors as

determined by the U.S. Congress. As pointed out by Reynolds and Gregory in

their study and in Reynolds' statements to the Status Commission, the goal of increasing employment and increasing productivity may be incompatible.

Finding III

On the more aggregative level it has been sustained in this thesis that the production conditions operating in the industrial sector of Puerto Rico during the period 194 7 to 1967 were such as to suggest that a future slowdown of the growth process is forthcoming.

A simple model of growth was constructed to take explicit account of: (i) the fact that Puerto Rico is a recipient of advanced (American) technology; (ii) the fact that labor's quality increases through time; and (iii) the fact that some form of adaptation of the imported technology is possible in order to increase employment.

The results obtained from testing that model must be taken to be only very broad indicators. Nevertheless they seem to show that little adaptation (in the labor-using sense) occurs, i.e., that the ratio of the "imported" capital-out-

put coefficient over the capital-output ratio obtained in Puerto Rico "after

innovation" is too smaJ\.3 This ratio or coefficient is an indicator of the "degree of capital stretching." It has been shown in Chapter II that the capital stretching coefficient is an increasing function of the percentages change in labor productivity. The magnitude of that coefficient determines the satisfaction of the "minimum assimilation criterion," i.e., that the capital requirements per unit of output after innovation are lower than those embodied in imported techniques. If the minimum assimilation criterion is not satisfied, sustained growth will not occur continuously over the long run.

Interpretation III

It can be seen from the above cliscussion that the magnitude of the capital stretching coefficient is crucial to a technology recipient country because it measures the effort at innovation being undertaken by that country. The estimates made of this elasticity, i.e .. the degree of responsiveness of capital stretching as labor productivity increases, suggest that the minimum assimilation criterion was not met during the period under consideration for Puerto Rico, i.e., the capital-output ratio after innovation was not sufficiently different (less) than the "imported" capital-output coefficient. In other words the process of imported technology to the countries' factor endowment conditions has been too weak.

3. This would tend to explain the observed (ex post) constancy of the capital output ratios within industries in the EDA sector.

92

3.3.0 SUMMARY

The findings obtained by the aggregated model and by the less aggregated sectoral models used in this dissertation tend to support each other. The estimation of the substitution parameter in the EDA sector and the estimates as derived from the technology transmission model show that a Cobb-Douglas production relation is not a bad approximation to describe the production conditions operating in Puerto Rico's industrial sectors.4 Because capital is a bottleneck factor in Puerto Rico all efforts must be undertaken to decrease its requirement per unit of output. This will have the double effect of increasing output and releasing capital which can then be employed to equip more workers thus providing badly needed labor employment� or at least prevent increases in technological unemployment due to technical substitution.

The empirical testing of the structural equations of the aggregated model �although highly tentative and only suggestive of trends � do indicate that Puerto Rico has in fact been able to adapt to a degree the techniques brought from the United States. This adaptation has tended to follow a path of increasing the productivity of complete establishments through the introduction of management actions designed to reduce waste, do away with "unnecessary" labor and improve the efficiency of the establishment. It has also been concluded that the degree of adaptation has remained short of the requirements posed by the model as necessary for the release of capital to be used in conjunctions with more labor to produce higher levels of output with increased employment of labor.

3.4.0 SOME FINAL COMMENTS

It has been the purpose of this research to provide a quantitative analysis of the unemployment situation in Puerto Rico with special emphasis on its technological aspects. Whatever policy considerations we chose to propose have been outlined in the Mathematical to Note to the Appendix of Chapter I. The main argument is based on the results obtained by the research itself. The conclusion reached here, i.e., that through continuation of present policies regarding growth through an industrialization program which rests heavily on foreign capital utilizing modern techniques for the production of exports will not solve the employment problem of Puerto Rico, is inescapable. This is specially so, and is further aggravated by the lack of control over the wage minima by the government of Puerto Rico. The influence of the minima set by

the United States Congress, in response to totally different economic condi­

tions originating in the mainland, hampers an employment policy in Puerto

Rico through the technical substitution effects on industry production func-

4. As shown in Chapters I and II, unit elasticity implies a Cobb-Douglas production function; and such a technical production relation spells a rate of decay for the growth of the capital stock, thus placing added importance to its scarcity characteristics in a

labor surplus economy.

93

tions. The alternative course of action must be one of developing the agricul­

turl!l potential of the island to its limits. This must be accompanied by a

new effort in the industrial sector which would be directed at the manu­

facturing and distribution of the agricultural product for local consump­

tion. Later on, the "overspill" after domestic demand has been satisfied,

will constitute another source of exports. The initial displacement of workers

from the rural sector, which will be triggered by the modernization and diversification of that sector, must be met by well-organized training programs designed to develop the work force to be utilized in the new plants which will use the product of the land as input. Secondary sources of employment will be generated in the service industries, e.g., transportation, marketing, etc., all of these, integrated in the new agricultural-industrial complex. The increases in productivity which will be forthcoming in the rural sector will enable that sector to pay higher wages, thus reducing the real income differential between the urban and rural areas. That will become a factor in reducing further migration to the cities.

The essential prerequisite for the implementation of an agricultural development strategy as outlined above is the control over foreign trade instruments such as tariffs. These would be essential to protect local production in the initial phases of such a programme. This is not possible within the present colonial status of Puerto Rico. The same applies to control over industrial wage minima. It is therefore imperative that a complete revision of the present relationship between Puerto Rico and the United States be undertaken.

94

APPENDIX OF TABLES

95

\() .....]

TABLE A-1

AVERAGE HOURLY EARNINGS IN SELECTED INDUSTRIES: PUERTO RICO

AS A PERCENTAGE OF UNITED STATES AVERAGE 1952-67

Industry 1952 1954 1956

Cigars .30 .34 .42

Broad woven fabrics .38 .49 .56

Knitting .41 .35 .53

Floor coverings .26 .26 .32

Men's & boys furnishings .32 .36 .47

Women's misses outerwear .26 .27 .35

Women's children undergarments .32 .36 .56

Girls & chjldren outerwear .28 .30 .38

Paperboard, containers & boxesa .36 .43 .42

Drugs .22b -- .41

Leather footwear .30 .35 .39

Fabricated metal products .31 .32 .36

Machinery (non electrical) .39 .43 .47

Household appliances -- -- .39

Toys & sporting goods .26 .28 .54

Costume jewelry, buttons & notions .33 .35 .36

a Data for Puerto Rico arc of a broader industrial group.

bRatio is for J 950.

Sources: Reynolds and P. Gregory, op. cit., Table 1-13, p. 26.

1958 1960

.54 .59

.56 .57

.66 .68

.34 .41

.55 .56

.42 .46

.63 .65

.49 .54

.52 .55

.46 .43

.43 .49

.44 .46

.52 .47

.59 .58

.40 .42

.40 .41

Average Gross Hourly Earning

P.R. U.S. P.R. as 1962

J Oct. 1967 Oct.1967 %ofU.S.

.67 1.369 1.82 .70

.56 1.300 2.15 .61

.70 1.373 2.02 .69

.53 1.363 2.18 .63

.61 1.207 1.76 .69

.52 1.292 2.26 .57

.70 1.377 1.87 .74

.59 1.182 1.90 .62

.63 1.789 2.71 .66

.49 1.673 2.91 .58

.52 1.188 2.04 .59

.51 1.762 2.99 .59

.54 1.758 3.22 .56

.56 1.362 3.05 .45

.51 1.129 2.13 .53

.50 1.191 2.16 .55

Puerto Rico Department of Labor, Bureau of Labor Statistics, Census of Manufacturing Industries of Puerto Rico, (October of each

year). U.S. Department of Labor, Monthly Review, (October of each year).

TABLE A-2

AVERAGE HOURLY EARNINGS IN SELECTED INDUSTRIES:

PUERTO RICO AS A PERCENTAGE OF U.S. 1958-1964 1958 Puerto 1964

SIC* Rico as

a per-

Puerto centage Puerto (Industry Code No.) Rico US. o[US. Rico

201, 203 0.75 1.92 39 1.28 202 .71 1.96 37 1.12 204 .56 2.00 28 1.75 205 .69 1.90 36 1.03 206 1.08 2.07 54 1.29 2082, 2084, 2085 1.11 2.80 40 1.65 208 (exc. 2, 4, 5) 1.72 2.22 32 1.15 207, 209 .58 1.76 33 0.95 21 .48 1.59 30 0.91 22 .86 1.49 58 1.11 231' 232 .68 1.42 48 1.03 233 .72 1.72 42 1.11 20341 .71 1.36 52 1.03 20342 .93 1.49 62 1.22 235�9 .65 1.54 42 0.97

24, 25 .67 1.79 37 1.05 26 1.04 2.10 50 1.45 27 .93 2.49 37 1.51 28 1.03 2.29 47 1.46 29 1.35 2.73 50 2.30 30 1.88 2.19 40 1.12 31 .63 1.56 40 .96 32 .94 2.12 44 1.46 33, 34 1.01 2.46 41 1.43 35, 37 1.20 2.45 49 1.48 36 1.09 2.12 50 1.41 361, 362 .99 2.24 46 1.39 367 .91 1.79 51 1.37 38 .92 2.15 43 1.35 39 .73 1.77 40 1.05 * See list of Industry Groups and Code Numbers on following pages.

us.

2.32

2.45

2.43

2.41

2.50

3.50

2.71

2.18

1.97

1.78

1.67

1.98

1.56

1.76

1.80

2.11

2.56

2.97

2.80

2.20

2.54

1.82

2.55

2.90

2.99

2.52

2.67

2.15

2.54

2.08

� � Puerto

Rico as

a per-

centage

o[US.

55

33

72

43

52

47

42

44

46

62

62

56

66

69

54

50

57

51

50

72

44

53

57

49

50

56

52

64

53

52

Source: Computed from data for Puerto Rico and U.S. given by Hearings of the Commis� sion of Status of Puerto Rico, San Juan, Puerto Rico, D ecember, 1965 Govern� ment Printing Office, Washington, D.C. pp. 112-113.

Department of Labor, Bureau of Labor Statistics, Monthly Labor Review, Washington, D.C.

98

Standard Industrial

Classification

Industry Group

Meat products, canned & frozen foods

Dairies

Grain mills Bakery products

Sugar Malt liquors, wines & brandy

Distilled liquors (except brandy)

Bottled & canned soft drinks, flavorings

Candy & related products, misc. foods.

& Kindred products

Tobacco manufactures

Textile mill products Men's & boys furnishings

Women's & misses outerwear Women's & children's underwear

Corsets & allied garments

Millinery, hats & cups; children's outer·

wear; misc. apparell; fabricated texti­les n.e.c.

Lumber & wood products; fixtures

Paper & allied products

Printing & publishing

Chemical & allied products

Petroleum & coal products

Rubber & plastics products, n.e.c.

Leather & leather products

Stone, clay, & glass products

Primary metal

Machinery, excepts electrical; transporta-

tion equip

Electrical machinery

Instruments and related products

Miscellaneous man. (in ordenance)

99

Standard Industrial

Classification

Code Number

201,203

202

204

205

206

2082,2084,2085

208 (exc. 2, 4, 5)

207,209

21

22

231,232

233

20341

20342

235-9

24,25

26

27

28

29

30

31

32

33,34

35,37

36

361,362

367

38

TABLE A-3

EDA-PROMOTED FIRMS BY INDUSTRY GROUP 1954-64 PROFIT AS PERCENT AGE OF AVERAGE EQUITY*

SIC

ndustry Industry ode No. Group 1954 1955 1956 1957 1958

20 Food & kindred 3 11 4 31.7 36.4 21 Tobacco 62 47.6 36.7 22 Textile mill products 31 19 17 36.2 21.6 23 Apparell 48 37 50 25.0 21.2 24 Lumber 8: related 2 products 9.1 25 Furniture & wood

products 75 25 37 28.1 15.9 26 Paper and allied

products 66 89 68 38.4 19.4 27 Printing & publishlng 12.7 1.7

1959

19.6 27.0 27.1 25.3

4.3

25.4

8.6 26.5

28 Chemicals 13 29 43 19.4 3.1 - 13.0 29 Petroleum 45 62.6 -36.4 50.8 30 Rubber & plastic

products 65 62 47.3 30.2 42.2 31 Leather & products 10 37 34 16.4 21.3 36.8 32 Stone & clay prds. 18 22 20 14.4 12.3 13.2 33 Primary metal prds. 5.9 6.2 62.5 34 Fabricated metal prds. 32 27 24 19.4 20.4 25.7 35 Machinery 76 73 57 28.6 11.1 28.5 36 Electrical machlnery 71 67 59 63.3 41.2 43.5 37 Transportation

equipment 38 Instruments & related

prds. 14 17 20 8.7 24.2 35.9 39 Miscellaneous 25 23.1 22.0 20.5 19 (ordenance

All firms 38 35 39 33.9 21.8 27.9

a Includes (37)

* Average Equity defined as half sum of beginning & closing equities for the year. Profit figures are net of taxes. Few firms are subject to corporate profit taxes, until later years.

Source: Economic Development Administration, EDA Statistical Yearbook 1964-65, San Juan, Puerto Rico.

100

SIC

Industry Code No. 1954

20 8.1

21 10.2

22 1.9 -

0 23 4.5

24 6.3

25 6.0

26 9.9

27 9.2

28 11.6

29 12.5

30 10.6

31 5.9

32 12.5

33 8.9

34 7.6

35 8.6

36 12.4

TABLE A-4

U.S. MANUFACTURING FIRMS PROFITS AS A PERCENT AGE OF AVERAGE EQUITY*

1954-1964

1955 1956 1957 1958 1959 1960 1961

8.9 9.3 8.6 8.7 9.3 8.7 8.9

11.4 11.7 12.5 13.5 13.4 13.4 13.7

5.7 5.8 4.3 3.5 7.6 5.9 5.0

6.2 8.1 6.3 4.9 8.6 7.7 7.1

1 1.1 8.7 4.7 5.7 9.3 3.6 4.0

9.2 11.6. 8.5 6.3 8.8 6.5 4.9

11.5 11.7 8.9 8.0 9.5 8.5 7.8

10.2 13.1 11.8 9.0 11.4 10.6 8.5

14.7 14.2 13.3 11.4 13.7 12.2 11.8

13.2 13.8 12.4 9.9 9.9 10.1 10.3

13.2 12.2 11.2 9.1 11.0 9.1 9.3

8.5 7.2 7.0 5.6 8.4 6.3 4.4

15.6 14.8 12.4 10.1 12.7 9.9 8.8

14.1 14.0 10.8 6.8 8.0 7.2 6.5

10.0 10.7 9.3 7.3 8.0 5.6 5.9

10.3 12.6 10.7 6.9 9.7 7.7 7.8

12.3 11.4 12.6 10.2 12.5 9.5 8.9

1962 1963 1964

9.2 9.3 10.4

13.2 13.4 13.4

6.2 6.1 8.6

9.1 7.8 11.9

6.4 8.2 9.8

8.2 8.3 10.1

10.4 8.1 9.3

13.4 9.3 12.6

10.2 13.8 15.2

9.7 11.4 11.5

7.0 9.4 10.7

9.0 7.0 10.6

6.2 8.7 9.6

7.9 7.2 9.2

9.2 8.3 10.1

10.2 9.7 12.7

15.2 10.2 11.2

-0 IV

SIC

TABLE A-4 ( c_.:::on :.:..:t::..!.. ):.----.----,----,,--...,----

/i ndustry 959 11960 11961 1 19621196311964 1Jde No. _Q 1954 1955 1956 1957 1958 --- -·--

37 -- -- -- -- -- -- -- -- -- 15.5 16.1 38 ] 2.3 12.5 12.4 12.0 10.6 13.0 ] 1.6 10.5 12.1 12.2 14.4 39 7.5 8.6 11.6 7.7 8.1 9.2 8.6 9.9 9.6 8.8 9.3

19

All 9.9 12.6 12.3 11.0 8.6 10.4 9.2 6.9 8.5 8.4 11.4

* Data has been adjusted to exclude all U.S. tirms with assets exceeding $100 million. Profits are in an "after taxes" basis.

Source: Federal Trade Commission, Securities and Exchange Commission, Quarterly Financial Reports for Manufactur· ing Corporations, 1954-64.

-0 w

t/l 0 � .., () ('D

VltrJ .. () = o ::; '-' o § 2.

. ()

2'0 � � -� O o :;o"' �.3 <> CD o ;:.

> 0. 3 §: � � c;· ?

g; A. v, � :::1". "' ::t.

R

i .... <::!" 0 0 _?-;-

...... '0 v, -1>. .:... '0 D\ _-�>.

TABLE A-5 TOTAL CAPITAL PER EMPLOYEE IN EDA-PROMOTED

FIRMS BY INDUSTRY SIC

Industry CadeNa. I954 1956 1959 1967 1962

20 $ 7,269 7,657 18,593 18.515 20,980 21 --- 6,503 6,857 7,296 8,177 22 6,857 5,895 7,483 8,661 8,113 23 2,248 4,175 4,633 5,773 6,172 24 --- --- 35,880 27,471 9,594 25 7,886 6,736 7,912 9,839 26 23,725 35,983 30,222 33,768 24,732 27 --- --- 15,095 13,964 17,308 28 51,116 63,898 69,944 74,581 70,790 29 --- 121,117 101,309 90,214 92,025 30 --- 8,333 11,002 14,832 13,950 31 4,076 3,622 5,010 4,915 5,122 32 14,665 13,348 15,388 18,394 19,710 33 --- --- 20,752 25,285 24,325 34 9,583 10,969 20,053 21,084 22,581 35 9,355 14,759 16,639 22,149 29,181 36 8,658 12,755 15,950 16,527 19,266 37 --- --- -·- --- 16,630 38 3,935 4,245 7,398 7,957 9,841 39 6,654 5,775 7,241 7,511 7,490 All 5,832 9,551 12,630 12,897 13,159

1963 1964

19,548 20,744 8,544 7,638 9,778 10,378 6,237 6,822

15,125 10,339 9,639 10,253

25,889 27,841 14,144 16,189 87,920 119,185 97,825 103,794 16,648 18,005

5,434 8,954 29,041 32,120 22,719 27,112 22,978 24,679 31,966 64,931 23,768 30,869 17,936 24,741 10,721 13,423

8,878 8,169 14,867 16,803

TABLE A-6

CALCULATION OF ELASTICITY OF SUBSTITUTION FROM FACTOR

INPUTS AND FACTOR PRICES: PERIODS 1956 TO 1963,

AND 1961 TO 1964

Elastici

SIC Code No. 1956-63 1961-64

20 7.23 10.39 10.62 .6958 .9785 .5103 .7484 I .0789 1.0622

21 3.55 4.26 4.18 .8333 1_0192 .3849 .9307 1.2116 -0.0042 ......

22 3.52 4.54 5.06 .7753 .8972 .4729 .9362 1.1282 0.9906 0 +>-

23 2.42 3.24 3.47 .7469 .9337 .3696 .7843 1.1949 1.0400

24 18.55 10.65 6.51 1.7418 1.6359 11.0. 11.0. n.o. 11.0.

25 3.78 5.01 4.96 .7545 1.0101 .2998 .6119 1.2842 -0.0024

26 16.36 13.90 12.69 1.1770 1.0954 11.0. 11.0. n.o. 11.0.

27 7.46 7.70 7.79 .0106 .9884 .5877 .6442 1.1449 1.1028

28 36.22 41.28 54.62 .7805 .7558 1.4889 .9602 -10.9514 0.9475

29 52.55 42.29 49.61 1.2426 .8524 .3186 .6212 - 0.0627 1.0766

30 5.20 7.56 8.07 .6878 .9368 .2896 1.0781 1.2570 ·: -60.4785

31 2.34 2.63 3.71 .8897 .7089 .4446 .9604 1.1828 0.9293

32 7.27 11.37 15.18 .6394 .7490 .3123 2.7618 1.2082 - 4.2486

33 10.21 12.11 12.34 .8331 .9814 .1765 1.1300 1.5406 -37.5122

34 7.81 11.09 11.88 .7042 .9335 .3865 .9209 1.1641 1.0030

35 7.88 13.62 23.36 .5786 .5830 .3467 .6247 1.1444 0.9833

TABLE A-6 (cont.)

Capital Intensityl Relative Factor Cost Elasticity of Substitution

sic (K/L)o (KjL)1 (W0/W1) X (WifW2) X

Code No. (K/L)o (K/L)l (KjL)2 (K/L)l (KjL)2 (rdro) (r2/rl) 1956-63 1961-64

36 7.12 9.77 13.30 .7288 .7346 .3353 .7739 1.2211 0.9880

37 n.o. 8.60 10.83 n.o. .7941 n.o. 1.4822 n.o. -11.1164

38 2.86 4.60 4.60 .6217 1.0000 .9038 .7753 0.9169 - 0.0000

39 3.50 4.11 8.44 .8516 .4870 .4981 .7625 1.1372 - 1.3750

N.O.; Not obtained.

-

1( (K/L)o; (K/Lh; and (K/L)2 correspond to average for the periods 1954-59; 1961-62; and 1963-64 respectively. 0 Vl

..... 0 0\

TABLE A-7

CALCULATION OF ELASTICITY OF SUBSTITUTION FROM FACTOR INPUTS AND FACTOR

PRICES: PUERTO RICO'S EDA SECTOR VS. A SAMPLE OF SOUTH ATLANTIC STATES

Capital Intensity Relative

factor

Cost

(WPR )(Nsaus) Elasticity

(K/L} saus (K/L} EDA (KLL) EDA Wsaus NEDA of

SIC SIC (K/L) saus Substi-

Code No. Industly Group tution

20 Food products 3.72 7.23 1.944 .1296 .3251

22 Textile mill products 3.06 3.52 1.150 .0620 .0505

23 Apparel 0.83 2.42 2.916 .1288 .0522

24 Lumber & wood products 1.69 18.55 10.976 .2852 -1.9096

25 Furniture 2.18 3.79 1.738 .2077 .3517

26 Paper & products 8.84 13.16 1.489 .1631 .2194

28 Chemicals 10.81 36.22 3.351 .1986 .7478

29 Petroleum 17.26 52.55 3.045 .0839 .4492

30 Rubber products 3.36 5.20 1.548 .0963 .1865

31 Leather & products 1.22 2.34 1.918 .1621 .3578

32 Stone, clay & glass 4.82 6.77 1.404 .3726 .3440

33 Primary metals 6.50 10.21 1.571 .7001 -1.2667

34 Fabricated metals 5.1'l3 7.81 1.387 .2188 - .2153

"

......

0 -..)

SIC Code No.

35

36

38

. . .

SIC Industry Group

Non-electrical machinery

Electrical machinery

lnstrumen ts

TABLE A-7 (cont.)

Capital Intensity

(K/L) saus

3.15

2.63

2.23

(K/L) EDA-PR

7.88

7.12

2.86

-

{KLLl EDA-PR

(K/L) sa us

---�-- -�

2.502

2.707

1.282

Source: Data for U.S. is for 1957 while data for EDA is an average for the years 1956 and 1959.

Relative factor

Cost WPR X

--

Wsaus Nsaus

NEDA-PR --

.1776

.0837

.4862

Data for the U.S. was obtained from analysis based on Census data made by Liw and 1-lilldcbroad, op. cit.

--

Elasticity of

Substi-tution

.5305

.4015

.3448

BIBLIOGRAPHY

BIBLIOGRAPHY

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Haber. William and :\lurrav, Merrill G . . Unemployment insurance in the American Economy, ·

Richard D. ln\·in, l.nc., Homewood, Ill., 1966.

Hildebrand, George and Liu, Tao-chung, Manufacturing Production Functions in the United States, 1957: An Inter-industry and Interstate Comparison of Productivity, Cornell University Press, Ithaca, 1965.

Jaffe, A. J ., People, Jobs, and Economic Development: A Case History of Puerto Rico, The Free Press of Glencoe, Illinois, 1959.

Johnston, J. (Translation by A. Herranz Yuste), Merodos de Econometria, Editorial Vinccns-Vives, Barcelona, 1967.

Keyserling, Leon H., The Role of WaKes in the Great Society, Conference on Economic Progress, Washington, 1966.

Kindleberger, Charles P., Desarrollo Econ6mico, McGraw Hill, Inc., New York, Barcelona, 1966.

Klein, Lawrence R., A Textbook of Econometrics, Row, Peterson and Company, New York, 1953.

Long. Oarence D., Wages and Earnings in the United States, 1860-1890, National Bureau of Economic Rescar�h, New York.

111

Meads, J.E., A Neoclassical Theory of Economic Growth, George Allen and Unwin Ltd., London, 1960.

Minhas, Bagicha Sing, An International Comparison of Factor Costs and Factor Use, Amsterdam; North Holland Publishing Co., 1963.

Nicholson, R. J., Economic Statistics and Economic Problems, McGraw-Hill Book Company, Limited, Maidenhead England, 1969.

Perloff, Harvey, Puerto Rico: Economic Development 1940-1960, Puerto Rico Planning Board, February, 1951.

Reynolds, lloyd and Gregory Peter, Wages, Productivity and Industrialization in Puerto Rico, R. D. Irwin, Homewood, lll., 1965.

Salter, W. E. G., Productivity and Technical Change, Cambridge University Press, 1960. Senior, Oarence and Watkins, Donald 0., "Towards a Balance Sheet of Puerto Rican

Migration," Selected Background Studies Prepared for the U.S. - Puerto Rico Commission on the Status of Puerto Rico, Washington: U.S. Congress printing office, 1966.

Shultz, George P. and Weber, Arnold R., Strategies for the Displaced Worker, Harper and Row Publishers, New York, 1966.

Simon, Herbert A., "Productivity and the Urban-Rural Population Balances," Models of Man, Chapter 12, John Wiley and Sons, Inc., New York, 1957.

Stahl, John Emery, Economic Development Through Land Reform in Puerto Rico, Iowa State University of Science and Technology, Ph.D. Thesis University Microfilm Inc., Ann Arbor, Michigan, 1966.

Stiber, Jack, (ed.) Employment Problems of Automation and Advanced Technology, I.I.L.S., Me Millan, New York, 1966.

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Treadway, Arthur B. "What is Output," In Pro.ductivity and Productivity in the Service Industries, Victor R. Fuchs, (editor) ational Bureau of Economic Research, Series on Income and Wealth, 1969.

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Articles

Andie, Fuat, "La Distribuci6n dellngreso de Ia Fuerza Obrera en Puerto Rico 1949-1959," Revista de Ciencias Sociales, Vol. 7, June, 1963.

------,'"Un Comentario en Torno a Ia Distribuci6n del lngreso en· Puerto Rico: un estudio realizado en base a los aiios 1953-1963," Revista de Ciencias Sociales, Vol. 9, No.4, December, 1965.

Arrow, Kenneth, et al., "Capital-Labor Substitution and Economic Efficiency," Review of Economics and Statistics, Vol. 43, No.2, August, 1961.

Baumol, William J., "Macroeconomics of Unbalanced G rowth: The Anatomy of Urban Crisis," American Economic Review, Vol. LVII, No. 3, June, 1967.

Castaneda, R. and Herrero, 1. A., "La Distribuci6n del Ingreso en Puerto Rico: Algunos Comentarios en Base a los Aiios 1953-1963," Revista de Cien cias Sociales, Vol. 7, No.4, December, 1965.

------ "Mas Sobre Ia Distribuci6n del Ingreso: Contrarreplica al Doctor Andie," Revista de Ciendas Sociales, Vol. 7, No.3, June, 1966.

Professor. Gutierrez says in the introduction

to his book: The purpose of this dissertation is to test some hypothesis regarding the severe

and chronic unemployment which has charac­

terized the economy of Puerto Rico in spite of its accelerated growth during the last two decades. Emphasis is placed upon the technical

nature of unemployment and its relation to factor endowments."

In his foreword to the book, Dr. Gerardo Navas, Director of the Graduate School of Planning makes the following remark: "Vari­ous theoretical models are presented to explain

entrepreneurial behavior in the government

sponsored manufacturing sector regarding the observed process of sustitution of capital for

labor under intense wage pressure. A num­ber of alternative methods are utilized to obtain econometric estimates of the degree with which

the EDA manufacturing sector responds to changes in relative factor prices."

In his book, Dr. Gutierrez discusses invest­ment decisions in Puerto Rico, the capital-labor

substitution in manufacturing, the historical changes in labor's share, a proposed strategy for

future action. Models used to stretch his points and interpretations and findings give the reader

a clearer view of what he has been discussing throughout the book. Professor Gutierrez·

points arc clearly explained through tables.

graphics, and diagrams. His work is a valuable contribution to the studies on unemployment in Puerto Rico.