Employment in Puerto Rico
At a Glance:
- Pharmaceuticals make up a large part of the manufacturing industry and are mostly produced for export.
- Puerto Rico has experienced a serious recession ever since tax exemptions for US investors ended in 2006.
- The tourism industry is a big contributor to the island’s GDP — more than 10 million visitors came to the island in 2016.
- Residents of Puerto Rico are subject to most federal tax laws with the exemption of federal income tax.
- Despite full social security contributions, residents do not receive the same Medicare funding in Puerto Rico as on the US mainland.
In September 2017, Puerto Rico, along with other Caribbean islands, was hit by a series of hurricanes, one of which caused severe destruction to the infrastructure, as well as destroyed 80% of the island’s crops. At the end of 2017, large parts of the island are still without electricity and running water, leading to a severe healthcare crisis as a result. It is unclear how long it will take the island to recover.
Puerto Rico’s status as an unincorporated territory of the United States means that people working here enjoy similar benefits as US employees, but they also face many challenges which people working on the mainland need not worry about.
A Brief Economic History
Up until the second half of the 20th century, Puerto Rico’s economy was mainly driven by agriculture. Most people working in the agricultural sector were involved in the sugar cane production for the American market, which dominated the whole country. However, constant urban expansion claimed more and more flat land, while at the same time prices for sugar cane remained low.
As working in the country’s sugar cane production was no longer profitable, coffee became the most important crop and is still a viable source of income for a number of people in Puerto Rico today.
In the late 1940s, the government launched an ambitious industrialization program — “Operation Bootstrap” was planned to develop Puerto Rico into an industrialized economy. In order to create jobs and improve the living condition of its people, the island’s economy now focused on manufacturing for export to the wealthy mainland, instead of producing for local purposes only. The program also involved tax incentives for foreign investors and depended heavily on foreign resources. Initially successful in giving Puerto Rico’s economy a boost and helping it develop into the modern island it is today, “Operation Bootstrap” also plays a role in the economic struggle which Puerto Rico faces today.
Working in Puerto Rico Today
Today, manufacturing still accounts for over 40% of the GDP. However, the emphasis has shifted from labor-intensive to more capital-intensive industries. Most people working in Puerto Rico’s manufacturing industries are now involved in the production of chemicals, machinery, and electronics. Pharmaceuticals are also manufactured on the island, mostly for the mainland: 725% of exported goods are manufactured in one of the pharmaceutical plants. This sector accounts for about 90,000 jobs alone.
At less than 1%, agriculture today holds an insignificant share of the country’s GDP and just a little over 2% of the workforce is employed in the agricultural sector. Still, coffee and plantains, among other agricultural products, remain an important source of income in Puerto Rico and the sector experienced a renaissance with modest growth in recent years.
Hurricane Maria, which hit the island in September 2017, has unfortunately affected about 80% of the crops and flattened or stripped most trees. It might take the agriculture sector a while to recover from this natural disaster and the island will have to rely on food imports even more than usual.
Economic Challenges
Although Puerto Rico is classified as a high-income economy, the territory’s median household income has been in decline for close to a decade. Its GDP per capita of some 37,700 USD in 2016 still compares favorably to that of other Caribbean nations, at least.
Nevertheless, working in Puerto Rico entails a lot of challenges, both for expats and for locals. As an expat, you’ll have to get past the strict US immigration laws. For more information on visas and work permits, please refer to our guide on moving to the USA.
On top of that, most of the incentives for foreign companies and employees working in Puerto Rico have been revoked. Tax exemptions for US companies under section 936 have contributed significantly to the economic development of the island. When these tax exemptions finally ended in 2006, the commonwealth experienced the beginning of a serious recession, as foreign companies started to leave Puerto Rico, looking for more favorable destinations.
Attempts to attract investors with income tax breaks for specific industries have not had the desired effects and Puerto Rico experienced quite a loss in tax revenue. The island had to borrow heavily from the mainland to make up for this, leaving Puerto Rico about 70 billion USD in debt. The current economic situation and the high unemployment rate of 12%, together with the devastating effects of the 2017 hurricane, are bound to also significantly reduce opportunities for expats.
Another challenge faced by consumers as well as businesses is economic discrimination. Many US companies do not offer the same services and products to people in Puerto Rico as to the US mainland. This is mostly due to the Jones Act which requires ships carrying cargo between US ports to be manufactured in the United States, and for the ships to be owned and largely staffed with US citizens. This monopoly is heavily defended by the US shipping industry and causes goods in Puerto Rico (as well as other US territories and states like Hawaii and Alaska) to be significantly more expensive due to the higher freight rates. That is why ordering supplies from a company on the mainland is often simply not an option for a small business in Puerto Rico. This limited access to products or discounts can be a serious obstacle to doing business and working in Puerto Rico.
Puerto Rico: Tourism, Trade, and Taxes
Tourists Are Welcome on the Island
Tourism is an important source of income for the island and its inhabitants. In 2016, it contributed about 8 billion USD in total to the island’s GDP according to the World Travel and Tourism Council. The sector suffered significantly from the hurricanes in September 2017 and many tourists have cancelled their reservations for the high season, which runs from December until May. Nevertheless, the Puerto Rican government hopes to get visitors back on the island sooner rather than later.
More than 68,000 people were employed in jobs connected to Puerto Rico’s tourism industry in 2016. Roughly 10 million of the visitors to the island in the year 2016 arrived via plane, while the number of cruise passengers ranges from 1.5 to 1.6 million. .
Puerto Rico — A Regional Trading Hub
With a total of eleven seaports, Puerto Rico is a significant regional trading hub and its economy, especially the manufacturing sector, has a strong focus on exports and imports, mainly to and from the US mainland. Puerto Rico’s main export commodities are chemicals, electronics, rum and other beverages (mainly concentrates), as well as medical equipment, a large part of which go to the US. Other export partners include the Netherlands and Belgium.
As a country of virtually no profitable natural resources, Puerto Rico often imports the raw materials and machinery it needs for the manufacturing of export goods. Other commodities which are most frequently imported to the island are chemicals, food, and petroleum products. Many of the imports come from the US, but Ireland, Singapore, and Switzerland are also big importers.
A Word on Income Tax in Puerto Rico
Puerto Rico may have its own tax laws, but its residents are nevertheless subject to most US federal taxes, including social security, business taxes, and estate taxes. One exception is the federal personal income tax. Unless they are employed by the US government in one way or another, residents of Puerto Rico pay their income tax to local tax authorities instead of the IRS. It ranges from 0% on the first 9,000 USD of net taxable income up to 33% on all net taxable income exceeding 61,500 USD.
As a resident foreigner, you will be taxed like a Puerto Rican citizen on all your income. You will be classified as a resident if you
- spend more than 182 days in Puerto Rico during one calendar year;
- have your tax home, i.e. your principal place of business, in Puerto Rico;
- have close connections to the country.
Non-resident foreigners only need to declare their income from Puerto Rican sources. Although income tax is usually withheld from salaries and wages, you still need to file an annual tax return if you meet the minimum-income threshold.
A recently proposed tax plan of the US could also affect expats and their businesses. The plan proposes a 20% excise tax on goods and services exchanged between company branches in Puerto Rico and their parent companies on the US mainland. The forecasts for Puerto Rico’s economy are pessimistic to say the least, as this additional tax would prompt companies to shut down their operations and move to another destination.
Social Security and Its Potholes
Puerto Ricans also pay into the US social security system. However, they do not enjoy the same benefits as US citizens. While they are eligible for retirement benefits, they are excluded from the Supplemental Security Income.
Although Puerto Ricans pay fully into the system, the island also receives a smaller fraction of Medicaid funding than the US mainland: although the specified share of medical cost which the government covers, also known as federal Medicaid matching rate or FMAP, is fixed at 55% in Puerto Rico, this rate only applies to a certain (very low) annual amount of Medicaid funding. As a result, the island’s effective matching rate is only at 15–20%, and Puerto Rico is left with covering the remaining costs.
For more information on the US Social Security system, please consult our article on Working in the USA.
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