ELIAS R.

GUTIERREZ
FACTOR PROPORTIONS,
TECHNOLOGY TRANSMISSION
AND UNEMPLOYMENT
IN PUERT RICO
Facror Poportions, Technology TraPs
mision and Unemployment in Puerto Rico was
presented by Elias Ruben Gutierrez Sanchez as
h doctoral dissertation at Cornell University.
Dr Gutierrez is professor at the Graduate
5h Jl of Planning of the University of Puerto
Ric and member of the Consumer Research
I titute of the School of Business Administra
tion 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
prvate industry. He was membr of the Gov
ernor'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 Econ
omy 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
canritatil' prepared for the Consumer Re
,arch Institute (1970) in collaboration with
J. A. Herrero and J. J. Villamil; Un ana/isis
economico de Ia Puerto Rico Telephone Com
pn; y su relacion con Ia I. T T.: un caso de
empres regulada (1972), that will be published
:hortly by the University of Puerto Rico Press.
Factor Poportions, Technology Tral's
mission 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 Administra
tion 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 Gov
ernor'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 Econ
omy of Pueno Rico, a research Project currently
underway at the Graduate School of Planning;
A Regional Planning Model for Perto 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
cumitatilo prepared for the Consumer Re
"arch Institute (1970) in collaboration with
1. A. Herrero and J.J. Villamil; Un ani/isis
econ6mico de Ia Puerto Rico Telephone Com
pny y su relaci6n con la I. T. T: un caso de
empres 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,
TECHNOLOGY TRANSMISSION
AND UNEMPLOYMENT
IN PUERT 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 Overiew 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 Rco 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 :A
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
Fisca 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 < : 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 Earings in Selected Industries:
Puerto Rico as a Percentage of United States
Average 1952 -1967 ..... . ...... . . . . . ... . . . ...... . ... . . 97
A-2 Average Hourly Earings in Selected Industries:
Puerto Ri co 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
vii
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' Coeffcient ............. 71
1 0. Diagram A.4 Relationship among 'B' and 'C'
Coefficients ................................ 73
1 1 . Graph A.l Capital Stock for Puerto Rico 1 950-1 967 ............ 78
1 2. Diagram M.l Bounded Rate of Growth of Capital ................ 8 2
I
ACKNOWLEDMENTS
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 fnancial 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 fnal 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 Rco
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 valicl ity of the general policy conclusions and the
empirical findings pertaining to changes in relative factor juries and technical
factor substitution reported herein.
xiii
FORWOR
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 fuctuating level of 10 to 12 per cent of the labor force.
This dissertation studies the teclological 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
bhaviour 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?nsred and otherwise) shows the coeficient 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 industrializa
tion 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
instrumelts such as miima 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 concludig 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 Plannin
g
INTRODUCTION
I. PtRPOSE AND BACKGROUND
The purpose of this dissertation is to test some hypothesis regarding the
r 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 les 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
:.u of Labor Statistics are based on the question: Were you seeking a job during
i ek? (the week of the survey). Persons who would have been seeking a job during
t week but did not because: a) expected to retur to a previously held job from
"cl they were suspended for some indefinite period of time; b) thought there were
employment opportunities within their community or occupation; c) were
ry il: are also included as unemployed. Cf. Como Mide Nuestro Gobiero el
!mpo. egociado de Estadisticas del Trabajo: Departamento del Trabajo, Puerto
;orubrede 1965.
supplying the market most profitably, excess capacity (idle equipment or only
partly utilzed 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 Goveror, 1968 and the Junta de
Planificaci6n Four Year Economic and Social Development Plan of Perto Rico
1969-197 by the Planning Board of the Commonwealth, plus other studies such as the
Junta de Panificaci6n Manpower Report to the Goveror: 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 sociologcal conditions
characterizing Puerto Rico and other Caribbean countres 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 Poductivity 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 Cencias 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 Cencias
Sociales, Vol. 9, No. 4, Dec. 1965, pp.363 ff.
(4) Rolando Castaneda & Jose A. Herrero, "Mas sobre Ia distribuci6n del ingreso:
contra replica a doctor Andie", Revista de Ciencias Sociales, Vol. 7, No.3, June 1963,
pp.277 ff.
See also Junta de Panifcaci6n, Jnforme Economico a/ Gobemador, 1968, Temas
Especiales, 2 nda. parte.
2
JAill I i '1
Sl 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! 1966 1967 1968 1969
(iiUs f'r orhrct $ MiiiiOIIS /!Jt.!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.'15.0 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;39.3 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
.
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 .e 347 535 569 614 656 689 739 794 823 882 921
1U!Jll 1UUU I !lUI lOili 1!1113 1 !(l 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
Housin
g
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
V
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
Wa
g
e 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
Wa
g
e 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
Wa
g
es 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-.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
lassifed 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
:lthough 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. Unemploy
ment 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
pr 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 b 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 oftcial 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 11ho are consuming what others produce, but 11ho 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. Goverment, 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 employ
ment 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 Cororaci6n 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
pople 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. Thore, 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 avalable 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 .: .: .: .: 49 46 62
In school 58 60 II 13 58 60 10
Handicapped .: .: 2 3 ---- 2 ----
Idle 15 15 7 7 2 .. 1 ..!
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/ Goberador. 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 Perto 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.1
2
(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) refect changes in relative factor prices
:lld/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
3 become an important contributor to GN 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
se Table i-3).
Using this target, a rough notion of the task confronting the FOMENTO
brogram 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
Migation," Selected Backgound Studies Prepared for the U.S.-P.R. Commission on
rhe Status of Puerto Rico (Wahington D.C.: U.S. Congress Printing Offce, 1966),
p.6 9 ff.
II
TABLE i.3
EMPLOYMENT
S
TATU
S
OF MALE
S
16 TO 24
YEAR
S
OF AGE, BY AGE AND
S
EX: (Males)
FI
S
CAL 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)
Mae Femae
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
FOiENTO plants generates an additional indirect job outside that sector.)
Eployment 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
it 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
t will not create sufficient employment to cope with the projected increase
1:. Te 264 establishments which started operations in 1966-67 averaged 33.3 workers per
plt. 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
;e usua 10 per cent increase which is observed in the first year of operations for those
;:ctories. Employment for thos plants in 1968 was 8,800. See !nforme Economico al
GberlUdor, 1968, op. cit., p. 21.
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. Lbor-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 underem
ployment, 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 earings 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 analyss but with earlier fgures has been made by Senior, op. cit. pp.
739-740.
17. The Planning Board estimates immigation at 8,000 and 6,000 in 1970 and 1975
respectively. Their estimates depend on: (a) the ratio of returing 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 Pan, op. cit., p.31.
18. ibid., p.77.
19. The Four Year Economic and Social Pan 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 classifcation 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 insttutional forces as shall be seen.
14
V
TABLE i.S
AVERAGE HOURLY EARNINGS FOR SELECTED MANUFACTURING INDUSTRIES
1949, 1956, 1962 AND 1968
Average Index of Average
Hourly Earings Hourly Earings
{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; & j uniors'
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 Earings Hourly Earnings
(dollars per hour) (1959 =100)
Industry Group
I
19497 1956 1962 19678. 1949 1956 1962 1967
Petroleum refning & 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
0
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 classifcation
according to the previous edition of the Manual, the pre-
1
956 data are not strictly comparable with those of
1
956 and
later years.
2Thc industrial chemicals industry group did not include plastics prior to 1956. The 1954 data include drugs.
3
Prior to 1956, the agriculture chemicals classification included only fertilizer mixing plants.
4
Thc J 95
4
data for these industrial divisions do not include plastic products.
5
The 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.
8
From Department of Labor, Bureau of Labor Statistics, Censo de Industrias Manufactureras de Puerto Rico, San Juan,
Puerto Rico.
9
1ncludes paper.
lODoes not include tanning and finishing whose wage per hour in October 1967 was $1.
3
50.
1
1
Docs not include miscellaneous wood products, $1.178.
1
2Does not include household furniture and fixtures, $1,
2
90.
Source: L. Reynolds and P. Gregory, op. cit., pp. 69-70 and Empleo y Salarios en las lndustrias Manufacturers de Puerto
Rico, Septiembre, 1968, Department of Labor, Commonwealth of Puerto Rico (Bureau of Labor Statistics, San
Juan: 1968).

\
$1.60
1.20
1.00
. 80
.60
.40
.20
4
*

4
/
*
*
*

..
*"
*

verage Industrial

* *
*
/ Minimum Wage
US Minimum
--_ood processing
-0-0-Sugar
, x _x _Corsets etc.
--- Rubber footwear
oooooooo Real average hourly
f
'
earnings for production
workers (J 957-59=100)
--CMen'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 bhavior 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, refects 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 refected 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 genlral 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 alost 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 .26 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
a
octo ber of each year.
b
Annual averages.
cDeflatcd by the consumer price index for wage earners with 1957 = 100.
d
septem ber of that year.
**Notes:
1. During period 1948-52, not all EDA reporting frms reported 'hours.' Those
21
fgures refer thus to a smaller number of plants and do not equal average hourly
earnings as do latter fgures.
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,
a obtained from Economic Development Administration, Annual Statistics Report of
EDA Manufacturing Pants, 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 milion 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,
2
4 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 fxed 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 (J) are decreased from Jo
to p3, solely on responses by the wage pressure which raises the capital-labor
ratio for (K/L)0 to (K/Lh. This process
2
5 is possible without changing the
capital-output ratio which remains constant at k
0
, 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 frms in an industry
are at a point "A" in the unit contour, with labor requirements per unit of
output Jo and capital requirements per unit of output k
0
- 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 coeffcient can be reduced to a still lower level of
1
2
by the introduction of "process innovations" - whch 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 p
2
and at the previous level of the capital coeffcient 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 innova
tions, from "B" to "C" which results from the introduction of more effcient
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 proftability of the enter-
24. A similar diagram wilbe presented and expanded in Chapter II.
25. Reynolds & Gregory observe the net result of a process and thus fall into an
identifcation problem.
23
K
a
K/L3
N
I I /
""
1
3 12
Il Jo
Diagram i.l.
K
I '
a
K/L1
a
I
I
I
I
I
\
'
I
K/L
2
I
'
I
I
K/L2
I
I
I
I
/i/
I
K/L
1 I
I '
K/L
0
I
o
K/Lo
a
K
o
I
/'/:

L
i :
12
Il
:
a
'
- ..- .... .. - .. --- - - -
a
Jo
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 Englsh. Other ineffcient
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 proces 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 I MANUFACTURIG:
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
specifcally within that sector sponsored by the promotional activities of the
Commonwealth goverment; and the second subjects the fundamental assump
tion 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 patter of
the typical frm 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 fxed, the ranking of different industries in accordance
with the relative magitudes of the two coefficients would certainly be valid. It would
be meaningful even if the elasticity of substtuton were larger than zero, provided the
changes in the capital-labor ratios were so uniform as not to disturb to a signifcant
degee 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 substituton
of different industries were to be signifcantly different from each other, reversals would
be unavoidable. The distinction - or raking - of industries according to the factor
intensity would no longer b gven data for purposes of economic planning. This is the
point brought forth by Bagsha Sing Minhas, "A 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 Leontef, 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. I fact, he argues that Minhas' data gives evidence of
this. Notice should b 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. and in October 1968 the level was at $1.58 per hour. It is expected that
the minimum will reach $1.69 per hour by May 1969. These continuous
increases in average hourly earnings inflated wage bills for the entire manufactur
ing sector during 1967-68 by 16 per cent. The greatest increase was felt by firms
in [ D/. This sector experienced a rise in the wage bill of more than 20 per cent.
on-EDA firms reduced employment.2 See Table 1.1
TABLE 1.1
WAGE BILLS, HOURLY WAGE RATES, AND
EMPLOYMENT IN EDA 1966-67 AND 1967-68
1966-67 1967-68 %Change
Wage Bill ($'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 Goveror, 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 withn 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 moderize 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 sugests 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, and Productivity 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 Joural 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 Goveror, op. cit . . p.l5.
6. For tile period 1919-1958 the secular trend tor this ratio in U.S. manufacturing has
had a defnite upward trend although with sharp cyclical 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'n - is able to substitute capital for labor under the infuence 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
frms are granted tax exemption for periods ranging from I 0 to 20 years
depending on the site location. Financial assistance and generous tax deprecia
tion 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 grant arc provided to projects of extraordinary importance, e.g.,
core industries, highly-skilled operations, and projects which use local raw materials.
The Goverment Development Bank can provide loans through mortgages on building
or chattel mortgages on cquipmtnt. 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:
ws + G'I(the (')indicates the transposed vector) Q is the product
sold by the frm 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
)_ws
(t
)_
G'I(
t
)]
e
-
rt
d
y
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, Te Effects of Minimum Wage Legis/arion on rhe Rate of Growrh and Em
ployment 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
C
o =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 frm. 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/8C
i
= 0, i.e., C
i
does not enter the
technical relationship F. G
i
, the payments per unit acquired of C
i
, 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 C
j
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 G
j
of C
j
is irlevant as C
j
= 0,
i.e., there is no rate of accumulation, but W
j
i.e., the rent to Cj, may be positive.
In general C1 will not be either perfectly fxed 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 frm, constant returns to scale are required
so that
F(AQ,Ac,AC) = 0 for all A> 0 where CA= 0.
13. Notice that those resources external to the firm but relevant to a given process F and
entering in (2) as stocks or flows will not enter the revenue functi on (1). Their prices
will usually be zero. Such are for instance the technical knowledge produced by
goverment 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 = I
i
Where I
i
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;
pl, 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
fxed 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 thos outputs sold (including exteralities 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 thes rates of accumulation involve a purchase price G and a internal cost
in forgone sales.
15. We adopt from now on the discontinuous form which is more reaistic. See R.G.D.
Alen, 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 a expected rate of
growth per year of s.
The augmented Lagrangian version of the objective function becomes
l
6
Max. II jl
i
= P'Q-wL-dK
-
p
m
M
(l+)I
i
+
P'Q - W(l+)L(1+1)
-
l
-dL
-
p
m
M+
(1+r)2I
i
... + P'Q-w(l +)
t-1
L(1 +1)-
t
-
1)
-dK-p
m
M +A Q-F(L,K,M:X)
(i)
(ii)
(1 +r)
t
i
i
1
The first order conditions for maximization are
b (IJi
i
] =- w
b (l +r)l
i
-w(l +)
t
-
1
(i+I)
-(t-i)
( 1fr )
t
r
i
b [rr/t
i
] - _d
bK (1 +)l
i
w(1+)(1+1)
-1
-
...
(1 +)2l
i
+ t.gL=O
d
(1 +r)2I
i
d +
(1+r)
t
i
i
where IIjl
i
is profits per dollar of initial investment. We disregard b(IIjl
i
) /b/ ;
and b(II/I
i
) /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 b modified through the introduction of new vitage 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 manly 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) + A(x,y)
For critical values of Z, regarded as a function of three variables x, y, and the necessary
conditions are
(i) Zx = fx + A
s
= 0
(ii)
Z
y
= f
y
+ A
y
= 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 p
k
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 li
k
e 45 per cent for p
k
vs.
2
45 per cent for w during the
period 1950 to 1966.)18 Maximizing profts per dollar of initial investment
ma
k
es 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 (i) we obtain
w
+
or
1
+
... +
1
J
(1 +r)2I
i
(1 +r)
t
ll
1 ... + 1
J
(1 +)
2I
i
(1 +)
t
i
i
+A
.
w
+A
=
[ (l+r)II
which implies that (1 +) = (1 +1). For the case where s f 1 we obtain
w
or
where
t=T
+ (l+)(l+1)-
1
+ ... +] A+
=
_ [ 1
(1 +)2I
i g
K
(1 +r)I
i
.
=
I (i+l) (1 + )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 (i).
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 J 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 fgure 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 goverment 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
________ _ __
I
f
-------------------L
Figure 1.1. Elasticity of Substitution
Along Isoquant
38
1.3.2 The Rue 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 inter
pretation is that a unit percentage change in the factor price ratio will be
equally compensated by a unit.
prcentage 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. Mak Blaug, Economic Theory in Retrospect. (Home\\OOd, lll.: Richard D. lmin.
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 accumulation. 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 entrepreneur
ial 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/. )2
0
will be
E
ed 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 coeffcients 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 ', 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, August 1<61 )Jp.225-50. {
21. The CES and be written as V = '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:or) ' is seen
a the efficiency parameter and equals (a+(-
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 signifcance. 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: Methodolog ad Results
The method of estimation proposed by Arrow, et al. {from now on Arrow
model)
2
3 consists primarily of fitting the regression equation
(3)
wL
rK
log V /L =a Jog W + u
+
\

(
and o could be estimated from data on K. Land r (the rate of retur) together with a
estimate of a such as b, from the relationship
1
-
-

(+
p:
o and a seem to b fairly stable among countries. while - varies.
22. In fact there has been a strong Congressional lobby whose aim has been protection for
South Easter 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 returs 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 differential 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
l
g (Y/L) = log a+ b log { (Y/
L
-
[C
K/
L
)

d(V/
L)
] }
d/K/L)
The solution to this differential equation is
V = (jK-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." 1e 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 necesary 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 Poduction Functions in the United States, 1957: and
Interindustry and Interstate Comparison of Poductivit, 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
l!odel and more (b) (c) R
2
(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 ft is observable and that the coeffcient for
K/L is signifcantly different from zero at any acceptable level of confdence. The
solution to an equation which would include capital explicitly is very complcated. The
question of whether it exists must be explored at an early date and seems to have been
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 insignifcantly
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. I 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
priod 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 signifcantly different from unity. Time series estimates are obtained
At any rate, for the purposes of this 'tudy b prmides 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-signif-
Sample cance
Period Model Sector Size b
sb
R2 level
1964 lo
g
V/L=lo
g
a - b lo
g
W + u EDA 96 1.11 0.13 0.45 5%
1964 lo
g
V/L=o
g
a + b lo
g
W + u EDA 28 0.92 0.13 0.65 1%
Textile
""
& Apparel
V
1964 (*)lo
g
V/L=Io
g
a + lo
g
a
'
+
lo
g
W + v EDA 96 0.94 0.13 0.50 1%
*
a
' =
J when total assets per frm 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 signifes 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 Arow, 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
Furiture 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

-.
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.2
6
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)
il
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
a determined by the whole range of technical alteratives 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 (a 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
operaton activities. Zu Griliches, "Production Functions in Manufacturing: Some
Preliminary Results," in The Theory and Empirical Analysis of Poduction, Studies in
Incomes and Wealth, NBER, Vol. 31 (New York: Columbia Univ. Pess, 1967), p.292.
26. It remains to b 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
twodigit 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 Digresion
At this point it seems desirable to turn to an interesting fnding 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 para
meter 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 shifing 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 ftting the equation
(8) dV dL
1
/2(L0+L1)
a*+b* dW
+u
1
/
2
(W
o+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, Poductivity, 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
elsticit 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 varable.
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 d
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 fndings. They conclude that their
a* is not signifcantly different from zero. Their estimates for b* proved to be
insignificantly diferent 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.J
o
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. Chrstopher Clague, "An International Comparison of Industrial Effciency: 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 Reyn
o
lds, op. cit. p.l 01.
51
log

I
I
4
| I !
z
1

i
6
V
1
5
4
I
z
i '
3 4
I I I I I I
I ! ! ! ! !

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

f \

\
.
0

\
'\
\
I I I I
|EDA-PR
I I I I gSAUS
Factor Proportions
'

'
\

'

..
r-

. '"

o
o

r-

\1\\ \ \
lo
g
2 3 4 5 6 1 | z
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 regions
Puerto 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 fgure 1.3.
The most striking element of these results is the sign of the parameters. All
the elasticities are found to be negative! This fnding 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 ' (efficiency para
meter 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 frms 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
frm 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
i Puerto Rico. Differences in capitl 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 frm than for a firm operating in the Southern Atlantic
Region. Ths 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 ilustration one could compare apparel. The resulting slope would be
psitive 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 enter the relationship betwen 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. fg. 1.4 reproduces Chart 2 from Arrow, et al.
55
L
C
)g
'
jr
2 )
I
j
1
v

,
v
/

.
+


V

2 z x

2 2
.

/
h/

v
/

v
- -

b
v
l

y
c
-

'
0.s.

.
Factor Proportions

.
0 Japan

J

Z

L
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 effciency
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 frms, 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 ' is the
effciency parameter. a is the elasticity of substitution. Under the assumption of
neutral technological change ' 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
aI (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 justifed 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) ='o IQ
A
t
this will yield estimates of a and Let
a0 =alog(l-6)-a-1)log '
o
a1 = 1-a
a2 = -
A
(l-a)
and we obtain
(12) log (wL/V90 +a1log w +a
2
t.
Fitting (12) by ordinary least squares to data4
o
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
R
2
=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 whch
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 diference of the elasticity of substitution
from the hypothetical value of one, which is implicit in the Cobb-Douglas
formulation, requires that a1 and a
2
be both zero. the F-test was applied. F
or 20
observations it is signifcant at the 5 per cent level of confdence (not signifcant
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
=
'o1o
A
t
v dt dt
ln v = 1n'o +At 1n 10
1n v = 1n'o +At 2.3026
J [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
alterative hypothesis a
1
=1, i.e., a=O or the Leon lief model. Given a stadard error for
a1 of 0.947, the hypothesis is rejecttd.
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
confdence).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 mae 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 ITERNATIONAL TECHOLOGY
TRANSMISSION: A 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 slugishness in employment creation by the manufacturing
sector of Puerto Rco 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 Rco. Lw 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 employ
ment 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
technologcal unemployment due to factor disequilibrium and Schult's2 empha
sis on education as a "provider of augmented human resources" - even then as a
primary force for gowth, 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, whch 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 technol
ogy is likely to be the most important fact in our time. Puerto Rico represents,
perhaps, a polar case in the sens that U.S. mainland technology has been
transmitted and absorbed almost intact (or so we believe). This is equally true of
consumption patters, 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 frst two decades of
the 20th century) was accompanied by a procss 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 596,00 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," Amercan 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 entre
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 AD UNEMPLOYMENT IN PUERTO RICO
Year
1950
1960
1968*
Population
(min)
2.21
2.34
2.73
Lbor
force
(000)
684
625
797
*Means 1st of January, 1968.
Employed
(000)
596
543
701
Unemployed
{00)
88
82
96
%
Unemployed
12.9
13.2
12.0
Source: Economi Report to the Goveror, 1968, Planning Board.
The purpose of the present appendix is to throw some light on the way
Puerto Rco 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 wared 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 simiar result will occur.
It will be apparent that such predictions are simply theoretical derivations
from cerain assumptions. They are interesting in the sense that they illuminate a
basic technologcal 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 organi
zation 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-, then the contour on the
production surface where one unit of output is obtained will be 1 =_ Jl
l
-
a. Let
k
o
and Jl
o
be the initial factor quantities per unit of output in use due to a gven
technology level A0. Under these defnitions a 'is an "envelope contour" which
encompasses a series of "technological alteratives" 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-substitutabi
l
ity
situation, B or C, to another 'local' non-substitutability situation, A
0
, where that
movement is not smooth, but i 'jumps.' An innovation will be defined as
consisting of such changes in the technical conditions of productions that the
unit contour shifts toward the orign (to a position). Thus an innovation, by
definition, will necessarily reduce k
o
, Jl
o
or both.
If a point E0 were to describe an initial endowment combination, while
the lne OT represents the actual employment combination (given the
technology level) at a point in time t=, 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 ratos 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
1
a

Qi
I
I
I
L
: ..
I
|
I
|
- 1'
1
Diagram .1. Alterative Technology
Regions on the Production Space
Ub
factors of production and the "socially" (or those determined by existing factor
proportions and their respective opportunity costs) desirable combinations.
Four regions can be identifed in the diagram stemming from the
requiement 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 coefcient while the other remains, at most,
constant. Regon 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 dificult (if not
impossible, or at least traumatic) e.g., capital shallowing due to natural disaster
or warfare. Regon III is a second best with reductions on both coefficients
(except when movements are made so that k0 remains constant, but in general
this wil not be the case). Regon 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 a '. Any movement of aa 'away
from the origin only increases the factor requirements per unit of output -at
least one coeffcient increases.
Region IV, on the other hand, has the additional property of providing an
increased output throughout. There, the labor coeffcient is increased concom
itantly with downward changes in the capital coefcient. 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 a' 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-ast.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 Exstenc of a 'Laig Function' for Lbor
If !
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 returs) ths parameter (the recip
rocal of the labor productivity) will decrease only as "homogeneous labor" is
equipped with more units of capital. This concpt 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 J enable movements along the unit contour shelf in the labor saving
direction of the north-west. Activities A0 to A
n
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 eficiency 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
i: 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 wil 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 pressues makes it difficult to be identifed.
67
K
a
Jo
\
L
\
c
\
\
"
Diagram A.2. The Complete Model
6S
A.2.3 The Contributions of Resource Augentation 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 (E0E
n
)
will extend toward the north-east; the employment path (F0F
n
), on the other
hand, will extend towards the north-west. The corresponding movements along
a' enabled by the labor improvement phenomenon dictate the locus of point
A0A
n
. 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 Concpt 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 J
o
to J4 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= 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 rato. 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 =
(
p
f
p
0)
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
ilustrates 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/p
0
. Under this theoretical construct, it
becomes evident that the ability to change the character of imported capital is of
geater 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 agregates in Puerto Rico, some testable
relationships are now derived.
If it is assumed that 'importable' technolog 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]
If capital stretching takes place
(
k/k'
)
= m > 1 and
(
3
)
m = (p
f
p
0)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
= p
C
(
K
f
p
C)
0
70
H C >1
C=l

0
3gf3H A.3. l0fD3lV0 3l0S Of l00
`C LO01C10Dl
71
given (2) and (3) k' can now be written as
k' =pC
0
p
(1-a)/a
pC
Lt a= pC; and b = [(1-a)/a]- [c) then
0
k
'
=p
g [(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+
""
Q
1
+ =(1/a)KN
b
; and
Q = (1/a)l
/(1
+
)
K
1/(
l
+b)
N
b/(1
+
).
Let Q0 = (1 /a)l
/(1
+
)
; and B = 1/(1
+
); 1-B = b/(1 +b), so that
(5) Q =Q0k
B
N
1-B
(5) is also a Cobb-Douglas type of production function but B now
72
B
I
/

/
-
a
-
-
-
I
|
/
I
O
c
1 - a
-B
a a
/
l
|
I
/
/
I
/
/
/
/
..-
iagram A.4. RcIation:hip Among 'B'
and 'C` Coccicn:
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 thee 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 tha one; (c) Case III shows that for values of c : (1/a), B will be less
than zero. Ths 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 Assimiation 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 gven 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 (=/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
7
T
7'
77
K
i/B
i(I -B)
= - e
B
74
Where
7
x
represents the rate of growth of a variable (x); i is the rate of annual
increase of the labor productivity; and 7
7
x
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 ' = (1-a)fa
l
(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 ' 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 '
A.3.0 Empical Evdence
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 signifcantly different from a Cobb-Douglas case (with
unity elasticity of substitution). In this appendix a criterion is presented which
when fulfiled 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 Econometrc Apct
The following recursive system of equations has been ftted by least
squares:
(1 ') lnp =
P
o +it+
Uti
(2'} lnk'=ln a+b ln p+u
t2
(3') c = ln a I In
P
o
(4') a= 1/ (1 ++)
75
(1 ') and (2') were fitted to data for net output at constant 1954 prices;
fgures 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 +.17 + 3.94) = 0.1956
(l-d)/d=4.1
The values derived from these estimates for the parameters of the quasi-Cobb
Douglas production function yield
(6
'e)
Q = 1.033 K
0.
858N0.142
.
The rate of capital acceleration is then obtained from
(8'e) 77
K
=
8 = i(c- ') = -0.00
8
A.3.3 Interprtation of the Results
As can be seen from inspectwn, the MAC is not fulflled. 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 laged 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, Jngeso y Poducto,
1966-67, Division of Social Accounts, San Juan, Puerto Rico.
76
acceleration is negative (although probably not signifcantly 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
goverment 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 b) 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 fndings to a degree.
Standard errors notwithstanding, the most striking fnding 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 insufcient 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 coeffcients used in its estimation it would probably
not be signifcantly 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 i equipped with more capital in itself will increase labor's
productivity. Contact with moder 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 extablish
rent in order to increase productivity. The problem is clearly more complex
13 Rafael de Jesus Toro, op. cit., p.l 05.
77
-.
0
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 suficient
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 frst 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. Ths implies striking a balance on the
product mix of the economy with a view to its effects on employment.
The methodolog applied in this chapter would perhaps render better
results, and be more useful, if disaggregated. The prsence of the service sector,
agriculture and manufacturing together with government, transportation, etc., all
in the same representative fgures 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;
(i) (Q/N) = p, be the productivity of labor;
(ii)
(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) = Ka
NI-a= (K/N) = T
a
N
k =
_K_ =
T
I
-a
= p
[(
I-a
)/
a
]
Ka
N
I-a
The following growth equations must follow:
I ) 1 i
(1) 1T
=
7p
I/
a
=
( 7p; assume 1p : i, thus,
7
T
=( ) i =;>0.
Which means that the technology ratio is increasing.
(2) 7
k
= 7
P
(I-
a
)/
a
= ()i > 0. Which means that the COR is increasing.
8I
(3) 1
J
1
K
=1JL= 1l. = 1 =
1
J
s
T
k
; but 1
s
is equal to zero by (iv) above,
hence,
K K K
1J
K
=
1
J
k
=

Q -)
i < 0. Which expresses a decreasing rate of capital
accumulation.
Let -D= { i. Then, the following case be written:
( 4) 1
=
7
J
0
e

Dt
. Where
1J
o is the rate of growth of capital at the initial
time period tt=). 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 approachig 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 stoc
k will steadily
approach zero. This is so becaus 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 gowth, based on modem techniques and given a degree of "rational"
calculation on the part of ivestors 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 i 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 (interna
tional) 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 gowth 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 efect will provide an incentive
for retention of young workers in the rural sector. This effect can be attained for
short periods of time by goverment subsidization schemes; but for a durable
structural change to occur in this area, a complete reorganization of agriculture
i required.3 A diversifcation of the agricultural product mix is to be
1. See The Four Year Economic and Social Pan of Perto Rico, op. cit., p.l l 9.
2. This same conclusion has been reached through a different approach by Michael P.
Todaro, "An Analyss 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 transformaton of the agricultural sector of
underdeveloped countries. They ask for moernization 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 Industri
alization 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 \. Schultz, Transforming Traditional
Agriculture, (New Haven: Yale Univ. Press. 1964), pp.212: Bruce F. Johnston and
John \. Mellor, "The Role of Agriculture in Economic Development," Amercan
Economic Review, Vol. 51, No. 3, Sept. 1961, pp.566-593; Thomas Bal ogh,
"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 Internatonal 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 icreases 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 diversifcation of agriculture, the substitution of
high income-elastic produce for sugar cane, coffee and tobacco, will have to be
stimulated heavily. A complete and eficient 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, Admiistracion del Derecho al Trabajo should coordinate al
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
pr 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
backgound 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 effcient (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, Strateges
for the Displaced Worker Confronting Economic Change (ew 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
vew, whether that demand can be stimulated.6 In comparison to the figures
gven above regarding unemployment rates among high school graduates,
unemployed high school gaduates 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
progams 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 gven 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 foor is clearly higher
than the prevailing wage in many Puerto Rican industries - severe dislocations
occurred in the program. The Manpower Report to the Goveror explains that
"because of this requirement, for the frst time since MDT A became operative in
P.R., money appropriated in 1967 for such training remained unused. In each of
the three previous fscal 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 provded 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 Technolog in Support of the Perto Rican Economy, N.A.S.,
National Research Council, Wash., D.C., Feb., 1967, p.Sl.
7. Manpower Report to the Goveror, op. cit., p. 101; 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
becaus 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
prmary source of training and retraining adult workers on the island. Cf. Iid., p. 1 07.
10. Iid., 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,
i 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 Rcan 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 benefts 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 goverment 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 dificult 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 fexible 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 Poblems of Automation and
Advanced Technolog, Proceedings of a Conference held at Geneva by the Inter
national Institute for Lbor 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 consump
tion 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 desiged to elaborate and distribute the new
diversifed 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 begis, agriculture will
be able to sustain an industrial sector which in turn will help the economy to
become integated. 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
SUMARY AND CONCLUSIONS
3.1.0 INTRODUCTION
This chapter will review main fndings 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 refected 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 classifcation. When a
shift parameter was introduced to allow for differences in scale of operations, a
value for the elasticity of substitution coeficient 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
sigificantly 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 sigifcant fashion.! This method has the advantage of using
direct observations on capital and rates of retur (as a measure of the internal
cost of capital). It has the advantage of being independent of changes in
efciency. Seventeen industry groups at the two-digit level (SIC classification)
were studied. Of these, fourteen yielded parameters measuring substitution
possessing values geater tha unity. The instrument industry produced a value
of 0.9; chemicals ad petroleum - which were undergoing tremendous
expansion - not surprisingly exhibited very small (negative) coefcients.
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
iitial investment in the island's plants. They can adjust the amounts of capital
and labor 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.
Sice the coeffcients of substitution estimated here simply measure
historical changes in capital-labor ratios in response to historical changes in
factor-price ratios, the sigificance of the government's wage policy in restricting
the gowth of employment is apparent.
1. For the earlier period 1949 to 1958 it was suggested that the estimates for the
"elasticity of demad 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 methodolog 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 gven that their products are
destined to the mainland U.S. market where they must compete at the gven 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 frms from other regions of the U.S.
The negative values obtained for these coefcients 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 fnding.
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 retur 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 fnding 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 procss. 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 classifcations
of the EDA sector is strong evidence that the process of substitution described
above has continued for thos 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 Rco 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 coeffcient 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 II
It can be seen from the above ciscussion that the magnitude of the capital
stretching coeffcient 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 suffciently different
(less) than the "imported" capital-output coeffcient. 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
icreasing the productivity of complete establishments through the introduction
of management actions desiged 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 idustrialization 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
turll 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 satisfed,
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
APPENDI 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
Averge Gross Hourly Earing
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 Perto 1964
SIC* Rico as
a per-
Perto centage Perto
(Industr 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
2359 .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

Perto
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. gven by Hearings of the Commis
sion of Status of Puerto Rico, San Juan, Puerto Rico, December, 1965 Govern
ment Printing Offce, Washington, D.C. pp. 112-113.
Department of Labor, Bureau of Labor Statistics, Monthly Labor Review,
Washington, D.C.
98
Standard Industal
Classifcation
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 texti
les 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
Classifcation
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
ndustr Industr
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 frms 38 35 39 33.9 21.8 27.9
a
Includes (37)
* Average Equity defined as half sum of begnning & closing equities for the year.
Profit fgures are net of taxes. Few firms are subject to corporate proft taxes,
until later years.
Source: Economic Development Administrati on, EDA Statistical Yearbook 1964-65,
San Juan, Puerto Rico.
100
SIC
Indust
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
I
SIC
TABLE A-4 (

--

- -
/i ndustr
1de No.
.

-- --
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
0

.
(
(
Vt
. (
= o
:
'o

2.
. (
20

-
O o
:"
.3
< C
o ;
>
0
3
:


c
?
g
A
v

::.
"
:.
R
i
...
<:
0
0
_?
..
'
v
-
..
'
D
_-
TABLE A-5
TOTAL CAPITAL PER EMPLOYEE IN EDA-PROMOTED
FIRMS BY INDUSTRY
SIC
Indust
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
Elstici
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 Intensitl Relative Factor Cost Elasticit 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; 1961-6
2
; and 1963-64 respectively.
0
V
..
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 Intensit 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. Industl 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 5.13 7.81 1.387 .2188 - .2153
"
P
0
-.
SIC
Code No.
35
36
38

SIC
Industr Group
Non-electrical machinery
Electrical machinery
lnstrumen ts
TABLE A-7 (cont.)
Capital Intensit
(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 1lilldcbroad, op. cit.
~
Elasticit
of
Substi-
tution
.5305
.4015
.3448
BIBLIOGRAH
BIBLIORAH
Allen. R. G. D .. Mathematical Analysis for Economists, MacMillan, St. Martin's Press, New
Yok. 1936.
Barbancho. lfonso G., Complementos de Econometria, Ediciones Ariel, Barcelona, 1966.
Blaug. MJrk. Economic Theory in Retrospect, Homewood, Ill., R. D. Irwin, Inc., Revised
ldition 1968.
Chiang. Alpha C.. Fundamental Methods of Mathematical Economics, McGraw-Hill Book
Compny, New York, 1967.
Chri,t. Carl F., Econometric Models and Methods, John Wiley and Sons, Inc., New York,
1966.
Demas, William G., The Economic Development in Small Countries with Special Reference
to the Caribbean, Me Gill University Press, Great Britain, 1965.
lvans, Michael K., Macroeconomic Activity: Theory, Forecasting, and Control, Harper &
Row Publishers: New York, 1969.
Freyre, Jorge F., External and Domestic Financing in the Economic Development of Perto
Rico, University of Puerto Rico Press, Rfo Piedras, Puerto Rico, 1968.
Friedman, Milton, Pice Theory: A Provisional Text, Aldine Publishing Company, Chicago,
1963.
Goldberger, ArthurS. Econometric Theory, John Wiley and Sons, Inc. , New York, 1964.
Griliches, F., 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 Pess, 1967.
Haavelmo, Trygve, A Study in the Theory of Investment, University of Chicago Press,
Chicago, 1960.
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 Poduction 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 Societ, 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 Earings in the United States, 1860-1890, National Bureau of
Economic Rescarh, New York.
111
Meads, J.E., A Neoclassical Theory of Economic Growth, George Allen and Unwin Ltd.,
London, 1960.
Minhas, Bagcha Sing, An International Comparison of Factor Costs and Factor Use,
Amsterdam; North Holland Publishing Co., 1963.
Nicholson, R. J., Economic Statistics and Economic Poblems, McGraw-Hill Book
Company, Limited, Maidenhead England, 1969.
Perloff, Harvey, Perto Rico: Economic Development 1940-1960, Puerto Rico Planning
Board, February, 1951.
Reynolds, lloyd and Gregory Peter, Wages, Poductivity and Industrialization in Perto
Rico, R. D. Irwin, Homewood, lll., 1965.
Salter, W. E. G., Poductivity and Technical Change, Cambridge University Press, 1960.
Senior, Oarence and Watkins, Donald 0., "Towards a Balance Sheet of Puerto Rican
Migation," Selected Backgound Studies Pepared for the U.S. - Perto Rico
Commission on the Status of Peto Rico, Washington: U.S. Congress printing office,
1966.
Shultz, George P. and Weber, Arnold R., Strategies for the Dispaced 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 Perto Rico, Iowa
State University of Science and Technolog, Ph.D. Thesis University Microfilm Inc.,
Ann Arbor, Michigan, 1966.
Stber, Jack, (ed.) Employment Problems of Automation and Advanced Technology,
I.I.L.S., Me Millan, New York, 1966.
Stigler, George J., Capital and Rates of Return in Manufacturing of Industries, National
Bureau of Eonomic Research, No. 78 Genera Series Princeton University Press,
Princeton, New Jersey, 1963.
Treadway, Arthur B. "What is Output," In Poductivity and Poductivity in the Service
Industries, Victor R. Fuchs, (editor) ational Bureau of Economic Research, Sries
on Income and Wealth, 1969.
Zellner, Arnold (ed.) Reading in Economics and Econometrics, Little, Brown and Co. Inc.,
Boston, 1968.
Artcles
Andie, Fuat, "La Distribuci6n dellngeso d Ia Fuerza Obrera en Puerto Rico 1949-1959,"
Revista de Ciencias Sciales, Vol. 7, June, 1963.
--,'"Un Comentario en Toro a Ia Distribuci6n del lngreso en Puerto Rico: un
estudo realizado en base a los aios 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 Growth: The Anatomy of Urban
Crisis," American Economic Review, Vol. LVII, No. 3, June, 1967.
Castaeda, R. and Herrero, 1. A., "La Distribuci6n del Ingeso en Puerto Rico: Algunos
Comentarios en Base a los Aios 1953-1963," Revista de Ciencias Sociales, Vol. 7,
No.4, December, 1965.
--"Mas Sobre Ia Distribuci6n del Ingeso: Contrarreplica al Doctor Andie,"
Revista de Cendas 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: "Vari
ous theoretical models are presented to explain
entrepreneurial behavior in the goverment
sponsored manufacturing sector regarding the
observed process of sustitution of capital for
labor under intense wage pressure. A num
ber of alternative methods are utilized to obtain
econometric estimates of the degree with which
the EDA manufacturing sctor responds to
changes in relative factor prices."
In his book, Dr. Gutierrez discusses invest
ment 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.