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  • What Raising Minimum Wages Has Meant for Two American Island Territories

    Liberals, and especially unions, frequently claim that raising the minimum wage helps workers and the economy. They contend that if people earn more money through a higher minimum wage, then they will be able to spend more as well, creating more jobs, and making everybody better off as a consequence. Now two U.S. territories are putting these theories to the test.

    The Federal minimum wage increase passed in 2007 also applied to American Samoa and the Commonwealth of the Northern Mariana Islands (CNMI). The law incrementally raises the minimum wage in these two territories by $.50 per hour per year, until the minimum wage reach the level of the U.S. minimum wage. Both these territories have lower cost of living than in the continental United States so the Federal minimum wage hike affected a substantial portion of their workforces: 74 percent of workers in American Samoa and 33 percent of workers in the CNMI. The Government Accountability Office recently issued a report examining the effects that this enormous increase in wages has had on the local island economies.

    The GAO found that increase caused the last garment factory in the CNMI to close in early 2009, formerly one of two major employers in the territory. In American Samoa, one of the two tuna canneries – an industry that employed almost a third of the territory’s workers — closed in September 2009.

    Polls show that workers in American Samoa, who were initially enthusiastic about the wage increase, now express serious concerns about it. No wonder. One of the biggest single sources of hiring has closed, and private and public officials express concern that the other tuna factory will follow when the minimum wage rises again. Largely as a consequence of these changes, the number of people with jobs at large companies in American Samoa decreased by 12 percent between 2008 and 2009, the overwhelming majority of whom are still unemployed. The total number of people employed in the CNMI decreased by 27 percent between 2006 and 2008. What happened to that shared prosperity again?

    Employers in American Samoa have also responded to the minimum wage with other cost-cutting measures, such as freezing hiring and cutting job benefits. In the CNMI, the report found that hotels have had to raise room rates to compensate for the rise in wages that they must pay workers, and these raises may have caused a significant decline in visits to the island of anywhere from 3 to 14 percent. Adding insult to injury, the CNMI government has taken in 6 percent less in taxes from 2006 to 2008, despite the higher wages. The government cannot artificially raise wages without serious harmful consequences to workers.

    These authors are very much for higher wages, but this should happen through increased worker productivity – not through government dictate. When workers produce more, competition forces employers to pay higher wages, lest their workforce leave for a competitor. But when wages are increased by government dictate it raises business costs, causing companies to fire some workers and cut the benefits of others. It manifestly does not create a cycle of more purchasing power leading to higher earnings and a stronger economy, great as that would be.

    This post is co-authored by Aleksey Gladyshev. Aleksey currently is a member of the Young Leaders Program at the Heritage Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/About/Internships-Young-Leaders/The-Heritage-Foundation-Internship-Program

    Posted in Economics [slideshow_deploy]

    17 Responses to What Raising Minimum Wages Has Meant for Two American Island Territories

    1. D R, DC says:

      Phew. Good thing nothing else happened in the economy between 2007 and 2009 which might explain a large loss of travel to remote parts of the world or otherwise reduce demand for apparel or fish.

      Nope. Can't think of a thing. Must be the minimum wage hike.

    2. Bobby, Birmingham, A says:

      Very predictable, D R. It's an easy argument to make, but also one dimensional. If minimum wages are intended to benefit a particular work force, it should have ameliorated some of the effects of the recession. However, since these businesses are required by law to increase costs instead of responsibly lowering costs or at least keeping them in check, the effect has been magnified.

      The demand for fish, by the way, is fairly flat. The demand for inexpensive apparel would increase in recession, but the apparel makers can't lower their prices if they can't lower their costs. The folks traveling to American Samoa and Mariana are not the same folks choosing between Sandestin or Panama City Beach.

    3. Billie says:

      It's too bad the wage of anything is set by the federal government. Since they work for us, shouldn't we be setting their wage? And since they're so willing to do right for the people, shouldn't it be at a minimum wage? Their performance shows nothing more earned.

    4. Billie says:

      shouldn't be up to the government. should be freedom of the business owner, what he wants to afford and the freedom of choice to work there at that wage. Wrong is government intervention and wage mandates to business owners… the government's job is to oversee corruption, not invade and set mandates on wages to businesses. More expense to business, no matter how they're running, sure is devious.

    5. Angelo Villagomez, S says:

      None of the people who lost jobs were American citizens. If anything, the law made it easier for American citizens to get jobs.

      The factories also closed down because of WTO rules, not the minimum wage. Even the $3.55/hour was not competitive with the $2/day workers make in China. Globalization had more to do with the job losses than the minimum wage.

    6. Jim, Wisconsin says:

      What the poor, stupid sheep don't realize is that, despite liberalism's demagoguery, the "minimum wage" is, always has been, and always will be zero.

    7. D R, DC says:

      Bobby,

      You are correct. Snark aside, that was my point– blaming the minimum wage for job loss is completely one-dimensional. The rise in the minimum wage probably does hurt employment there, but you might consider why apparel is being produced there in the first place. Is it because workers there are better at sewing than elsewhere, or is it because producing there is a /cheap/ way of getting a "Made in the U.S.A." label?

      How much of that cost advantage was lost during the run-up of oil prices? (In the Samoan businesses surveyed by GAO, 94 percent of workers were employed by those implementing non-labor cost saving strategies, compared to 24 percent layoffs.)

      How much of the minimum wage hike was simply cut out from other benefits? (42 percent of covered workers were employed by those who employed that strategy)

      But face the facts– low-wage workers almost always get hit disproportionately hard in recessions.

    8. Robert Schwalbach says:

      "The GAO found that increase caused the last garment factory in the CNMI to close in early 2009, formerly one of two major employers in the territory."

      Where do you find this conclusion in the GAO report?

      GAO says: "According to a CNMI economic study, the phasing out of quotas for garment trade led to the decline of the CNMI [garment] industry prior to the minimum wage increases." pp. 85-6.

    9. Pingback: Right-Wing Links (April 28, 2010)

    10. James Kneubuhl, Amer says:

      Something most Americans will never understand about remote US territories like American Samoa and the CNMI unless you've been there is that the economic conditions are far, far different than on the US mainland. For mainlanders, the wage hike may be a good thing, but for American Samoa, it's a disaster for reasons stated above. Congress could easily have taken the difference in economic factors into account and simply granted the Territories an exemption to the mandated wage hikes, but won't do so either for political reasons or more likely just out of sheer ignorance. To tell a short version of a long story, in American Samoa's case, after the wage hike it's now cheaper for the US tuna manufacturers to produce their product in Thailand. The tuna manufacturers are about profits, not charity, so what do you expect they'll do? For those of you who have no idea what or where American Samoa is, they say a picture is worth a thousand words, so if you're interested I have some pictures posted at: http://www.flickr.com/photos/22541086@N04/

    11. mary jo says:

      The recent GAO report did nothing than just reporting the same issues several years ago about the negative impact of minimum wage in American Samoa. To me they did nothing to suggest that it best that minimum wage increases should be left up to each entity to decide how best it will serve their island territories. The GAO report was another rubbe stamp of the same issues and concerns, and it did not pin point important areas which would devastate the local population and its fragile economy if the next minimum wage takes place. I am very disappointed about the whole document presented by GAO to the US Congress, and it was huge waste of tax payers money.

    12. Tiare Pomare - Seatt says:

      This is a matter which seemed like a tug of war at both ends, much have been discussed by the government of American Samoa and the effect it will cause by such hike of minimum wage, they have already see the effect and the decline that has caused the people of American Samoa, they should focus on ways to create jobs for the people or create sum sort of balance in terms of wages and jobs, but they obviously realize that such samll islands do need that much of higher wages, but the need for more opportunities and programs for the many childrens who graduate from school and collage each year..as an outsider looking in, you do not know exactly whats at stake, research and review before any mistake is made..for the betterment of our pacific islands..fa'afetai

    13. Alex Gladyshev, Disc says:

      Mr. Schwalbach,

      As you point out, the report does say that phasing out of quotas for garment trade led to the decline of the garment industry, but the report continues that “according to industry officials, the wage increases caused the remaining factories to close more quickly” (Page 87) and also that “some employment loss coincided with increases in the minimum wage.” (Page 86) Mandatory increases in workers’ wages on top of the phasing out of quotas for garment exports adds another hurdle for the garment factories. It is both the phasing out of quotas and increases in wages together that ultimately contributed to the decline of the factories.

      The authors of the study admit that there are many variables that affected the two island economies when they say “it is difficult to distinguish between the effects of minimum wage increases and of other factors, including the global recession in 2009… However, we determined that the available data were, apart from these limitations, adequate and sufficiently reliable for the purposes of our review.” (Page 5)

      Talking about employment in the CNMI, the authors of the report say that “from 2006 through 2008, the total number of people employed fell by about 27 percent… largely reflecting the garment factories’ closure. Small employers and other private sector officials expressed mixed views about the future minimum wage increases, including concern that they would make it more difficult to attract new industries to the CNMI.” (Page 8 ) The minimum wage increases played a key role in the reason employment decreased by such a large amount after the rise in minimum wages.

      You are right to point out that it was not solely the wage increases that led to closing of the factories. The report lists several reasons why the factories closed, one of which was the higher minimum wage. We wanted to highlight that raising minimum wages has this unfortunate and detrimental effects.

    14. James Kneubuhl, Amer says:

      Part of the problem is that there seems to be a prevalanet notion that American Samoa can just replace the tuna industry with something else. For the last 20 years, we've been trying, and nothing has worked. Garmet manufacturing, call centers, even tourism – none of that has gained enough of a foothold to make any significant difference in the American Samoa economy. We are the only US Territory in the south Pacific (Guam, Saipan, and CNMI are all in the north Pacific), and all of our neighbors are either independent Pacific nations or territories of Australia and New Zealand. US laws and policies place limits on our economic relations with these neighbors. Most foreign passenger planes cannot land here, which means that the one US carrier who services the air route between here and Hawaii, and on to the US mainland, now enjoys a monopoly and charges over $1000 for a round trip ticket between here and the west coast. Do you think tourists are going to pay that kind of price to visit somewhere they've never heard of? My point is, it's definitely an understatement to say that Congress didn't do their homework before giving us no choice but to raise the minimum wage, turning a blind eye to the predictable result that the tuna manufacturers would simply pack up and leave for cheaper locations. As far as industries to take the place of tuna, we're open to ideas, as long as those making suggestions do a little research and know what they're talking about.

    15. Zachary Zemby, Los A says:

      Having formerly owned shipping companies in the South Pacific, including the unincorporated territory of American Samoa, the conclusion and facts of the article are correct. Details, however, make the story even more interesting, those omitted from the posting and not appropriate to be listed in this comment. In summary, however, EVERY COMPANY has put in measures to minimize future hiring. The unskilled are the most hurt. The mandatory wage increase is devastating to the island's economy. American Samoa in particular (versus Northern Marianas) is an excellent controlled laboratory for studying many government programs, impact of individual pursuit of accomplishment, and general administrative effectiveness thereof.

    16. Mark Williams, Alega says:

      Wow, what a truly misguided article, playing loose and fast with real life on the ground here in American Samoa.

      First off, the cost of living is much, much higher here than in the US. The first assertion the author gets wrong is that the cost of living is cheaper here. It is absolutely, without question, far more expensive to live here than in the mainland US.

      Next, the truth is that some of the work that "left" with the closing of Samoa Packing (the tuna cannery that shut down) has been picked up by the Starkist factory next door. That's the first thing the author does not mention. The next thing is that the vast majority of the work that did in fact dry up was not held by the local US Nationals. It was held by aliens from Western Samoa (the Independent Nation of Samoa–not the US Territory of American Samoa). Those resident aliens were here because they had been sponsored by a family from American Samoa. The locals here generally bring someone over from Western Samoa, have them work brutal shifts in the tuna canneries, and take a share of their earnings. Usually, that share is so much as to render the resident alien an indentured servant to the local family. It is not a pleasant situation, to say the least, and the prospects for earning enough to return to one's own island are so minimal as to be inconsequential, not to mention that any sort of "advancement" is simply impossible.

      Next is the "evidence" that "Polls show that workers in American Samoa, who were initially enthusiastic about the wage increase, now express serious concerns about it." What polls? Whose polls? Believe me, there are no true pollsters on the ground here. There are people living in tin-roofed shacks without electricity right next to the factory, but there are no real "pollsters."

      Next up is the assertion that "Largely as a consequence of these changes, the number of people with jobs at large companies in American Samoa decreased by 12 percent between 2008 and 2009, the overwhelming majority of whom are still unemployed." News flash: there are NO LARGE COMPANIES HERE. Certainly not by any standards your readers would recognize. Again, some of the folks who lost their jobs from the closure of Samoa Packing have, in fact, left the Territory and gone back to Western Samoa, and others have been absorbed into their host family's household as servants. There are two McDonald's restaurants here, so I suppose that counts as a "large company," but trust me, nobody's being fired from McDonald's here. It's one of the few employment opportunities available to locals.

      I am not allowed to quote anyone here, but I have been told by at least one individual in management at one of the tuna canneries that the day was long coming when it would become cheaper to export labor and the canning business to Thailand or other Southeast Asian countries–regardless of any minimum wage hike. This is simply an effect of globalization. The only other choice to keep both canneries open would be to offer more government subsidies from the US to keep the cost low here. That's the story this article is not telling.

      The remaining tuna cannery is finding new ways to compete, ways that Samoa Packing could not easily implement. For instance, more and more Americans are buying their tuna not in cans, but in more expensive sealed foil bags. (You see these at supermarkets all over the US.) The Starkist cannery here has the machinery to increase production of this method of storage, which has a higher margin for Starkist. I am told that Samoa Packing did not have quite the "modern machinery" that Starkist has. I have spent time in the Starkist factory, observing how this is done. It is a more labor-intensive process, and at this point, slower, but will probably be more difficult to implement in Thailand or other emerging markets.

      Obviously, I could go on and on here (I suppose I already have), but the fact is that this article just glosses over way too many things and simply doesn't dig deep enough to uncover what is really going on here. It reads more like a set of assumptions about economic policy, and then tries to find situations to prove its assumptions, rather than try to understand the complexities of a local economy that is already entirely propped up by government subsidies in the first place.

      Sorry for the length of my response. Life is not easy on the ground here.

      Cheers.

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