The Minimum Wage and Its Employment Impact

There’s no better illustration of the unintended consequences of "benevolent" economic policy-making than events in American Samoa, an archipelago in the South Pacific that is a territory of the United States and so falls within the purview of Congress.

Chicken of the Sea, the tuna company, has just announced the closing of its canning plant in American Samoa in September. The chief culprit is 2007 legislation in Washington that gradually increased the islands' minimum wage until it reaches $7.25 an hour, effective July 2009, almost double the 2007 levels.

So, this summer, some of the 68,000 residents of this United States territory will celebrate the higher minimum wage. Their ranks are unlikely to include people who now hold the 2,041 jobs—12 percent of total employment, almost half of all cannery workers—to be lost when the cannery closes. And the 2,700 employees of Star Kist, the other American Samoa tuna canning company, will be hoping that they keep their jobs.

American Samoa’s loss is Georgia’s gain. Chicken of the Sea will move to Lyons, Georgia, (2007 population 4,480) employing 200 people in a new $20 million plant on a more capital-intensive production line.

It didn’t have to be this way. In January 2007, when Congress debated the bill that raised the federal minimum wage from $5.15 to $7.25 over a two-year period, the legislation originally did not include American Samoa. Until then, the Labor Department had set wage rates in American Samoa every two years, following an extensive study of economic conditions on the island. But before final passage, Congress included American Samoa.

The result was a big wage boost for residents of American Samoa. In 2007, the hourly minimum wage for fish canning and processing was $3.76. The minimum wage for government employees was $3.41. Shipping had the highest minimum wage, at $4.59. Garment manufacturers got the lowest, at $3.18 an hour.

Back in 2007 there might have been general rejoicing in American Samoa on hearing that many workers would get a raise. But not so. Governor Togiola Tulafono worried that increasing the minimum wage “would kill the economy” and Congressional Samoan Delegate Eni F.H. Faleomavaega forecast that it would devastate the local tuna industry.

Fans of minimum wage increases say the hikes have no depressing effect on the economy or on jobs, but American Samoans were smarter. They knew that industries would go elsewhere if they have to pay $7.25 an hour.

And they were right. American Samoa will lose not only the 2,041 jobs at the Chicken of the Sea canning plant, but also secondary jobs from the ripple effect of loss of income—stores and eateries that cater to cannery workers, shops that mend fishing nets, shipyards, and buses that transport workers.

In addition, the cost of goods sold on the island will rise, because the ships that exported the cans of tuna came back with products to sell to the American Samoans. Now ships with imports to American Samoa will have to return empty or stop at other destinations.

In a telephone conversation this week, Representative Vaito'a Hans A. Langkilde of the Ma'oputasi District #10, representing the villages of Leloaloa, Satala and Atu'u, described the prospective devastation of the community. His district is home to the two major tuna canneries, Starkist and Chicken of the Sea.

According to Mr. Lankilde, “Over the past 50 years the industry provided massive job opportunities for unskilled labor. The increase in the minimum wage was the beginning of the end for the tuna industry and the cause of massive job losses for our already fragile economy. The only way to resolve the trend towards total economic disaster is for Congress at its soonest opportunity to reverse its position.”

With the recent laying of fiber-optic cable linking American Samoa to the United States, Samoans could get jobs in call centers. Yet the higher minimum wage could discourage firms.

In his campaign, President Obama promised to increase the minimum wage to $9.50 an hour by 2011. This would drive even more jobs away from American Samoa. In the United States it would have the effect of shifting jobs from low-skill to high-skill workers, raising unemployment among those who are least equipped to handle it. Requiring employers to provide sick leave and paid maternity leave, legislation also under consideration in Congress, would cause additional low-skill workers to lose their jobs.

Rather than having to accept direction from a government thousands of miles away, where they have no voting representation, residents of American Samoa should be given the power to decide on their own minimum wage. And perhaps Congress should leave further minimum wage increases and employer mandates to individual states, to choose as they see fit.

It takes American Samoa to show us that higher mandated compensation causes workers with low skill levels to lose jobs. What can harm American Samoa can also harm the United States.