Thousands lose jobs due to higher federal minimum wage

May 14, 2009

 Diana Furchtgott-Roth– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own. —

As President Obama considers whether to fulfill his campaign promise to raise the minimum wage from $7.25 to $9.50 per hour by 2011, there’s no better illustration of the consequences of well-intentioned policy-making than recent events in American Samoa, a United States territory in the South Pacific that falls within the purview of Congress.

Chicken of the Sea, the tuna company, announced this month that it will close its canning plant in American Samoa in September. The culprit is 2007 legislation in Washington that gradually increased the islands’ minimum wage until it reaches $7.25 an hour in July 2009, almost double the 2007 levels.

In 2007, the hourly minimum wage in American Samoa for fish canning and processing was $3.76 and 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. A $7.25 wage is a substantial increase for most residents.

Chicken of the Sea will lay off 2,041 employees—12 percent of total employment, almost half of all cannery workers. And the 2,700 workers at StarKist, the other American Samoa tuna canning company and Chicken of the Sea’s rival, are probably concerned that their jobs are the next to go.

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.

In January 2007 the legislation originally did not include American Samoa, perhaps because Del Monte, at the time the parent company of StarKist, was headquartered in Speaker Nancy Pelosi’s district.

Until then, the Labor Department had set wage rates in American Samoa every two years, following an extensive study on economic conditions on the island. But before final passage, Congress included American Samoa.

Back in 2007 American Samoa 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.

They knew that industries would go elsewhere if they have to pay $7.25 an hour.

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 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 both StarKist and Chicken of the Sea.

Mr. Lankilde told me, “Over the past 50 years the industry provided massive job opportunities for unskilled labor. The 2007 law that increased 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.

Raising the minimum wage to $9.50 an hour 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.

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. Congress should leave further minimum wage increases to individual states to choose as they see fit, because wage levels and the cost of living vary substantially between states such as Mississippi and New York.

The closure of the Chicken of the Sea cannery in American Samoa shows us that higher minimum wages cause low-skill workers to lose jobs. What’s true for American Samoa holds equally true for the United States.

169 comments

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Our laws impose a huge penalty to our businesses who would otherwise prefer to locate their workforce on US soil because we refuse to apply them to our offshore competition. $9.50 per hour sends the clear message: Get Out Now! Now, just think, who benefits from this?

Posted by Brian | Report as abusive

You are right—why should the “low-skill” workers of the United States suffer the burden of unemployment? How pitiless that from them we try to embezzle the dream of such lavishness as food and shelter with the suggestion of a living wage. That they are paid at all reflects our nation’s failure to acknowledge the irrelevance of those whose profession involves actual work. After all, why should anyone care that, had wages kept pace with rising productivity from 1968, the average hourly wage would be $18.23?

Posted by jb | Report as abusive

This woman is so obviously biased in her “opinion”. She fails to mention that the new 20 million dollar plant is going to be state of the art and only employ 200 people compared to the 2000+ people employed in American Somoa.
It is obvious to me that the company was going to move the operation anyway, as soon as a new cannery was finished. Chicken of the Sea’s corporate move has absolutely nothing to do with the mandated wage increases. In mainland America the minimum wage is higher than that of the Island of American Somoa and everything to do with being able to reduce the work force to 10% of what was needed to run the “Old and outdated” cannery on the Island. Moving to mainland America should also cut its shipping fees, thus reducing overhead to maximize profits while the reduction in workforce will also reduce the amount needed to be set aside for benefits, social security, and taxes.

The move by Chicken of the Sea is based entirely on completing a newer facility with modern equipment while moving closer to consumers to reduce transportation costs. If this is her type of “opinion” piece, I wonder if she even grasps the concepts of newer business models.

Your argument has one massive flaw:

‘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.’

So they have $20 million dollars to spend on setting up a new factory, and I’m sure there’s additional costs to be considered in that move. Why? Because paying 2041 people an extra $3.49/hr is too costly. How much will the workers in the new factory be paid? How much more could they afford to pay these poorly paid people by cutting the wages of top executives by even 5%? This to me smacks of an inauthentic reason to avoid having to pay the poorest people a livable wage. The other factor to be considered is how much the cost of living went up during this time. $7.50/hr isn’t enough to live off of and certainly not enough to live comfortably off of.

Diana, how can you illustrate such a lack of logic? First, the move from A. Samoa to Georgia changed nothing in salary. As you stated they moved into a new automated facility that could be run by 200 bodies verses 2000 bodies in A. Samoa. This facility had to be planned far in advance and obviously without regard for minimum wage effects. How you could use this as some sort of reason not to increase minimum wage leads me to wonder what motivates your opinion pieces.

Posted by B.Free | Report as abusive

So the alternative is what? Paying people a salary that will garuntee that they are on social services? I suppose that is a great use of tax payer dollars, to subsidize businesses for their lack of responsibility toward their workers. I would suggest that the writer take a minimum wage job and see if she is able to survive. Perhaps than she might actually grow some empathy and compassion towards those who work in low wage jobs, but are unable to escape poverty. I doubt the writer will survive such an experiment in hardship. Placing corporate profits on the predication that workers have to be condemed to a lifetime of poverty is not only unfair, but it is immoral. We should stop calling ourselves the “greatest nation on earth” if we cannot provide hard working men and women a working wage. That should not be happening in the richest nation on the planet.

Posted by BB | Report as abusive

Where are the facts (both positions)?
When did the planning for this new facility start?
When did construction start?
Is GA giving the company tax breaks?
How much money do most people live on in American Samoa?
Is it possible that the company knowing the wage increase was coming decide to bail?
Is everyone living in poverty there since the highest wage is $4.59/hour?
People that don’t live there shouldn’t be commenting on what an acceptable wage is. Maybe they aren’t the pigs we are in the mainland and can live happily without iPods, SUVs and $100/month cell phone & cable TV plans.

Posted by SC | Report as abusive

The minimum wage debate will continue on and on. In the short term it raises wages for the workers at the bottom, but in the long term they are not any further ahead than they were at the lower wage. Do you remember when you could get a hamburger at McDonalds for sixty nine cents back in the late 90′s. Now, you can get them for a one dollar. As wages are artificially increased, so do the costs of everything else. More people earning more money means that in the short term more people buy more things. As time goes on, businesses have to pass the increased costs to consumers. Consumers then buy what they used to buy before the wages were increased. I know that a minimum wage increase is not the only thing that raises costs, but wages are the largest expense that most businesses have.

Also, to answer the question as to how much the company would save by moving to Georgia, here are the figures. 1800 fewer employees working 26 80 hour pay periods at an increased rate of 3 dollars per hour.
1800 * (26 * (80 * 3)). The savings is $11,232,000 in wages payable alone without including the savings for any health care benefits that may have been paid. Also, a new facility requires less maintenance and is more up to date as far as food safety and codes are concerned. Also, by acquiring a brand new facility, the company will likely be able to take advantage of the tax and income effects that the newfound plant depreciation will give them for several years to come.

As far as CEO and executive pay is concerned, how much is enough? Shouldn’t we all make as much as we can? If my farm grows more fruit and my herds grow faster than someone elses, shouldn’t I be able to eat more? If I own the land and work it and help it to produce, shouldn’t I enjoy the harvest? If I take the risk, shouldn’t I be able to enjoy the reward?

Posted by Raul | Report as abusive

Ideas such as these are at the root of the crisis that we are all in. They betray a complete inability to see the greater picture, the interconnections that make up the economic system. Or worse, they are the expression of a propaganda machine trying to legitimize an economic model that is extremely destructive, both socially and ecologically.

Posted by Andre | Report as abusive

It was “planned” because the minimum wage was going up. This 2009 increase was part of 2007 legislation.

So, instead of 2000 Samoans having a job that pays $3.50, they now have no job, which pays $0.00.

This helps poverty, how, exactly? If they couldn’t “live” on $3.50, they could quit. Now the choice isn’t theirs.

Let’s just make the minimum wage one hundred dollars an hour and we’ll all be rich. What’s wrong with that? You can’t simply “give” people a wage. The best possible outcome of a minimum wage is simple inflation that makes the increased salaries worthless. The typical outcome is that automation and general economic decline will cause massive unemployment.

Besides the economic illiteracy regarding the minimum wage, this tuna example just shows how racist the minimum wage is.

Posted by AmishDude | Report as abusive

USA is going down the drain. This is economic genocide against your own people. Support the people/help the people to be prosperous. Anyway: easier said than done. If buying any kind of small item is so difficult when you are poor in USA how can USA call itself developed. People milking a goat in Greece are far less stressed than civilized homeless,jobless americans. Sorry for the negativity.

Posted by Dracula | Report as abusive

Diana, I understand that you are paid to write these biased opinions, but this time is completely nonsense and laughable. Exactly the same ignorant economic reasoning brought the Republican party to its current reality :)

Posted by Ananke | Report as abusive

What does the minimum wage law matter anyway? When there are no real consequences for hiring illegal immigrant labor and paying them under the table, who cares what the official minimum wage is?

Posted by balloon | Report as abusive

Attempts to smooth out the bumps in the road often backfire.

No matter what you were taught you in school, it’s a jungle out there, and failure is always an option. Stop blaiming “them” for not looking out for your best interests.

I’ve never been given a job or a hand up by a bleeding heart. Life is made up of those who will use you for their own interests and those who are think they have the right to tell you what to do.

Posted by dlerhetal | Report as abusive

I quit school in the 10th grade and entered the work place with a job paying $40 a week for 6 twelve hour shifts. This was when weekly wages were exempt from minimum wage controls. Moving onto an hourly job at .90 cents, current minimum wage, equaled a considerable raise at the time. I continued on moving from job to job that payed higer wages. I have neer belonged to a union, as I see this as an artifical support for deadbeats. Minimum wages should be set for each State individually, as only they are aware of living expenses in their area. Raising the wages in A. Somao to what it may take to live in the U.S. solves nothing of benifit to the locals who are lurched out of a job when the business relocates. Get our Government out of trying to control everyone’s lives, as they can’t even manage the basic Government functions without wasting tax dollars.

The harmful effects of higher wages? well…aren’t you the popular one.

Posted by John J. | Report as abusive

I guess we should change the minimum wage to $1.50 an hour then. If you poor people don’t like it, well then just quit! Greedy poor people, trying to make a living wage. When will people learn that it should be what the corporations want to pay us, not what we need to get by on without handouts and Federal aid! Big Business is more important than the working poor.

Posted by theDagda | Report as abusive

My firm actually is forced to pay not minimum wages but a legally mandated rate for government work called Davis/Bacon. New rates were just handed out for a new round of contracts that increase the hourly rate for skilled labor by more than half. Has there been a 50% inflation since last year. Obviously not. This is a union sponsored effort to grab some of the wasteful government stimulus spending. Fair enough, but, in reality, none of this will happen. to win the contracts a company has to be competitive and so THEIR prices cannot increase. As a result, they CANNOT afford to pay these greedy legally mandated rates and stay in business. Instead, every minute not spent doing the nominal work category will be paid at any lower applicable rate as long as consistent with the law (bathroom breaks at minimum wage, walking to the job at laborer rates, travel to the job at minimum wage, there is no law that says you have to be paid the same amount every minute you work…you get the picture) and everyone, worker, bookkeeper, will have to spend much more time complying with the requirement by filling in forms. No one will make any more except the union bosses. it will be a complete waste of more time instead of productive expenditure. thats what you get with having your government run your life…a life lived at the Department of Motor Vehicles.

Posted by Markie Mark | Report as abusive

The minimum wage issue is very emotional to some people but Diana’s point is well taken. The company had two years to weigh the cost of continuing to employ 2,041 unskilled workers at $30,000,000 wages a year wages plus benefits or spend $20,000,000 for a new plant and employ 200 skilled workers at $4,000,000 to $5,000,000 wages plus benefits. This is a savings to the company of at least $5,000,000 the first year of operating the new plant even after paying for the new plant.
The compassion for the unskilled workers needs to be shown by Congress, they know that they are putting unskilled workers out of work every time they raise minimum wage. The point is, if congress cared about poor people they wouldn’t make it so profitable to hire skilled workers over unskilled workers.
Most workers only work for minimum wage while they are building their skills or until they can increase their income. Those that are unable to acquire skills need to be considered before congress raises minimum wage because they are the ones that loose when minimum wage goes up. Skilled workers don’t stay at low wages very long anyway.

Posted by Craig Coal | Report as abusive

…and, of course, no discussion of the role of corporate remuneration, golden parachutes and excessive shares/options for the board, the necessity of having ridiculous profits (due, amongst other things, to the thousands of mom/pop shareholders with their fingers in the pie via superannuation), the thirty year trend toward ever greater profits despite wage stagnation and rising living costs, a general corporate culture of tax avoidance, secret offshore bank accounts… but no, let’s not talk about that. Let’s punish labour and let big capital off the hook.

Posted by Peter Chambers | Report as abusive