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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The entire American lifestyle depends on a near-infinite supply of cheap labor. Does anyone realize that if their Plasma Screen televisions were manufactured in a fair-wages situation, they would not be able to afford such devices? Americans need to wake up and realize that the rest of the world is not their personal valet.

Posted by J Smith | Report as abusive

I see just as much bias in the comments as in the commentary. Businesses must make money to stay in business by competing with companies all over the world, not just in the U.S.
They are not in business to provide jobs or benefits. Any community or region relying on one company or industry will fail at the moment that industry or company is undercut by better technology, either in production or in product.
Also, a one industry community sells it population short since it creates a have and have-not society, even at minimum wage. You have a job, or you don’t. Diversity in industry provides competition and choice in the workforce, which forces companies to pay competitive wages. This is much more effective than artificial wage standards which always result in less competitive and less efficient business practices, which leads to failure.
In a diverse economy, if a company takes advantage of its workers, they leave for higher ground and the company changes its ways or goes away. It is quite simple.

In A. Samoa’s case, if they thought they had it made riding on Pelosi’s skirt tails, they just learned a very valuable, albeit painful, lesson. The canneries very well may have left anyway, but the minimum wage made it a very easy decision that the governing body of Samoa had no power to negotiate for themselves. Had they broadened their base of industry, this would still be painful but not devastating. This is the same situation as the auto industry in Michigan where I spent many years. If there is no consideration of business costs in social/economic policy, the businesses will be driven out and you be left crying in your soup at the shelter.

Posted by Dale | Report as abusive

Responding to jb’s comment about average wage following the rise in productivity: According to http://www.bls.gov/news.release/empsit.t 16.htm, the average hourly wage is about $18.50 for the first few months this year – slightly above your suggested $18.23.

Posted by JD | Report as abusive

Raul, your comments, if not meant to satirical, are so devoid of empathy as to be truly frightening. You ask “Shouldn’t we all make as much as we can?” The answer if you or other like-minded beings care, is NO! Utopia does not exist, but we will never approach anything like compassion if we choose to simply ignore anyone who is less fortunate. Greed can be disguied in innumerable masks, but it inevitably springs from an attitude of not caring. Unfortunately, during my life I have never learned how to convince a person to care about something, short of their experiencing some type of personal catastrophe which opens their eyes to the condition of the rest of humankind.

It is a disingenuous and myopic idea to suppose that a living wage is the cause of poverty. Businesses will always pass along any increased cost that they are able to; if they can’t, then they go looking for a population that is so mired in poverty that they have no choice but to accept whatever is offered to them. It’s a simple concept; it’s what is known as exploitation, and unscrupulous and greedy businesses have been doing it for decades. Of course, as long as the world is mired in the zero sum ‘game’ known as ‘competition’, things will not change. The question seems to me to be why the ‘winners’ think that the ‘losers’ will simply go away or magically disappear from the planet. One of the very legitimate purposes of government, at least in my opinion, is to do whatever it can to regulate greed and assist the losers. It’s not very Darwinian, I realize, but I believe that if there is any hope of extricating the disadvantaged from lives of misery and hopelessness, we all must one day realize that we’re all in this together. Greed will ultimately destroy everyone, not just the poor.

Posted by R. J. | Report as abusive

Besides the inflationary effect of a minimum wage rise that will give temporary relief to low income workers, it should be quite carefully adapted to expecially sensitive geagraphical areas like the Samoa Islands. For them, a low wage is better than no wage for sure. On a greater scale, in order to be competitive with low wages in other countries, a carefully concerted approach to taxation, productivity and labor cost should be considered. e.g. in the USA corporations pay too much taxes compared to Singapore, for example.

Posted by Rob | Report as abusive

Looks like this article got spammed by Obama’s Welfare Nation who believe that people go into business to provide them with a job and not to get a return on the money THEY invested and accepting the risk of losing that investment.

Not to worry though, these leeches now have Obama in power and if any business isn’t will to pay them $100 an hour, sell the product for 1.99 and take a loss for the “greater good”, then Obama will just take it away from the business anyway and give it to his Welfare Nation.

And these brainiacs can’t understand why the unemployment rate is going above 10% and no one is spending or providing investments or capital. These people are how we end of with a “community organizer” taking control and trying to run the auto, banking and insurance industries to a complete failure.

Posted by LogicalUS | Report as abusive

this move is good for the samoan’s….packing tuna in a factory is god awful…now they will have more free time to live in tranquility on their beautiful island.

Your Chicken of the Sea example does not support your argument. They are moving $7.25/hour jobs to Georgia, which has the same $7.25/hour minimum wage. Obviously, the wage hike had little to do with their decision.

why do so called experts who make high 5,6,7 and even 8 figure salaries want people who do not have to endure low wages?
I have a BS degree and I only make $13.99 an hour on a job that I’ve had since 2003!!!!!!!!!!!!! I live in Chicago.
It isn’t fair!!!! Gov, Mayor, and Cook County Commish are taxing us unfairly.
We should always have the right to repeal unfair increases…especially during a recession!
Oh by the way…they increase their salaries without the voters approval. Should’nt we??

Posted by PETER | Report as abusive

Soylent green is the answer.

Posted by kelly p | Report as abusive

How dare that Obama, He wants min wage to pay above the poverty line.Next thing he’ll want something craze like health care for all.

Posted by Rentsdueagain | Report as abusive

Dale writes–

“Diversity in industry provides competition and choice in the workforce, which forces companies to pay competitive wages. This is much more effective than artificial wage standards which always result in less competitive and less efficient business practices, which leads to failure.”

What you have stated is a very broad and generalized conclusion, which to be discussed effectively would mean conducting valid research into a broad sampling of data for support. For example, does ‘diversity’ itself actually cause competition so that employers will be forced to pay higher wages? The answer, I suspect, depends to a great extent on the industries, their geographic location, their relative market dominance, and many other factors. There have no doubt been many instances in our economic history where diversity has not produced upward wage pressures, just as there are probably examples where it has. If that is the case, then it becomes necessary to closely examine the contradictory examples to determine if ‘diversity’ is actually the driving or predominant force or reason for upward wage pressure. It may well be other factors that have nothing to do with ‘diversity’. Of course, it seems a truism that competition cannot exist without at least some ‘diversity’, but that is not a critical analysis that would suport a generalization that diversity always leads to increased wages, or that it is a better vehicle to use than government regulation. It seems to me that your statement presupposes that there is a relatively small workforce for those ‘diverse’ employers to call on. For me, it has been my experience that as long as there is a relatively large available workforce, there will be little, if any, upward wage pressure, no matter how ‘diverse’ an economy may be.

Posted by R. J. | Report as abusive

Wow – so the minimum wage laws are different, and employers in American Samoa pay more than employers in Georgia?

No, of course they don’t. Diana conveniently ignores the fact that the minimum wage is a federal law, and that Chicken of the Sea will have to pay the same wage in Georgia, because that destroys her argument that it’s the big bad Democrats who are putting these poor people out of work.

Its plain old American greed, something Diana chooses to defend surreptitiously instead of with honesty and integrity.

Posted by Lee Ward | Report as abusive

The reason rich people want to push minimum wage is because they want to preserve their wealth. Her argument is completely wrong because low wages create the walmart effect where the communities and the gov’t have to subsidize their expenses through welfare programs. I love the example of the $100 wage. Scare tactics by extremes. Please read the 7 methods of propaganda before reading any article or listening to anyone with an opinion about politics or business.

Posted by Matt | Report as abusive

Professor Alan Krueger has already taken the time to prove Mrs. Furchtgott-Roth wrong, and over 16 years ago.

To quote from an article published in the New York Times on August 22, 1993,

“Their studies of the minimum wage have attracted the most attention. Classic economics assumes that a higher minimum puts more money in the pockets of some low-wage workers, but forces others out of work, dismissed by companies who cannot afford to pay them. Professors Card and Krueger decided to test that when New Jersey, in the middle of a recession, raised the minimum wage in the state to more than $5.05 — 80 cents higher than neighboring Pennsylvania

They surveyed 400 fast food restaurants and found that those in New Jersey actually added 2.5 workers after the minimum wage went up. In Pennsylvania restaurants, meanwhile, payrolls shrank.”

I wonder how the author of this blog will react to actual evidence and hard facts.

Posted by DCX2 | Report as abusive

Without getting into the political dimension of this, it should be recognized that running a business on a remote island (ignoring labor) is more expensive than running the same business on land. Electricity, clean water, parts, supplies, etc. all cost more. If the plant is older and has a lower level of industrial sophistication (and is less efficient) than a new facility, the only way to make the island factory cost competitive is cheaper labor. Raise the labor rates to the same level as the mainland and it will make sense to invest new capital on shore since the island labor advantage is gone. 7 dollar labor on an island is not the same as 7 dollar labor in Georgia and the wisdom of investing capital in each is also not equal.

People should be able to sell their labor at a rate that makes sense in the real economic system where everyone has competition.

Posted by Bryan Baskin | Report as abusive

Take her words with a pinch of salt, folks. This was what she said about the likelihood of a recession in 2008 when her buddies, the Republicans, were in power:

“On balance, it is not likely that the United States will experience a recession in 2008.”

http://www.american.com/archive/2007/dec ember-12-07/the-great-recession-of-2008

Posted by Peter | Report as abusive

Hold it people. Please note: 2041 people will lose their job. And only 200 people will get one. That is only 10% of the jobs lost. Have any of you even thought about that factor. I want a pay raise too, but this dose not add up as being the way to do it.

Posted by Dana | Report as abusive

Diana Furchtgott-Roth misleads readers repeatedly in this article. This is ALL SPIN. Shame on the author. I will not trust anything by Diana Furchtgott-Roth in the future.

Posted by Joe | Report as abusive

A living wage is a fair wage where people can afford a roof over their head and food..it is the very least of the American dream. Homelessness is a huge issue for the working poor..

For those who say the US can’t compete if the minimum wage is raised, I disagree. The US can compete if people are well educated and have skills for the 21st century. Education is key to everything and it is there that the US is falling behind. Obama gets it.

Posted by ginny | Report as abusive