President Obama and some congressional Democrats are united in their opposition to an increase in the minimum wage.
Sounds unusual, right? After all, there's rarely been a time when liberals weren't in favor of a wage hike. Yet last month, President Obama signed bipartisan legislation to curb job losses in American Samoa by delaying the territory's minimum-wage increase.
It's a sensible decision and a victory for less experienced Samoans who would prefer a job to a raise. It's unfortunate that liberals won't acknowledge that a similar relationship between labor costs and employment exists here in the United States.
Let's start with a bit of history. In 2007, Congress passed legislation to increase the federal minimum wage by approximately 40 percent in three steps, from $5.15 to $7.25. American Samoa, a U.S. territory in the Pacific, also was required to increase its minimum wage to $7.25 per hour, raising the rate by 50 cents every year. The territory previously set separate minimum wages for different industries, ranging from $2.68 to $4.09 per hour.
Flash forward five years: The territory's unemployment rate now stands at nearly 30 percent. The economy relies primarily on exports of canned tuna, and one of the island's two canneries shut down in 2009, citing increases in the minimum wage as a significant factor in the plant's closure. Other island employers have reported to the Government Accountability Office that they plan to leave American Samoa, again naming the minimum-wage increases as the culprit.
Instead of improving the lives of Samoans, minimum-wage increases have decreased their standard of living. Federal data show that from 2006 to 2008, the median annual inflation-adjusted earnings declined by 6 percent even as earnings for minimum-wage workers rose by 14 percent. Employers, needing to adjust radically in order to keep their businesses afloat, have frozen hiring and cut worker benefits since mandatory wage increases began.
Legislation to freeze the territory's minimum wage passed unanimously in the U.S. Senate and overwhelmingly in the House when legislators learned of the devastating effects of the increases, and this latest law signed by Mr. Obama keeps the freeze in place.
But in a case of outrageous irony, some of the same lawmakers are pushing several proposals to increase the federal minimum wage to nearly $10 per hour. In fact, on the day Mr. Obama signed the Samoan wage freeze, Rep. George Miller, California Democrat, and Sen. Tom Harkin, Iowa Democrat, introduced legislation to increase the U.S. minimum wage by 35 percent. Democratic lawmakers joined activist groups at pro-minimum-wage-hike rallies, arguing that raising the wage would increase employment.
However, as a wealth of academic studies -- not to mention the experience in American Samoa -- prove, raising the minimum wage would have the opposite effect. According to economists at the University of California at Irvine and the Federal Reserve Board, 85 percent of the most credible studies on the subject from the past two decades point to job loss following an increase in the minimum wage.
Of course, the loss of employment we've seen in the United States isn't as devastating as in America Samoa, but the dynamic is the same. Just as the tuna cannery on American Samoa couldn't afford to pay its workers a higher wage and remain competitive, many U.S. businesses will be unable to absorb the increased labor costs or pass them along to customers through higher prices. Restaurants and grocery stores, some of the largest employers of minimum-wage workers, keep just a few cents in profit from each sales dollar, making it nearly impossible to adapt to a $9.80 minimum wage without cutting employment costs.
As the economy struggles to recover from the recession, businesses already are moving toward automation and self-service. Just last month, J.C. Penney & Co. announced it is replacing all checkout clerks with a self-checkout system. Analysts predict that self-checkouts in North America will increase by up to 10 percent in the next few years -- and that's assuming the minimum wage remains at its current level.
Samoans caught a break when Congress supported and the president signed this delay in the minimum-wage increase. Let's hope lawmakers also do a favor for our country's beleaguered job seekers and give a thumbs down to proposals to raise the federal minimum wage.
Michael Saltsman is a research fellow at the Employment Policies Institute.