The minimum wage hike that Congress imposed on two U.S. territories in 2007 has harmed their economies, according to a government audit released this week that shows more money for workers is more than canceled out by inflation and job losses.
The economic fallout has been so severe that the governors of both islands are urging lawmakers in Washington, who are considering a nationwide minimum wage hike, to forgo further increases in their territories.
Congress acted seven years ago in the wake of the Jack Abramoff lobbying scandal, which cast an unfavorable light on working conditions in the Commonwealth of the Northern Mariana Islands. Under political pressure, Democrats also included American Samoa in the wage hike, which was designed to gradually raise the territories’ rates until they reached parity with the states.
According to a Government Accountability Office report this week, the economic situation remains bleak for Samoans and is only slightly better for the Mariana Islands.
“Our main argument was that, if they did this to the CNMI, the economy would tank. This is exactly what happened. We successfully held them off for 10 years, but when my career ended, and the Democrats assumed control of Congress, they socked it to the CNMI and the results are as disastrous as we predicted,” he said.
Senate Democrats are preparing to debate a broader national minimum wage increase from $7.25 an hour to $10.10, despite a Congressional Budget Office report that said such a hike could cost 500,000 jobs by 2017.
A key Republican lawmaker said the GAO report should be a wake-up call.
“This GAO report should be required reading for the Obama administration,” said Rep. John Fleming, a Louisiana Republican who chairs an influential subcommittee on the House Natural Resources Committee. “It describes businesses that cannot absorb the costs of another minimum wage increase, and workers who fear that another increase will lead to higher prices and lost jobs.”
According to the GAO, the auditing arm of Congress, both territories experienced significant economic downturns from 2007 to 2009, including a complete exodus of the garment industry in the Northern Mariana Islands where the minimum wage increased five times since 2007. The current minimum wage there is $5.55 per hour.
From 2006 to 2012, the gross domestic product in the Northern Mariana Islands plummeted by 36 percent and the employment rate fell by 45 percent. Average earnings increased by 29 percent, but local prices rose by 31 percent. The wage increases have left the islands’ economies dependent on tourism from Russia and China.
Economic conditions are even worse in American Samoa.
Since 2007, the minimum wage in American Samoa has increased three times across 18 individual work sectors, ranging from $4.18 to $5.59 per hour. The GAO reported that average earnings in American Samoa rose by 27 percent, but local prices increased by 34 percent. The employment rate in American Samoa declined by 11 percent from 2007 to 2012, and average inflation-adjusted earnings fell by 5 percent. In the tuna canning industry alone, the employment rate fell by 58 percent from 2007 to 2013.
The wage increases prompted the closure of the Chicken of the Sea tuna cannery in American Samoa, the only cannery on the island competing with StarKist. The tuna canning industry is the largest source of private-sector employment on the island.
Both territories are scheduled for more wage increases. A 50-cent rise is scheduled for Sept. 30 in the Northern Mariana Islands, and further wage hikes are set for Sept. 30, 2015, in American Samoa. Additional increases are scheduled every three years.
Governors in the island territories are protesting further wage increases. The governor of the Northern Mariana Islands has said he supports postponement of the minimum wage increase. In American Samoa, the governor has said he would “pursue changes in U.S. Law to allow American Samoa to take control of its minimum wage.”
Mr. Abramoff, who served 43 months in prison for his conviction in a corruption and ethics case, said he fears that continued wage increases as scheduled would further damage the economies of both islands.
“[Congress] should roll back the increase they put in place. The discussion should not be about increasing further, but taking away this horrible policy,” he said. “It is astounding that they would even consider continuing to raise this rate.”
The GAO report raises concerns about the economic effects of minimum wage increases in the United States.
Some research indicates that a wage hike in the U.S. would have similar effects to those in the island territories.
According to a study conducted by the American Action Forum, a $1-per-hour wage increase would lead to an unemployment rate increase of 1.48 percent and a 0.18 percent decrease in net job growth. The study found that high minimum wages in 19 states could lead to a surge in unemployment by 747,700 workers and a reduction of 83,300 jobs.
“Raising the minimum wage is a bad idea because it harms job growth and it hurts the ability to hire workers, and that impact will differ depending on the local work markets,” said Douglas Holtz-Eakin, president of the American Action Forum. “What we will see most likely is a big impact on retail trade and people working behind commerce and in restaurants. Places where low-skilled workers who dominate the minimum wage debate tend to be hired.”
President Obama has called on Congress to raise the federal minimum wage to $9 an hour by the end of 2015. The administration hopes the wage increase will address high levels of income inequality. The White House estimates that the wage increase would boost earnings for 15 million low-income workers.
In his State of the Union address, Mr. Obama noted wage inequality by saying, “Even with the tax relief we’ve put in place, a family with two kids that earns the minimum wage still lives below the poverty line. That’s wrong.”
The Congressional Budget Office reported that raising the hourly minimum wage to $9 would cost 100,000 jobs and an increase to $10.10 would cost 500,000 jobs.