Jonathan Weisman reports that the minimum wage bill that will be introduced in the House will apply to the Northern Marianas Islands, but apparently not to the territory of American Samoa. The article reports that the tuna canneries on the island pay workers an average of $3.50 an hour. These canneries are apparently big supporters of Samoa’s non-voting delegate to Congress, who is a Democrat.
Now I won’t be able to even open another can of tuna fish without thinking about these exploited workers. But let’s think about whether imposing a wage floor of $3.50 an hour is a good idea (after all, Max Sawicky is confusing me with Greg Mankiw of late).
First of all – there isn’t really great data on the economy of American Samoa and the information from the CIA’s World Factbook. First, it says GDP is around $510 million and then it says per capita GDP is around $5800 even though the population is less than 60,000. The CIA also says the unemployment rate is almost 30% and has this general description:
American Samoa has a traditional Polynesian economy in which more than 90% of the land is communally owned. Economic activity is strongly linked to the US with which American Samoa conducts most of its foreign trade. Tuna fishing and tuna processing plants are the backbone of the private sector, with canned tuna the primary export. Transfers from the US Government add substantially to American Samoa’s economic well being. Attempts by the government to develop a larger and broader economy are restrained by Samoa’s remote location, its limited transportation, and its devastating hurricanes. Tourism is a promising developing sector.
My understanding is that the town of Tutuila has only two tuna canneries with one of them canning tuna for Chicken-of-the-Sea and the other one pictured here. These two canneries employ about a third of the formal workforce with the government employing another one-third and the remaining formal workforce being employed by the services economy.
Before we discuss the economics of minimum wages, we should note a few aspects of the regulations and advantages that these tuna canneries either face or enjoy. Their parent companies enjoy special tax benefits as well as a duty-free status on canned tuna exported to the United States. The Department of Labor notes:
The Fair Labor Standards Act (FLSA), applies generally to employment within American Samoa as it does to employment within the United States. The minimum wage rates for American Samoa are set by a special industry committee appointed by the U.S. Department of Labor, as required by the Act. The rates are set for particular industries, not for an employee’s particular occupation.
Effective October 1, 2003, this minimum wage for this industry was $3.26 per hour, which is substantially below the U.S. minimum wage. So what would be the effect of the well-being of American Samoan workers if the U.S. Congress mandated a higher wage floor? We shall consider two very different models.
Greg Mankiw et al. assume a perfectly competitive market for workers. In this model, the concern would be that a higher wage floor would lead to less job opportunities in Tutuila. For example, Lewis Wolman wrote:
Year in and year out, the continued existence of American Samoa’s thriving tuna canning industry is imperiled, and thus the economic foundation of American Samoa is imperiled. At least that’s the story line advanced by the two multinational companies operating tuna processing plants in Pago Pago. But despite the dire warnings that American Samoa’s tuna processing industry is becoming globally uncompetitive, the two canneries keep investing more money and hiring more workers. In the past 25 years, the American Samoa canneries have increased their work forces approximately four-fold, far outpacing job creation in the government or the rest of the private sector. The two plants are now reported to be the largest and third largest tuna processing plants in the world. StarKist Samoa and Samoa Packing directly employ more than 5000 full-time workers – compared to 1976, when they employed 1400. They process almost 1000 tons of tuna each working day, enough to fill a thousand 20-foot containers each month for an annual export of US$500 million worth of tuna – the majority of the canned tuna eaten in the United States. StarKist Samoa is owned by food conglomerate HJ Heinz (annual sales: $9 billion), while Samoa Packing is part of Chicken of the Sea, now owned by Thai Union, a privately-held, very large company based in Thailand. American Samoa’s tuna plants face global competition from newly emerging tuna processors such as Thailand, Ecuador, Indonesia, the Philippines and Vietnam, which provide low wages. Thus the canneries are constantly fighting to keep minimum wages low in American Samoa. The vast majority of the tuna industry workers earn between US$3.25 and US$3.50 an hour. Although such wages are low compared to the United States and Guam, where the minimum wage is US$5.15 an hour, they are relatively high in Polynesia and thus draw workers from Samoa and Tonga.
In other words, $3.26 an hour is most the competitive market would pay for those currently working in these two tuna canneries. Increasing the wage floor would simply increase the unemployment rate. That is – if you buy the Mankiw perfectly competitive market view. I find Wolman’s discussion interesting as he presents the argument but never endorses it.
There is also the monopsony market view given that only two companies exist in this labor market and the workers are sort of faced with the one company town situation where they don’t have many choices. What would that kind of labor market look like? First, wages would be low as well as employment as that’s how monopsonists keeps wages down. And the profits of the multinationals would tend to be high. Of course, these profits would be captured by the foreign multinationals, which would imply that GNP would actually be less than GDP. Some accounts have the GNP of American Samoa being only $470 million as compared to the $510 million of GDP. Is this arm’s length profitability or more evidence of tranfsr pricing manipulation?
But back to our question. If the two tuna canneries do enjoy monopsony power, then a higher minimum wage would lead to more employment – not less. Of course, U.S. policymakers could consider something akin to an Earned Income Tax Credit as Greg Mankiw suggests. But this is the real reason why I bothered to mention Max Sawicky:
To keep the story simple, in 2006 the maximum Earned Income Tax Credit for a family with two children is $4,536. To get this you need earnings of $11,340, a bit more than the earnings of one full-time minimum wage worker ($10,300 for a 2,000 hour year). An increase in the minimum wage to $7.25 from $5.15 increases pre-tax earnings by $4,200. Matching this with a higher EIC raises at least three issues.
While you should read the rest of Max’s post, I have to apologize to all as I don’t know enough about the economy of American Samoa to model Max’s insights for the situation of this island with few potential employers.