Liberals, and especially unions, frequently claim that raising the minimum wage helps workers and the economy. They contend that if people earn more money through a higher minimum wage, then they will be able to spend more as well, creating more jobs, and making everybody better off as a consequence. Now two U.S. territories are putting these theories to the test.
The Federal minimum wage increase passed in 2007 also applied to American Samoa and the Commonwealth of the Northern Mariana Islands (CNMI). The law incrementally raises the minimum wage in these two territories by $.50 per hour per year, until the minimum wage reach the level of the U.S. minimum wage. Both these territories have lower cost of living than in the continental United States so the Federal minimum wage hike affected a substantial portion of their workforces: 74 percent of workers in American Samoa and 33 percent of workers in the CNMI. The Government Accountability Office recently issued a report examining the effects that this enormous increase in wages has had on the local island economies.
The GAO found that increase caused the last garment factory in the CNMI to close in early 2009, formerly one of two major employers in the territory. In American Samoa, one of the two tuna canneries – an industry that employed almost a third of the territory’s workers — closed in September 2009.
Polls show that workers in American Samoa, who were initially enthusiastic about the wage increase, now express serious concerns about it. No wonder. One of the biggest single sources of hiring has closed, and private and public officials express concern that the other tuna factory will follow when the minimum wage rises again. Largely as a consequence of these changes, the number of people with jobs at large companies in American Samoa decreased by 12 percent between 2008 and 2009, the overwhelming majority of whom are still unemployed. The total number of people employed in the CNMI decreased by 27 percent between 2006 and 2008. What happened to that shared prosperity again?
Employers in American Samoa have also responded to the minimum wage with other cost-cutting measures, such as freezing hiring and cutting job benefits. In the CNMI, the report found that hotels have had to raise room rates to compensate for the rise in wages that they must pay workers, and these raises may have caused a significant decline in visits to the island of anywhere from 3 to 14 percent. Adding insult to injury, the CNMI government has taken in 6 percent less in taxes from 2006 to 2008, despite the higher wages. The government cannot artificially raise wages without serious harmful consequences to workers.
These authors are very much for higher wages, but this should happen through increased worker productivity – not through government dictate. When workers produce more, competition forces employers to pay higher wages, lest their workforce leave for a competitor. But when wages are increased by government dictate it raises business costs, causing companies to fire some workers and cut the benefits of others. It manifestly does not create a cycle of more purchasing power leading to higher earnings and a stronger economy, great as that would be.
This post is co-authored by Aleksey Gladyshev. Aleksey currently is a member of the Young Leaders Program at the Heritage Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/About/Internships-Young-Leaders/The-Heritage-Foundation-Internship-Program