Most people probably have not heard of American Samoa, or what has been happening there. It is a small island located tens of thousands of miles away from the continental United States, and has a small economy with a high rate of unemployment and a low level of income per capita. The island is frequently hit by storms, and does not benefit from tourism to the same degree as some other islands.
Most people probably don’t know that the recent hikes to the minimum wage have ravaged the economy of American Samoa, causing thousands of jobs to be lost. The economy already depends to a large degree on federal transfers from the federal treasury, and this dependence will only grow as more jobs continue to be lost.
What is behind these job losses? The well-sounding law of a “minimum wage”. Thousands of jobs have been destroyed by rich people that care more about seeming like they help the poor instead of actually helping the poor.
The harmful effects of the minimum wage
Many people love the idea of a minimum wage, or “living wage”. People naturally don’t want to see their fellow man downtrodden or exploited, so a minimum wage sounds nice in theory. Why not pay these people some more money? Surely these big companies can afford it. Unfortunately, we do not live in a fairy tale land of abundance, and there are real opportunity costs to minimum wage legislation:
- It hurts employers by raising their costs of labour, making it more difficult for some to invest in growth and expansion for the future, and making it more difficult for others to stay in business.
- It hurts employees by kicking out the bottom rungs of the ladder. It becomes more difficult for employees to gain work experience, which has a dramatic effect on teen workers and workers new to the labour market.
- It creates a generation of people dependent on the government for wealth transfers, as legitimate work has been effectively banned. It also creates an underclass of illegal workers who are forced to work outside of the law in order to gain a wage.What about the worker that wants to learn to become a chef, but needs to start out as a helper in the kitchen? In a tight-margin industry like the restaurant business, the minimum wage might force the chef to hire this helper under the table, if he even wants to take the risk at all. These people get hurt the most by these laws, which are often passed by rich folk that only care about having the image of “helping the poor”.
The minimum wage law is a law that prevents legitimate voluntary relationships from taking place, and damages people in the marketplace by splitting people into classes of unemployed and privileged. Those that still retain their jobs benefit; those that get laid off lose, and those that are prevented from getting hired in the first place lose even more.
The mathematics of the minimum wage law
How do buyers and sellers come together to find a price? On a market characterized by voluntary trade, this happens through supply and demand. Buyers raise their prices in accordance with their value scales, and sellers do the same. These prices are always moving toward an optimum point that maximizes everyone’s expected value:
The market for labour is no different. Employees are sellers of labour, and employers are buyers. Just like in any other market, prices eventually reach an optimum equilibrium.
Minimum wage laws interfere with this equilibrium, and impose a minimum price floor above what buyers and sellers would voluntarily agree on. Again, since we do not live in a fairy tale land of unlimited abundance, some employees will now cost more than what their employers can afford. Permanent unemployment will result:
The shaded zone represents the loss caused by the imposition of the law. Employees are more willing to work because wages are higher, but employers drop out of the market as some cannot afford the new costs. This has the effect of causing an oversupply; in other words: permanent unemployment.
This is what you would expect from common sense (otherwise, why not make the minimum wage equivalent to the skilled market wage? Why not $100/hr? Because of common sense, that’s why), and pretty much all economists are also in agreement with this, whether Austrian, Chicagoan, or even liberal-socialist.
However, there is one special exception: under the limited mathematical conditions of a monopsony, it can be shown that a higher minimum wage, to a certain point, can increase both employee wages and overall employment. What is a monopsony? It is a situation where the market is dominated by buyer power; imagine having only one company to choose from to get a job! Of course, with a higher minimum wage, the company can still lose profits and this may cause other second-order effects such as reduced investment and higher prices for consumers. Remember, there’s only one company hiring, so that’s probably also the only company to buy from as well!
However, just to show that we are not being dogmatic, we do have to admit that there are scenarios where the minimum wage can achieve the first-order effects that it claims: higher wages for workers. So, can we find an example of this in real life? This is a rather unrealistic situation, since people can always start new companies, become entrepreneurs, or move if they have to. Nonetheless, if you’re looking for a textbook definition, then American Samoa must have been a good case with its local industry dominated by the tuna fisheries.
How the minimum wage planted a bomb right in the middle of the American Samoan economy
Americans may not know that American Samoa benefited from exemptions to the minimum wage laws up until recent times. For example, the minimum wage was as recently as 2007 was $3.26. Then, “the Fair Minimum Wage Act of 2007 was passed, increasing minimum wage in American Samoa by 50¢ per hour in 2007 and another 50¢ per hour each year thereafter until the minimum wage in American Samoa equals the federal minimum wage of $7.25 per hour in the United States.” .
What happened then?
- One tuna cannery, Chicken of the Sea, was shut down, destroying over 2,000 jobs.
- The other tuna cannery, StarKist, plans to lay off more than 800 workers.
- The U.S. Department of Labor expects total losses to be 8,118 jobs, or 45.6% of total employment. 
- The loss of shipping traffic has caused local consumer prices to rise by 20%. 
Now, instead of being “exploited” by the big tuna canneries, Samoan workers can now join the unemployment lines, or perhaps they can try out for the NFL; American Samoan players are known for their size & strength. I am sure they are thankful to the kind and generous politicians in Washington that have kept their best interests at heart.
Let’s look at the numbers:
- Unemployment: 23%
- Public sector employees: 28%
- Jobs directly lost: 3000+
Keep in mind that American Samoa receives a comparatively huge amount of money from the U.S. federal government; without this aid, the impact could be worse. If tourism can pick up, then this may provide new opportunities for American Samoans; otherwise, it seems like the only real future might be to find work with the government, as that is where the highest wages and the most job growth seems to lie.
What are your thoughts? It’s unfortunate that American Samoa had to suffer due to a political tangle-up. The road to hell is paved with good intentions, and the minimum wage has certainly done more than its fair share of damage to the people of American Samoa.