How the Federal Minimum Wage Crushed the Economy of American Samoa

American Samoa. Source: http://en.wikipedia.org/wiki/File:1farleftpalms.jpg

American Samoa. Source: Wikipedia

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:

Supply and Demand. Source: http://en.wikipedia.org/wiki/File:Supply-and-demand.svg

Supply and Demand. Source: Wikipedia

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.” [1].

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. [2]
  • The loss of shipping traffic has caused local consumer prices to rise by 20%. [3]

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.

1: Wiki: American Samoa
2, 3: Congress Sacks Samoan Economy

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.

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28 Responses to How the Federal Minimum Wage Crushed the Economy of American Samoa

  1. PK February 13, 2012 at 11:35 am #

    Nice post! I’ve written about the political and economic implications of the minimum wage multiple times (here’s one), but I think your diagnosis is completely correct. It is basically forced private welfare – the government dictates that there is a must-pay wage, creating mis-allocation in the easier jobs in the economy.

    Even though I’m of a free market slant, I have looked quite a bit at the Milton Friedman negative income tax discussions. Those prescriptions seem to me much superior to the current minimum wage laws. However, I don’t see the minimum wage disappearing anytime soon. the best idea? Wait and let inflation take care of it, or perhaps exempt certain groups which are affected the most – like teenagers.

    • admin February 13, 2012 at 12:03 pm #

      Unfortunately exempting certain groups probably won’t work, as witnessed by the political fiasco around the fact that American Samoa had been enjoying an exemption until recent times.

      Letting inflation take care of it is probably the path that the government will follow — it is the path of least resistance, after all, even if it is a bad path to follow!

  2. Kris @ Everyday Tips February 13, 2012 at 2:59 pm #

    Oh my gosh, this post gave me so many college flashbacks – supply and demand charts, and the word monopsony!

    I will say that I never, ever think to travel to Samoa.

    So many people cry about how minimum wage is not high enough. However, people don’t seem to realize that the money has to come from somewhere. Even when money is magically printed it has consequences on the economy. You can’t just give and give and not expect some fall out- as Samoa shows.

    Great post.

    • admin February 13, 2012 at 10:55 pm #

      Thanks, Kris! I only recently graduated but it’s also been a long time for me. Samoa is a bit out of the way — otherwise tourism would probably be able to fill the slack. It’s unfortunate — out of sight, out of mind, while the politicians clap each other on the back on how “generous” they are.

  3. 101 Centavos February 14, 2012 at 10:20 pm #

    Ironic that the minimum wage came to be from labor unions lobbying against cheap black labor from the south. Helping the little guy, indeed….

    • admin February 21, 2012 at 9:07 pm #

      Sometimes, those who cry the loudest have the most to gain…

  4. Thad P @ thadthoughts.com February 17, 2012 at 6:38 pm #

    Really an excellent look at the damage done to an economy by the political class. I wonder if our children will recognize the American economy in 50 years.

    • admin February 21, 2012 at 9:08 pm #

      I’m very curious where things will be by then. There could be a whole new flourishing economy, trading online, and millions of people will be living on the sea by then. I can’t wait to see it. :)

  5. Penny Stock Blog February 22, 2012 at 2:17 pm #

    I would like to comment about the minimum wage.. Please those of you that do not believe in a minimum wage do not spread misinformation about it. Did you know that in states where their minimum wage laws mirror the federal minimum wage laws you can hire and pay anyone under the age of twenty 4.25 hour for the first ninety days that they are employed. Let me repeat that Did you know that in states where their minimum wage laws mirror the federal minimum wage laws you can pay anyone under the age of twenty 4.25 hour for their first ninety days that they are employed. Well now you know ok. Did you know that most states make exceptions for very small companies that have sales below 1 million dollars a year. These companies are not even required to pay the minimum wage. This would most likly be over half of all small businesses in other words over half of all the small businesses in the country are exempt from paying the minimum wage. Well now you know. I would suggest a simple solution to the minimum wage issue. Instead of requiring a company to pay the starting minimum wage of 7.25 hour allow them to phase it in by simply starting a employee out at 6.00 hour 5.75 for anyone under eighteen and than increasing their pay by 25 cents a month until it reaches 7.25 hour. It will take five months to reach 7.25 hour by doing this it will give the employer a little bit of time before they are required to pay the full amount. In other words while the employee is learning the job and is not yet as productive as the more experenced employees they can be pay a lower rate of pay for up to five months. I would also make exceptions for seasonal workers that are employed only for 60 days or less they can be paid 6 dollars an hour for up to sixty days. 5.75 hour if their under eighteen. I believe that this is a very reasonable compromise between the employee and employer. One other thing their is overwhelming public support for the minimum wage. Illinois had a referendum on increasing the minimum wage on the ballot over 85% of the voters supported increasing the minimum wage.

  6. Penny Stock Blog February 22, 2012 at 2:53 pm #

    This is a follow up to my comment about the Minimium wage. The annual sales excemption for companies is 500,000 dollars generally speaking any company that does under five hundred thousand dollars in annual sales is excempt from paying the Minimium Wage. This would include the vast majority of very small business owners which most likly do under 500,000 a year in annual sales and are excempt from paying the the Minimium wage. Their are millions of small business that do less than five hundred thousand dollars in annual sales. I obtained this following information from {nolo} law for all website. Which Employers Must Pay the Federal Minimum Wage?
    The main federal law that sets the minimum wage is the Fair Labor Standards Act (FLSA), found at 29 U.S.C. sections 201, and following. Although the FLSA covers most employers, some employers and employees are not covered.

    Generally, your business must abide by the FLSA if you have $500,000 or more in annual sales or if your employees work in what Congress calls “interstate commerce” — that is, if they do business between states. This includes making phone calls to or from another state, sending mail out of state, or handling goods that have come from or will go to another state.

    • admin February 22, 2012 at 5:24 pm #

      Interesting; I don’t think that this applies to Canada, but that still does not negate the job-destroying effects of a minimum wage. The public supports many things that sound nice in theory, but don’t work out so well in practice. If the problem is that some people don’t have enough income to survive, there are better ways of addressing that than job-destroying regulation.

  7. Miiockm February 25, 2012 at 7:20 pm #

    Desperate people will work for ridiculously small amounts of money. Ensuring some level of dignity for people is not a bad thing. $7/hr is not even a livable wage. I dont know what
    Amer. Samoas local GDP was but the minimum wage should have been proportionate to it at least. If the minimum wage was much higher relative to local cost of living issues then I see how that could have been a problem.

    • admin February 29, 2012 at 3:23 pm #

      Yep, and you cannot ensure dignity by preventing voluntary association from taking place. That in fact removes dignity by destroying jobs and forcing people to go on welfare. Working even at a low wage is far more dignified than having to accept assistance because it is illegal to work, or because the company has been driven out by excessive regulation. I have a lot of respect for immigrants and others that work hard and make the world a better place.

  8. Money Infographics April 11, 2012 at 2:24 am #

    I’ve got a few mates from the other Samoa who have moved back there after living in Australia for years. I know alot of American Samoans are starting to make the move across to Samoa to work in the tourist industry as it’s more established and get lots of tourists from Australia and NZ. This might have a knock on effect on the Samoan economy as well!!

    • admin April 12, 2012 at 11:43 am #

      It looks like a loss for American Samoa, but might be a gain for the other. Hard to say, since the increased labour supply could lower wages, but at the same time, if tourism is picking up and the newcomers are entrepreneurial it could be a big win overall.

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