Saturday, July 02, 2011

Amazing Discovery by the Government in American Samoa: Demand Curves Really Do Slope Downward

From the Government Accountability Office's (GAO) June 2011 report on the devastating effects of Congressionally-mandated increases in the minimum wage in American Samoa by 56% and in the Northern Marian Islands by 66% since 2007 (see chart above):

"In 2007, the United States Congress enacted a law incrementally raising the minimum wages in American Samoa and the Commonwealth of the Northern Mariana Islands (CNMI) until they equal the U.S. minimum wage.  American Samoa’s minimum wage increased by $.50 three times, and the CNMI’s four times before legislation delayed the increases, providing for no increase in American Samoa in 2010 or 2011 and none in the CNMI in 2011 (see chart). As scheduled, American Samoa’s minimum wage will equal the current U.S. minimum wage of $7.25 in 2018, and the CNMI’s will reach it in 2016. 

Here are some of the key findings from the GAO report:

1. In American Samoa, employment fell 19 percent from 2008 to 2009 and 14 percent from 2006 to 2009.  Data for 2010 total employment are not available. 

2. GAO questionnaire responses show that tuna canning employment fell 55 percent from 2009 to 2010, reflecting the closure of one cannery and layoffs in the remaining cannery. Private sector officials said the minimum wage was one of a number of factors making business difficult. 

3. The employers reported taking cost-cutting actions from June 2009 to June 2010, including laying off workers, reducing overtime hours, decreasing benefits, temporarily closing and freezing hiring. The employers attributed most of these actions largely to the minimum wage increases. Cannery officials expressed concern in interviews about American Samoa’s dwindling global competitive advantage.

4. In the CNMI, employment fell 13 percent from 2008 to 2009 and 35 percent from 2006 to 2009.  In discussion groups, private sector employers said minimum wage increases imposed additional costs during a time in which multiple factors made it difficult to operate.

And here are some of the blunt comments about the report from the Governor of Samoa (Appendix VII) and the devastating effects of the mandated wage increases on the Samoan economy:

1. The draft report itself does not capture or convey the magnitude of the economic disaster that has befallen American Samoa.  

2. It is absolutely clear that American Samoa's cannery employment losses, plant closures and and other adverse actions were attributed significantly and most often to the minimum wage increases.

3. There is more than enough evidence in the report to support our recommendation to terminate the increases in the minimum wage immediately in American Samoa. 

4. Application of the U.S. minimum wage to American Samoa, pursuant to the scheduled increases mandated by Congress, continues to have devastating effects on American Samoa's economy.  It is causing severe distortions in American Samoa's labor market. It has driven up labor costs such that businesses are being forced to cut employment, close or relocate.

MP: What's amazing is that it apparently takes 142 pages of government-based analysis in this GAO report to come to the following conclusion: "Demand curves slope downward."

In an amazing flash of economic lucidity back in 1987 during its pre-Krugman era, the New York Times actually got it exactly correct in an editorial titled "The Right Minimum Wage: $0.00":

"The idea of using a minimum wage to overcome poverty is old, honorable - and fundamentally flawed. It's time to put this hoary debate behind us, and find a better way to improve the lives of people who work very hard for very little."

Given the economic devastation the minimum wage has caused for American Samoa, I'm pretty sure its Governor, employers and most employees would agree that the right minimum wage for American Samoa is $0.00 per hour, just like it's the right minimum wage for the entire planet.  

HT: jlkinsella

38 Comments:

At 7/02/2011 9:37 PM, Blogger PeakTrader said...

It seems, American Samoa has a per capita income of $8,000 compared to $45,000 in the U.S.

Raising the minimum wage to $7.25 may be like raising it to $42.00 in the U.S..

The U.S. functions in a global economy. It's no longer a "closed economy."

Our trading partners' low wages and open borders don't cause upward pressure on U.S. wages.

The result is lower living standards for lower income Americans (although, it's partially offset by lower prices, including import prices).

 
At 7/02/2011 9:56 PM, Blogger PeakTrader said...

So, when money doesn't flow into wages, where does it go?

National Economic Trends - St. Louis Fed has a chart on page 21.

The "Selected Component Shares of National Income" chart shows:

Corporate Profits and Proprietors' Income increased faster than Compensation (and Wages).

U.S. corporate profits peaked with a record 20 consecutive quarters of double-digit earnings growth in the 2000s.

 
At 7/02/2011 10:32 PM, Blogger Ron H. said...

"Corporate Profits and Proprietors' Income increased faster than Compensation (and Wages)."

What's your point?

 
At 7/02/2011 10:54 PM, Blogger Methinks said...

What's your point?

Apparently, it's that Peak is either lying or wasted a lot of time and money (probably your money) learning nothing while getting "degrees" in Echonomyx.

 
At 7/02/2011 11:07 PM, Blogger Methinks said...

The result is lower living standards for lower income Americans

You mean more competition doesn't put upward pressure on prices? WEIRD!!!

 
At 7/02/2011 11:16 PM, Blogger Methinks said...

The above was a response to the pressure competition puts on wages.

The quote I accidentally pasted is simple tripe unworthy of yet another response.

 
At 7/02/2011 11:43 PM, Blogger arbitrage789 said...

Idiocy - - on the part of government micro-managers - - knows no bounds.

 
At 7/03/2011 1:11 PM, Blogger Jason said...

I think a minimum wage is a useful tool to prevent abuse by business. However, the rate should be far lower than the present number. I remember in past discussions, it was mentioned that the $5.25 rate was determined to be very near the actual market rate. I'm in favor of reducing the rate back to that.

 
At 7/03/2011 1:43 PM, Blogger MaggotAtBroad&Wall said...

Re: The New York Times got it right back in 1987.

In 1987, the New York Times was a world class journalist enterprise under the leadershp of the very sane and capable Abe Rosenthal. Under Pinch's "leadership", which I believe started in 1992, it's become a hard core left wing rag.

I lived and worked in Manhattan during much of Pinch's reign. It was sad to watch the transformation. Not surprisingly, the stock has gone from about $60 when Rosenthal ran the joint, to $8 under Pinch's reign of error.

 
At 7/03/2011 4:06 PM, Blogger Ron H. said...

Jason,

"it was mentioned that the $5.25 rate was determined to be very near the actual market rate. I'm in favor of reducing the rate back to that."

If the min wage is at or below the lowest market rate, what is the point of having one at all? Why should government be involved at my expense, if they serve no purpose?

 
At 7/03/2011 4:29 PM, Blogger Ian Random said...

I love this tidbit from the Mariana Islands:

"in 1995, the government actually had to issue a directive prohibiting welfare recipients from hiring foreign maids. "

But seriously, they import Chinese to work in textiles that can then be labeled made in USA.

http://www.cis.org/node/409
(Would prefer a more progressive link for this)

 
At 7/04/2011 10:55 AM, Blogger Jason said...

...if they serve no purpose?

Ron, the only valid purpose of a minimum wage is as a backstop against abuse. For instance, without a minimum wage companies would take advantage of parolees, uneducated and otherwise vulnerable individuals. Without such a law we would have indentured servitude once again. However, the rate should be low enough to not distort the market in an appreciable way. I think economists could provide such a number.

 
At 7/04/2011 12:44 PM, Blogger paladin said...

what a load of crap...

http://www.infoplease.com/ipa/A0774473.html

what is the cost of money....

in 1995 & 1996 something changed....

 
At 7/04/2011 1:19 PM, Blogger paladin said...

American Samoa largest employer in starkist tuna....75%

and who owns it.....del-monte foods

* West to get $11.5 mln in "make whole" payment

* To get annual base salary of $1.2 mln plus a bonus

NEW YORK May 19 (Reuters) - David West, now the chief executive of Hershey Co (HSY.N), will receive a one-time payment worth $12.5 million once he becomes CEO of Del Monte Foods, the private company's owner said on Thursday.

Under the terms of an employment agreement made public in a securities filing, West will join Del Monte on June 12 as an executive employee, earning a monthly base salary of $20,000.

He will become CEO on August 15, and will then earn an annual base salary of $1.2 million, with a performance-based annual bonus targeted at 100 percent of the base salary, but up to as much as 200 percent.

In addition to a $1 million signing bonus, West will also receive $11.5 million as a "make whole" payment, also known as a golden hello and meant to make up for leaving a prior job.

http://www.reuters.com/article/2011/05/19/delmonte-ceo-idUSN195805420110519


you can not make this crap up...

 
At 7/04/2011 1:32 PM, Blogger Methinks said...

Jason,

Exactly how will Parolees, etc. be abused? Will they be imprisoned and tortured by the company? No. Are you even thinking about what you're writing?

What you're incorrectly defining as "abuse" is what is correctly defined as "employment". Is employment abuse to you?

If parolees or members of other groups you consider "disadvantaged" are not worth at least the minimum wage you so arrogantly impose, they will not be employed AT ALL. Is that better for them? Do you think people in these groups think being unable to find any legal employment at all is better?

There is nothing more putrid and abusive than denying a man the right to negotiate the price of his own labour.

And don't bother looking to economists for the "correct" minimum wage (unless they tell you it's $0.00/hr). Only the employer can make that judgement about any employee.

 
At 7/04/2011 1:32 PM, Blogger Ron H. said...

"Ron, the only valid purpose of a minimum wage is as a backstop against abuse. For instance, without a minimum wage companies would take advantage of parolees, uneducated and otherwise vulnerable individuals. Without such a law we would have indentured servitude once again. However, the rate should be low enough to not distort the market in an appreciable way. I think economists could provide such a number."

And you believe it's the job of government to protect against such abuse?

Are parolees and uneducated people unable to think for themselves? Are they not free to decide what amount of pay they are willing to accept?

Who can decide what level of pay is abusive? Surely not you or me, but the people actually involved in negotiating a wage.

By the way, indentured servitude served a purpose. Those who indentured themselves did so freely, in exchange for something they valued more, like passage to the Americas from Europe.

You can do something similar now, by enlisting in the military for a specified period of time.

 
At 7/04/2011 1:38 PM, Blogger Ron H. said...

Paladin

What is your point?

 
At 7/04/2011 5:56 PM, Blogger Jason said...

Exactly how will Parolees, etc. be abused? Will they be imprisoned and tortured by the company? No. Are you even thinking about what you're writing?

Methinks, clearly you haven't gotten around much. Parolees and former felons are routinely taken advantage of. Now argue that they deserve it...

 
At 7/04/2011 6:26 PM, Blogger Methinks said...

Jason,

Well, I used to live in what we call "public housing", but what we called a ghetto in my day. But I confess I don't know any parolees. I'm not exactly ashamed of that.

Your "solution" to a non-existent problem is to rob these parolees and other "vulnerable groups" (whatever that means) of their right to negotiate the price of their labour for themselves. You clearly don't care at all if these "vulnerable groups" are shut out of the labour market entirely and are forced into a life of crime to earn a living.

Your argument is that these people don't deserve basic human rights.

How repulsive.

 
At 7/04/2011 7:03 PM, Blogger PeakTrader said...

Paladin, Wikipedia:

"American Samoa Governor Togiola Tulafono has suggested that, rather than laying off minimum wage workers, the companies could reduce salaries and bonuses of top-tier employees."

 
At 7/04/2011 7:08 PM, Blogger Jet Beagle said...

Jason: "Parolees and former felons are routinely taken advantage of."

Please explain what you mean.

Unlike methinks, I know several parolees and former felons. Two are close relatives. Please tell me how someone would take advantage of them if the U.S. had no minimum wage law/

 
At 7/04/2011 11:13 PM, Blogger Methinks said...

Peak,

Governor Togiola wants to be re-elected. He's responding to incentives too!

Since you've had six years or whatever of solid economics training, you should be able to inform us what happens when the wage rate exceeds the marginal productivity of labour (MPL), yes? I mean, even Lord Keynes concedes this point in the Last Word in Economics, the General Theory.

Now imagine what happens when the wage rate falls below the opportunity cost of the employee! Oh, you did cover that yourself, didn't you? Wasn't it you who lectured our good friend, Jet Beagle (wink, John, I know it's you, my friend. Smashing photo, btw!) on the impact of a wage rate lower than the opportunity cost of the employee (or potential employee, whatever the case may be)?

So, you should be able to work out what will happen if the company decided to underpay some of its employees in order to overpay other employees.

It's a funny little school you studied economics in where they taught that raising the wages of some employees above MPL would raise employment levels and slashing the wage rate of others to below MPL would attract more employees.

Now, look, I concede that I may be wrong. There are things I do not know. It's just that in my experience running my own company, I've always fired employees who are producing less than I pay them and I've never been able to hold on to employees whom I pay less than someone else is willing to pay them.

Why don't you start a business and overpay your low producers and underpay your high producers? If you can be successful in doing that I will eat my hat!

 
At 7/05/2011 2:30 AM, Blogger PeakTrader said...

Methinks, I don't disagree with the orthodox theory or the mainstream economics (e.g. at the University of Colorado). However, it's sometimes difficult to quantify (the variables).

You can quantify piecework. However, what's the disparity between the best worker and the worker who meets the minimum standard?

There are two trends:

1. The disparity between the highest and lowest income workers has been increasing and the gap is now huge.

2. There's an inverse relationship between profits and wages, and profits have been increasing faster than wages.

There are exogenous changes that should be taken into account (I explained some before).

 
At 7/05/2011 3:46 AM, Blogger Jet Beagle said...

Peak Trader: "Raising the minimum wage to $7.25 may be like raising it to $42.00 in the U.S.."

What? At the university where you received not one but two degrees in economics, did your professors ever discuss wage levels in industries where employers face global competition? When the customers of such suppliers make a buying decision, it doesn't really matter what the per capita income of any nation is. What matters is whether the price and quality of the goods and services of the supplier are competitive.

If minimum wage laws either in the U.S. or in American Samoa cause a supplier's costs to become uncompetitive with global competitors, that supplier is going to lose customers. And the employees of such a supplier are likely to lose their jobs.

Did your economics professors talk about such things, peak trader?

 
At 7/05/2011 8:13 AM, Blogger Methinks said...

Peak,

It is impossible for you to quantify the variables for my company, but it is far less difficult for me to quantify those variables. You just haven't the necessary information for my firm and it is not accessible to you - let alone all other firms combined. It's an insurmountable knowledge problem. Do you disagree?

Since you are missing vital pieces of information to be able to set a wage rate, on what basis then do you go ahead and set one?

Thanks for repeating trends, but so what? My job is to increase the return to my investors, not pay higher wages. I pay my highest paid employee the same as I pay my lowest paid employee - as little as it takes to keep them so long as their wage does not exceed their MPL. I am as subject to market forces as they are.

Trends are fun to study, but they're not an invitation for top down manipulation. If you think they are, you haven't made your case for why.

 
At 7/05/2011 10:18 AM, Blogger Jet Beagle said...

Peak Trader: "The disparity between the highest and lowest income workers has been increasing and the gap is now huge."

uh, so what? What does that have to do with a discussion on the impact of minimum wage laws?

Peak Trader: "There's an inverse relationship between profits and wages, and profits have been increasing faster than wages."

Please provide some evidence or explanation of this inverse relationship.

I don't have a thousand data points to analyze right now. But two will suffice to show that for the universe of American businesses, there is not an inverse relationship between wages and profits:

Walmart
2010 operating margin - 6.1%
2010 pretax income margin - 5.6%

Apple
2010 operating margin - 28.2%
2010 pretax income margin - 28.4%

I have not provided data about average wages at Walmart and Apple. I trust you will believe me when I assert that the average wage at Walmart is much lower than the average wage at Apple.

 
At 7/05/2011 5:20 PM, Blogger PeakTrader said...

If living standards for low income Americans have been falling, some people don't view that as a problem.

I'm sure, some people view paying slave wages as a great achievement.

Lots of money can be made through exploitation, if you can get away with it.

I'd prefer a rising tide lifting all boats than more and more boats slowly sinking.

 
At 7/05/2011 5:33 PM, Blogger Methinks said...

Peak,

You need to get your money back from the University of Colorado. You were ripped off. either that or you lack the intellectual ability to learn.

Slavery is not determined by wage rate.

Moreover, repeatedly asserting that living standards for low income Americans have been falling does not make it so. I have seen no evidence of this and neither have you. If you have, present it. Mind the living standards must also be falling for the individuals over time, not the particular quintile.

Just when I thought you were a Keynesian (bad enough), it turns out you're a Marxist. "Employment" and "exploitation" are not synonyms. Go look it up.

I submit that robbing people of the right to negotiate the price of their own labour is thuggery and exploitation of the worst sort.

You are a thug who doesn't give a damn about boats rising and falling. If I'm wrong, then go start a business and pay wages above the MPL and see if your firm is able to pay any wages at all (assuming anyone is dumb enough to give you start up capital). Show me how wrong I am. Do it.

 
At 7/06/2011 1:21 AM, Blogger PeakTrader said...

Methinks, "working poor" is a great concept, for some, and an oxymoron.

If you want evidence, here's a simple example that even you can understand:

Would you rather hire a domestic teen with a few months experience to mow your lawn for $10, or hire an older immigrant with over 20 years experience to mow your lawn for $8?

You get higher quality at a lower price hiring the immigrant. So, you'd hire the immigrant.

You don't care whether the immigrant sleeps in his car or shares an apartment with two other immigrants, and you don't care that the teen would rather be unemployed, living off his parents or the government, and play video games all day than compete by lowering his wage from $10 to $7.

All you care about is maximizing value for yourself.

 
At 7/06/2011 3:10 AM, Blogger Ron H. said...

"You get higher quality at a lower price hiring the immigrant. So, you'd hire the immigrant."

?? What am I missing? Don't we all shop for highest quality at lowest price? What would you do in this case?

"You don't care whether the immigrant sleeps in his car or shares an apartment with two other immigrants, and you don't care that the teen would rather be unemployed, living off his parents or the government, and play video games all day than compete by lowering his wage from $10 to $7."

Why would I care about those things, and more importantly, why would I even know about those things? All I know is that I got 2 offers to mow my lawn: 1 for $8 and 1 for $10, and I chose the one I considered the best value. Unlike you, I respect people's right to set their own price.

Which one would you choose?

"All you care about is maximizing value for yourself."

As we all do. Just as the immigrant values his leisure at less than $8 and the kid who values his at more than $10.

I can only decide how much I'm willing to pay to get my lawn mowed, not what value others should place on their work.

However, if I WERE to speculate about such things, I would guess that in the future, when the kid's parents finally threw him out, he might be able to get a job working for the immigrant, who has build his lawn mowing business into a highly successful landscaping company that employs 40 people.

If you have the amount of schooling you claim, you may be the poster child for those who claim a person can get too much education.

At some point, there may be no way to escape from the Marxist indoctrination students are showered with from their first day of class.

 
At 7/06/2011 3:32 AM, Blogger PeakTrader said...

Ron, when there's a problem and you don't see it, then there's no problem and nothing to solve.

Why should you care about lower living standards for lower income Americans?

You have more important things to do like either voting Republican to ignore problems or voting Democrat to get the most expensive solutions.

 
At 7/06/2011 5:29 AM, Blogger Ron H. said...

"Why should you care about lower living standards for lower income Americans?"

Peak, you have no idea what I care about or don't care about.

If someone comes to my door asking to mow my lawn for $8, I can either accept or reject the offer, or suggest a different price. That's our total transaction. I'm not in the habit of asking people whether they live in their car, or if they live with a roomful of other immigrants. That's not a subject that's likely to come up during a discussion of mowing my lawn.

Many immigrants have arrived in this country dirt poor, and many, if not most, have improved their standard of living far more than they could anywhere else in the world. Often their children do even better.

What's different about the guy who wants to mow my lawn? Should I have so little respect for him that I should offer to drive him to the nearest welfare office?

The kid who lives with his parents isn't a lower income American.

"You have more important things to do like either voting Republican to ignore problems or voting Democrat to get the most expensive solutions."

Wow. If only it were that simple. Are those my only choices? I think that voting either Democrat or Republican can get me 'expensive', but I doubt I will get 'solutions'.

What does my voting choices have to do with minimum wage?

 
At 7/06/2011 8:22 AM, Blogger Methinks said...

You're right, Peak, I do understand the example.

Unfortunately, you don't. You have no clue how markets work and it's obvious you don't have the intellectual capacity to understand.

You're a waste of time.

 
At 7/07/2011 10:55 AM, Blogger Jason said...

This comment has been removed by the author.

 
At 7/07/2011 11:04 AM, Blogger Jason said...

How repulsive.

Methinks: Laughable. What is repulsive here is your extension of my argument to basic human rights. Keep making me laugh, clown.

Jet, former felons I worked with in high school were so happy to have any job, they would take whatever terms our employer would role out to them. Including routine violation of state and Federal labor laws. Don't like it, find something else. Or not, and they would always have to come back. Whatever you may think of such laws, taking advantage of a persons situation seems a bit like a dick move to me.

Regardless, perhaps a minimum wage isn't a solution to this practice, but it is a start.

 
At 7/07/2011 1:56 PM, Blogger Ron H. said...

"Regardless, perhaps a minimum wage isn't a solution to this practice, but it is a start."

Actually, a min wage would take away one of the ways a former felon can get a job, and that is, by working for less.

If an employer is biased against former felons, to exclude them from jobs at lower wages in favor of non-felons at higher wages, costs the employer a premium for his bias. If he must pay the same wage, he can indulge his biases at no cost to the bottom line.

Here is Milton Friedman on discrimination against women, but the exact same argument applies for any form of discrimination. It cost the employer to indulge his bias. Minimum wage eliminates that cost.

 
At 7/07/2011 6:06 PM, Blogger James Kneubuhl said...

Hey all you economic geniuses!

American Samoa's economy is floundering. I invite you to test the validity of your respective economic theories by formulating a way for American Samoa to thrive.

We're the only US territory in the South Pacific (the rest are in the North Pacific and Hawaii is off by itself), so isn't there some way we can maximize the potential of our unique qualities?

The federal government doesn't seem to do much in this regard except jam us up.

 
At 7/07/2011 10:22 PM, Blogger Ron H. said...

"so isn't there some way we can maximize the potential of our unique qualities?

The federal government doesn't seem to do much in this regard except jam us up.
"

You are best qualified to determine for yourselves what is in your own best interest. The most likely result of asking others for help, is even more federal government jamming you up.

 

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