American Samoa and Commonwealth of the Northern Mariana Islands: Employment, Earnings, and Status of Key Industries Since Minimum Wage Increases Began
Published: 2011-06-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2007, the United States 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. 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. Recent economic declines in both areas reflect the closure of one of two tuna canneries in American Samoa and the departure of the garment industry in the CNMI. GAO is required to report in 2010, 2011, 2013, and biennially thereafter on the impact of the minimum wage increases. This report updates GAO's 2010 report and describes, since the increases began, (1) employment and earnings, and (2) the status of key industries. GAO reviewed federal and local information; collected data from employers through a questionnaire and from employers and workers through discussion groups; and conducted interviews during visits to each area.
section_title: What GAO Found
paragraphs: 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. 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. Average inflation-adjusted earnings fell by 5 percent from 2008 to 2009 and by 11 percent from 2006 to 2009; however, the hourly wage of minimum wage workers who remained employed increased by significantly more than inflation. Private sector officials said the minimum wage was one of a number of factors making business difficult. In the tuna canning industry, future minimum wage increases would affect the wages of 99 percent of hourly-wage workers employed by the two employers included in GAO's questionnaire. The employers reported taking cost-cutting actions from June 2009 to June 2010, including laying off workers 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. Available data suggest that relocating tuna canning operations to a tariff-free country with lower labor costs would significantly reduce operating costs but reduce American Samoa jobs; however, maintaining some operations in American Samoa would allow continued competition for U.S. government contracts. Some workers said they were disappointed by the 2010 minimum wage increase delay; however, more workers expressed concern over job security than favored a wage increase with potential for layoffs. In the CNMI, employment fell 13 percent from 2008 to 2009 and 35 percent from 2006 to 2009. Average inflation-adjusted earnings rose by 3 percent from 2008 to 2009 and remained largely unchanged from 2006 to 2009. Over the same periods, the hourly wage of minimum wage workers who remained employed increased by significantly more than inflation. 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. In the tourism industry, scheduled minimum wage increases through 2016 would affect 95 percent of workers employed by questionnaire respondents. Tourism employers reported that they took cost-cutting actions from June 2009 to June 2010 and planned to take additional actions, including laying off workers. Few of these tourism employers attributed past actions largely to the minimum wage increases, and one half or less did so for each of the planned actions. Available data suggest that hotels generally absorbed minimum wage costs rather than raise room rates. Hotel payroll will represent an increasing share of total operating costs due to the minimum wage increases. In discussion groups, some tourism employers expressed concern about the minimum wage increases, but others said the increases were needed and manageable and that the primary difficulty was the CNMI tourism industry's decline. Workers participating in GAO's CNMI discussion groups expressed mixed views regarding the minimum wage increases and said they would like pay increases but were concerned about losing jobs and work hours. GAO shared the report with relevant federal agencies and the governments of American Samoa and the CNMI. While generally agreeing with the findings, they raised a number of technical concerns that have been incorporated as appropriate.

section_title: Letter
paragraphs: In 2007, the United States enacted legislation that incrementally applies  the U.S. minimum wage to the U.S. insular areas of American Samoa and  the Commonwealth of the Northern Mariana Islands (CNMI). The  legislation raised the federal minimum wage in the U.S. 50 states from  $5.15 to $7.25 per hour over 3 years and, for the first time, also mandated a  series of $.50 per hour increases to the minimum wages in both American  Samoa and CNMI, beginning in July 2007, that would bring them to parity  with the federal minimum wage. In 2010, the United States enacted a law  delaying the scheduled minimum wage increases in both areas, providing  for no increase in American Samoa in 2010 or 2011, and no increase in the  CNMI in 2011. To date since 2007, the minimum wages in American  Samoa have increased by $.50 three times, with the minimum wage of the  lowest paid workers now set at $4.18 and the minimum wage of workers in  the tuna canning industry set at $4.76. Over the same period, the CNMI  minimum wage has increased by $.50 four times, to $5.05. Under current  law, the minimum wage for American Samoa’s lowest paid workers will  reach the federal minimum wage of $7.25 in 2018; in the CNMI, this is set  to occur in 2016.
The United States first adopted a federal minimum wage with passage of  the Fair Labor Standards Act of 1938 (FLSA). The FLSA states that its goal  is to eliminate labor conditions that hurt workers’ health, efficiency, and  general well-being, noting that this should be achieved both as rapidly as  feasible and without substantially curtailing employment or earning  power. The 2007 legislation changed decades of federal law that had  allowed both American Samoa and the CNMI to apply minimum wage  rates significantly lower than the minimum wage for the U.S. 50 states.  American Samoa’s minimum wage was set for each of 18 industries by the  U.S. Department of Labor (DOL) under biennial reviews, and its minimum  wages in 2006 ranged from $2.68 to $4.09. The CNMI had authority to set  its own minimum wage under its 1976 Covenant with the United States,  and its minimum wage in 2006 was $3.05. Public and private sector  officials and workers in both areas have expressed concern about the  impact of the federal minimum wage increases on the local economies.
Since our last report in April 2010, the economies of both American  Samoa and the CNMI have continued to face major challenges, and  economic indicators show decline. Both governments face budget  shortfalls, with local spending exceeding revenues in most recent years,  and they have reduced the work hours of government employees and  taken other steps to reduce the shortfalls. Studies funded by the U.S.  Department of the Interior (DOI) have projected major additional  contraction of the two economies. American Samoa’s private sector  economy is largely based on the tuna canning industry, and the closure of  one of its two tuna canneries in September 2009 significantly affected the  labor market and economy. The recent purchase of the closed facility by  another company may provide additional jobs, but operations planned in  the short-term are more limited than those before the facility closed.
Before the first minimum wage increase in 2007, about one-third of  workers in American Samoa were employed by the two canneries, and  more than three-quarters of cannery employees were foreign workers from  neighboring Samoa, an independent country. The CNMI’s economy has  been strongly affected by the departure of its garment industry and decline  in its tourism industry. Until recently, the garment industry was central to  the CNMI economy and employed close to a third of all workers; however,  by early 2009, the last garment factory had closed. Both American Samoa  and the CNMI have tried to develop new industries, including through  initiatives funded by the U.S. government, but they have had difficulty  attracting additional investment. The CNMI also faces uncertainty due to  the application of U.S. immigration law to the commonwealth, ending  decades of the CNMI’s control over its own immigration system. U.S. law  established federal control of CNMI immigration on November 28, 2009,  with provisions affecting employers’ access to foreign workers. In 2005,  foreign workers represented a majority of the CNMI labor force and  outnumbered U.S. citizens in most industries.
The American Recovery and Reinvestment Act of 2009 required that GAO  report annually on the impact of minimum wage increases in American  Samoa and the CNMI. In 2010, Congress changed the GAO reporting  requirement to 2011, 2013, and every 2 years thereafter until the minimum  wage in the respective territory meets the federal minimum wage.
In our April 2010 report, we found that before the first minimum wage  increase in July 2007, 37 percent of all workers and about three-quarters of  private sector workers employed by American Samoa questionnaire  respondents earned wages close enough to the minimum wage to be  directly affected by the first increase. In the CNMI, 18 percent of all  workers and about a third of private sector workers were directly affected  by the first increase. For both areas, we found that most private sector  workers would be directly affected by the increases once the minimum  wage reached $7.25. In contrast, according to Bureau of Labor Statistics  estimates, in 2006 approximately 2.2 percent of all hourly workers in the  U.S. states earned the federal minimum wage of $5.15 or less. Among other  findings, we also found that employment had very likely declined in both  areas, largely due to the loss of one of two tuna canneries in American  Samoa and of the entire garment industry in the CNMI.
This report updates our 2010 report with an additional year of information  and describes, since the minimum wage increases began, (1) employment  and earnings, and (2) the status of key industries.
In preparing this report, we reviewed and analyzed existing information  from federal sources and from the American Samoa and CNMI local  governments. In addition, because key federal sources of data on the U.S.  labor market do not cover the insular areas, we collected our own data in  each area. See table 1 for the methods we used and the scope and  limitations of our work.
Our review had certain limitations in addition to those already noted. In  particular, although our approach yielded information on trends in  employment, wages, and earnings in both areas, it is difficult to distinguish  between the effects of minimum wage increases and the effects of other  factors, including the global recession beginning in 2009, fluctuations in  energy prices, global trade liberalization, and the application of U.S.  immigration law to the CNMI. We conducted our work from September  2010 to June 2011 in accordance with all sections of GAO’s Quality  Assurance Framework that are relevant to our objectives. The framework  requires that we plan and perform the engagement to obtain sufficient and  appropriate evidence to meet our stated objectives and to discuss any  limitations in our work. We believe that the information and data obtained,  and the analysis conducted, provide a reasonable basis for the findings in  this product. See appendix I for further details of our methodology,  appendix II for additional background, and appendix V for our  questionnaire.
subsections: section_title: American Samoa Employment, Earnings, and Status of Key Industries
subsections: section_title: American Samoa Employment Fell Sharply in 2008-2009, and Employment and Average Inflation-Adjusted Earnings Were Lower than in 2006
paragraphs: Employment. Social Security Administration (SSA) data show that  from 2008 to 2009, the total number of people employed in American  Samoa declined 19 percent (from 19,171 to 15,434) and that over the  entire period from 2006 to 2009, employment declined 14 percent (from  17,852 to 15,434, with a peak of 19,171 in 2008). Data from 2010 on total  employment are not yet available. Questionnaire responses from the  tuna canning industry show that employment of their workers—most  of whom are foreign workers from independent Samoa—dropped by 55  percent from 2009 to 2010, reflecting the September 2009 closure of  one cannery and layoffs in the remaining cannery. In addition, we  estimated that from 2,000 to 3,000 temporary federal jobs funded  beginning in June 2009 will end when federal funding is no longer  available. Private sector officials said minimum wage was one of a  number of factors, including the high cost of goods and utilities,  making it difficult to do business in American Samoa. American Samoa  government data show the minimum wage increases would raise  government payroll costs for its employees by about 1 percent (about  $9 million) over 7 years, and the American Samoa governor and other  public officials said they supported a return to biennial reviews of  minimum wage in American Samoa or other alternatives to the  scheduled increases.
Inflation-adjusted earnings of those employed. Earnings data from  SSA and consumer price data show that from 2008 to 2009, average  inflation-adjusted earnings of those employed fell by 5 percent. This  resulted from a decrease in average earnings of 2 percent, and an  increase in prices of 3 percent. For the period from 2006 to 2009,  average inflation-adjusted earnings fell by 11 percent. This resulted  from a rise in average annual earnings of about 5 percent while local  prices rose by about 18 percent. Although earnings data do not allow  for a direct comparison of average and minimum wage annual earnings  or for tracking the earnings of workers who lost their jobs, the hourly  wage of minimum wage workers increased by more than inflation. The  inflation-adjusted earnings of minimum wage cannery workers who  retained their jobs and work hours rose by about 8 percent from 2008  to 2009 and by about 23 percent for the entire period from 2006 to 2009.
section_title: The American Samoa Tuna Canning Industry Has Continued to Lay Off Workers and Has Considered Alternate Locations
paragraphs: Tuna canning wages. Without a minimum wage increase in American  Samoa in 2010, there was no increase in the median wage of tuna  canning workers—in both 2009 and 2010, the median tuna canning  worker wage was $4.76. Consistent with our last report, from 2007 to  2010, the median wage among workers in the tuna canning industry  employed by questionnaire respondents rose by $1.46 (44 percent).  Based on questionnaire responses about workers’ wages as of June  2010, the future minimum wage increases would affect the wages of 99  percent of current workers in the tuna canning industry by the time the  minimum wage reaches $7.25, increasing the average annual cost per  worker in 2016 by $4,660 since June 2010.
Tuna canning employer actions. The two employers in the tuna  canning industry reported in our questionnaire that they had taken  cost-cutting actions from June 2009 to June 2010, including laying off  workers, reducing overtime hours, freezing hiring, decreasing benefits,  temporarily closing, reducing operating capacity or services, and  raising prices, among other actions. They reported plans to take the  same types of cost-cutting actions by early 2012, including laying off  additional employees. They attributed most of their past and planned  actions largely to the minimum wage increases and did so more often  than they attributed their actions largely to some other factors, such as  transportation and shipping costs and changes in business taxes and  fees. However, they said a decrease in the number of customers, such  as wholesale customers, was another important factor affecting their  actions.
Tuna canning industry analysis. In addition to the minimum wage  increases, cannery officials also expressed concern about American  Samoa’s dwindling competitive advantage in the global tuna canning  industry and said that current operations in American Samoa were not  competitive with other models. Analysis of alternate models available  to the industry suggests that moving tuna cannery operations— including unloading, loining (cleaning, cooking, and cutting), and  canning fish—from American Samoa to another tariff-free country  with lower labor costs would significantly reduce cannery operating  costs. However, given that tuna facilities in American Samoa are  among few in the United States that can meet the requirements of U.S.  government contracts, many of which require U.S.-sourced and  processed fish, maintaining some operations in American Samoa  would allow the facility to continue to compete for these contracts.  Despite the advantages of moving some operations to other countries,  the remaining cannery’s lease obligation through 2013 and the cost of  building new facilities elsewhere may pose obstacles to near-term  relocation. In addition, a new tuna facility operator has hired a small  number of workers formerly employed by the cannery that closed, but  it is unclear how many additional workers they will hire.
Tuna canning and other worker views. Some workers said they had  looked forward to the 2010 minimum wage increase and were  disappointed to see the increase delayed. However, more workers,  particularly tuna canning workers, expressed concern over job  security than favored a minimum wage increase with the potential for  subsequent layoffs.
See table 2 for key findings and appendix III for detailed findings and  tables on American Samoa.
section_title: CNMI Employment, Earnings, and Status of Key Industries
subsections: section_title: CNMI Employment Fell in 2008-2009 and Has Decreased Substantially since 2006, and Average Inflation-Adjusted Earnings Have Remained Largely Unchanged
paragraphs: Employment. From 2008 to 2009, the total number of people employed  fell by about 13 percent, according to CNMI government tax data. For  the entire period from 2006 to 2009, the number employed fell 35  percent. The decrease largely reflected the early 2009 closure of the  CNMI’s last remaining garment factories, which employed many  foreign workers. In addition, we estimated that less than 1,000  temporary federal jobs funded beginning in June 2009 will end when  federal funding is no longer available. In the tourism industry,  employment among GAO questionnaire respondents fell 8 percent  from 2009 to 2010 and fell 14 percent over the entire period from 2007  to 2010. Private sector employers reported in discussion groups some  layoffs and hiring freezes, and they said minimum wage increases  imposed additional costs during a time in which multiple factors made  it difficult to operate. They also expressed concerns about the  departure of the garment industry, decline of the tourism industry,  population loss, and changes to immigration law. According to CNMI  government payroll data, about 17 percent of government workers are  paid at or below $7.25 and would be affected by the minimum wage  increases by 2016.
Inflation-adjusted earnings of those employed. From 2008 to 2009,  based on CNMI government tax data and consumer price data,  inflation-adjusted average earnings of those employed rose by 3  percent. This resulted from a 7 percent increase in average earnings,  with a 3.5 percent increase in prices. Over the entire period from 2006  to 2009, average inflation-adjusted earnings remained largely  unchanged, with a slight drop of .5 percent. This resulted from a 19  percent increase in average earnings and a 19.5 percent increase in  prices. Although earnings data do not allow for a direct comparison of  average and minimum wage annual earnings or for tracking the  earnings of workers who lost their jobs, the hourly wage of minimum  wage workers increased by more than inflation. The inflation-adjusted  earnings of minimum wage workers who retained their jobs and work  hours rose by about 9 percent from 2008 to 2009, and by about 25  percent for the entire period from 2006 to 2009.
section_title: The CNMI Tourism Industry Has Experienced Declines in Visitor Arrivals, and Hotels Have Absorbed Minimum Wage Increases Rather than Raising Room Rates
paragraphs: Tourism wages. From June 2007 to 2010, a period that included three  minimum wage increases, the median wage among workers employed  by CNMI tourism industry questionnaire respondents rose by 95 cents  (26 percent). In addition, in the tourism industry, the 2007 through  2010 wage increases narrowed the wage gap between the lowest and  highest paid employees of questionnaire respondents by 52 percent.  Employers said in interviews that the wage compression had lowered  morale for more senior employees. Based on questionnaire responses  about workers’ wages as of June 2010, the future minimum wage  increases would affect the wages of 95 percent of current workers in  the CNMI tourism industry by the time the minimum wage reaches the  U.S. minimum wage of $7.25, increasing the average annual cost per  worker in 2016 by $4,707 since June 2010.
Tourism employer actions. Hotel and other employers in the CNMI  tourism industry responding to our questionnaire reported having  taken cost-cutting actions from June 2009 to June 2010, including  reducing hours, freezing hiring, decreasing benefits, and raising prices  of goods or services. Employers also reported plans to take the same  types of cost-cutting actions by early 2012, as well as laying off  workers. Few employers—weighted by numbers of employees—  attributed their past actions largely to the minimum wage increases,  and one half or less did so for each of the planned actions. Employers  noted other factors, including changes in immigration law and a  decrease in the number of customers, that largely contributed to their  actions.
Hotel industry analysis. Due to competition from other vacation  destinations and to declining visitor arrivals, CNMI hotels have  generally absorbed minimum wage costs rather than raise room rates.  Both visitor arrivals and flight seats available to the CNMI declined  from 2005 to 2010, and the greatest declines in both by country were  from Japan—the CNMI’s largest tourism market. Industry data show  that since 2006 the hotel occupancy rate has remained between 58 and  64 percent, while inflation-adjusted room rates declined by about 12  percent from 2006 to 2009. If observed trends continue, scheduled  minimum wage increases will increase the share of hotels’ total  operating costs attributable to payroll from approximately 29 percent  of operating costs in 2010 (with minimum wage increases representing  about 1 percent of total operating costs) to 34 percent in 2016 (with  minimum wage increases representing about 8 percent of the total). In  discussion groups, some hotel and other tourism employers and  managers expressed concern about the minimum wage increases, but  others said the minimum wage increases were needed and manageable  and that the primary difficulty was the CNMI tourism industry’s  general decline.
Tourism and other worker views. Workers participating in our CNMI  discussion groups expressed mixed views regarding the minimum  wage increases and said they would like pay increases but were  concerned about losing jobs and work hours. Participants said they  wanted to receive the pay increases to help meet rising prices,  including for utilities and consumer goods. However, they said they  had observed that while some workers received pay increases, others  lost jobs or work hours.
See table 3 for key findings and appendix IV for detailed findings and  tables on the CNMI.
section_title: Concluding Observations
paragraphs: Since the minimum wage increases began in 2007, both American Samoa  and the CNMI have experienced substantial decreases in employment,  largely resulting from the loss of one of two tuna canneries in American  Samoa and, in the CNMI, loss of the garment industry. The local  economies of both these insular areas differ from the U.S. economy in a  number of ways, including that the percentage of workers paid the  minimum wage is much higher than in the U.S. 50 states.
In American Samoa, tuna canning employers responding to our  questionnaire attributed most past actions such as layoffs, work hour  reductions, and hiring freezes largely to the minimum wage increases.  CNMI tourism employers responding to our questionnaire also took  actions including reducing hours, freezing hiring, and decreasing benefits.  Few attributed past actions and one half or less attributed each of the  planned actions to the minimum wage increases. In both areas, employers  in discussion groups said the minimum wage increases were one of  multiple factors making it difficult to conduct business.
The economic declines in American Samoa and the CNMI are substantial,  and both areas face budget shortfalls that may threaten their ability to  fund public services and make investments in support of future economic  development. In addition, the expiration of federal assistance and  temporary jobs funded through the Recovery Act and other programs will  likely expose greater challenges. Both areas have tried to identify  opportunities for new industries and growth, but so far neither has  succeeded in attracting significant new investment. Identifying new  growth opportunities and maintaining needed infrastructure and services  in the meantime will require substantial effort by the private sector and by  both the local and federal governments.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to officials in DOC, DOI, DOL, SSA, and  in the governments of American Samoa and the CNMI for review and  comment. We received written comments from DOC, the American Samoa  government, and the CNMI government, which are reprinted in appendixes  VI, VII, and VIII, respectively. We also received technical comments from  DOI and DOL, which we incorporated as appropriate. SSA had no  comments. We shared excerpts of the draft with several private sector  entities and experts and incorporated their comments as appropriate.
Following are summaries of the written comments from DOC, the  American Samoa government, and the CNMI government, with our  responses.
Department of Commerce. In its written comments, DOC said it  appreciated the opportunity to provide comments, and it provided  additional technical comments.
American Samoa. In its written comments, the American Samoa  government generally agreed with our findings. However, it stated that  employment losses and other aspects of economic decline in American  Samoa are greater than the report suggests and constitute an economic  depression. It stated that 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 and labor market. The American Samoa government also  compared the economy and minimum wage increases in American  Samoa to those in the U.S. states and concluded that the minimum  wage increases caused severe employment decline in American  Samoa. In addition, the American Samoa government recommended in  its written comments and in a January 2011 letter that GAO explore  alternative methods for setting minimum wage levels in American  Samoa and issue recommendations. The government provided several  alternative methods for consideration. While we considered these  suggestions and summarized them in the report, our research  objectives and methodology were developed in response to the  legislative mandate and in discussions with congressional requesters.  These objectives and methodology were designed to provide sufficient  information and analysis to support congressional deliberation on  minimum wage in American Samoa and the CNMI. In its written  comments, the American Samoa government asked GAO or other  federal entities to consider the following recommendations: terminate  increases in the minimum wage immediately in American Samoa;  conduct a thorough analysis of why adverse economic effects of the  minimum wage increases were greater in American Samoa than in the  United States; and determine procedures for addressing minimum  wage in American Samoa in a way that avoids future economic  disasters. Appendix VII provides our more detailed evaluation of the  American Samoa government’s letter.
CNMI. In its written comments, the CNMI government said the draft  report fairly characterized current conditions in the CNMI and stated  that the findings were similar to those in our last report. It noted that  CNMI businesses were struggling to survive as they faced multiple  factors, including the contracting economy, uncertainties surrounding  the application of U.S. immigration law, rising energy costs, and the  global recession. It raised several questions and concerns regarding  the report methodology. First, the CNMI government questioned that  for some key past and future actions, such as reducing regular work  hours and freezing hiring, no CNMI employers attributed the actions to  the minimum wage increases. We note that, as stated in the report, we  present the weighted percentage of employers who attributed each  action to the minimum wage increases “to a large extent” (not those  who attributed the action to the minimum wage increases “to a small  extent” or “to a moderate extent”). The CNMI government cited several  of the limitations of the tourism industry questionnaire, as described in  this report, and recommended that the reporting method be improved  to gather a clearer picture regarding minimum wage increases and to  improve data integrity. However, for any questionnaire based on self- reported data, we cannot eliminate the possibility that some  employers’ views of the minimum wage increases may have influenced  their responses. In addition, the CNMI government stated that the  analyses of CNMI residents’ living standards should be strengthened,  as required by congressional mandate. Although the original mandate  (2009) specifically required us to study minimum wage effects on living  standards, the current mandate (2010) does not. However, the report  includes qualitative findings related to living standards based on  discussion groups with employers and with workers, as well as  quantitative findings on the inflation-adjusted earnings of average and  minimum wage workers. Last, the CNMI government stated that it  appreciated the delay in the minimum wage but was concerned about  other factors. It recommended that this and future reports provide  recommendations to Congress, federal agencies, and the local  government on managing these challenges. Appendix VIII provides our  more detailed evaluation of the CNMI government’s letter.
We are sending copies of this report to interested congressional  committees. We also will provide copies of this report to the U.S.  Secretaries of Commerce, the Interior, Labor, to the Commissioner of  Social Security, and to the Governors of American Samoa and the CNMI.  In addition, the report will be available at no charge on the GAO Web site  at http://www.gao.gov.
If you or your staffs have questions about this report, please contact David  Gootnick at (202) 512-3149 or gootnickd@gao.gov, or Tom McCool at   (202) 512-2642 or mccoolt@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made key contributions to this report are  listed in appendix IX.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report updates our 2010 report on American Samoa and the  Commonwealth of the Northern Mariana Islands (CNMI) with an  additional year of information and describes, since the minimum wage  increases began, (1) employment and earnings, and (2) the status of key  industries.
To describe employment and earnings, we analyzed earnings data from the  Social Security Administration (SSA) and tax data from the CNMI  government, and we adjusted the earnings data using Consumer Price  Index (CPI) data for each area. We also analyzed responses from GAO’s  questionnaire of large employers in the American Samoa tuna canning and  CNMI tourism industries. To describe the status of key industries, we  collected responses through the industry questionnaire. For both  objectives, we conducted discussion groups with employers and workers  and interviews with public officials. We provide additional information on  each data source below.
In preparing this report, we interviewed officials from the U.S.  Departments of the Interior (DOI), Commerce (DOC), and Labor (DOL), as  well as from SSA. We reviewed relevant reports and data from DOL and  other U.S. government sources. We also reviewed U.S. minimum wage  laws and other relevant laws and regulations. We did not focus on the  extent to which laws were properly enforced or implemented, although we  considered enforcement as appropriate. The scope of our study also does  not include workers in the underground economy.
subsections: section_title: Site Visits
paragraphs: As noted previously, the federal sources generally used to generate data  on wages, occupations, and employment status for the United States,  including the Current Population Survey and the Current Employment  Statistics program, do not cover these insular areas.
Because these data sources were unavailable, we collected our own data  in each area. During visits to American Samoa and the CNMI in October  2010, we conducted interviews and discussion groups with government  officials, employers in a range of industries and sizes, other private sector  representatives, workers, and community members to obtain views and  information on the minimum wage increases and related topics. In each  area, we established e-mail accounts to obtain comments from the public.  We also collected detailed data from large employers in the American  Samoa tuna canning and CNMI tourism industries through a questionnaire,  as described below.
In American Samoa, we visited the island of Tutuila and interviewed  officials in the Office of the Governor, the Department of Commerce, the  Department of Human Resources, the Department of the Treasury, the  Department of Program Planning and Budget Development, the Office of  Samoan Affairs, the Department of Legal Affairs, and other American  Samoa agencies. We met with officials of DOI’s Office of Insular Affairs.  We also interviewed representatives of the private sector, including  representatives from the tuna canneries, and workers.
In the CNMI, we visited the island of Saipan and interviewed officials in  the Office of the Governor, the Department of Commerce, and the  Marianas Visitors Authority. We were not able to meet with some other  CNMI agencies, and the Office of the Governor said the officials were not  available because they had just returned to work following a government  shutdown. We met with officials of DOI’s Office of Insular Affairs and of  DOL. We also interviewed representatives of the private sector, including  representatives from hotels, and workers. In addition, we held a phone  interview with the Tinian Chamber of Commerce.
section_title: Employer Questionnaire
paragraphs: In American Samoa and the CNMI in 2010, we collected updated data on  employment, wage structure, past and planned employer actions, and  related topics covering 2009 and 2010 from employers in key industries  who had responded to our 2009 questionnaire. We weighted employers’  responses by the number of workers they employed. Questionnaire  responses are limited to the American Samoa tuna canning industry and  the CNMI tourism industry and are not representative of all workers and  employers in each industry or each area.
For our 2009 questionnaire, we defined a large employer as one that  employed 50 or more workers in recent years. The employers selected to  receive the 2009 questionnaire comprised for-profit, not-for-profit, and  public sector employers. We sent the questionnaire only to employers with  50 or more workers because we did not have sufficiently reliable frames  from which to draw a probability sample of employers and because we  could contact only a limited number of employers in each area, given  available resources. By limiting our questionnaire to the largest employers,  we were able to concentrate data collection efforts on those who  employed a disproportionately large percentage of the workforce.
In accordance with other federal employment surveys and with our 2009  questionnaire, our 2010 large-employer questionnaire asked for wage data  for the pay period containing June 12. The questionnaire asked separately  for data regarding workers paid an hourly wage and workers paid an  annual salary. The questionnaire also included detailed questions about  changes in benefits, about employers’ past and possible future actions, and  about the extent to which employers attributed these actions to past and  future minimum wage increases. (The questionnaire is reproduced in app.  V.) Because our questionnaire collected wage data as of June 12 of each  year, the data do not reflect the CNMI’s September 30, 2010, minimum  wage increase.
Before sending the 2009 questionnaire to employers, we pretested it over  the phone with three employers in the CNMI and two in American Samoa  to make sure that the questions were clear and comprehensive, the data  were readily obtainable, and the questionnaire did not place an undue  burden on employers. While we eliminated some 2009 questions for the  2010 questionnaire, revisions to remaining questions were minor and did  not require additional pretesting.
Most employers received the questionnaire by e-mail in an attached  Microsoft Word form that they could return electronically after marking  checkboxes or entering responses in open-answer boxes. Employers  returned questionnaires by e-mail, mail, or fax.
We conducted nonresponse follow-up in person and by phone while in the  insular areas. We also contacted nonrespondents by e-mail and phone. In  addition, we contacted respondents to clarify responses and request any  missing data.
Because of the lack of data on the entire workforce, it is difficult to  precisely state the percentage of the workforce that our questionnaire  represents. In 2010, both of the American Samoa employers that received  our questionnaire provided responses—including the one remaining tuna  cannery and a closely related business that manufactures and supplies  cans—resulting in a response rate of 100 percent (both in terms of  respondents and employees). Based on Social Security data, our  respondents in 2010 represented about 12 percent of the total workforce in  2009. Based on U.S. Economic Census data, our respondents represented  about 17 percent of the private sector workforce in 2007. In all, American  Samoa questionnaire respondents provided hourly wage data on a total of  1,869 workers as of June 2010.
In the CNMI, 12 of 14 employers completed the questionnaire. We  confirmed that one employer had closed, and thus we did not count the  employer in the final unweighted response rate of 92 percent (12 of 13).  Respondents included hotels and other employers in the tourism sector,  such as tour operators. Based on CNMI tax data, our respondents  represented about 6 percent of the total workforce in 2009. Based on  Economic Census data, our respondents represented about 8 percent of  the total private sector workforce in 2007. Our hotel respondents  represented about 48 percent of workers in the CNMI accommodations  industry, also based on Economic Census data. In all, CNMI questionnaire  respondents provided hourly wage data on a total of 1,576 workers as of  June 2010.
In reporting the percentages for questionnaire responses throughout our  report, we weighted each percentage to reflect the proportion of workers  employed by the responding employers relative to all workers employed  by all questionnaire respondents. As a result, the responses of larger  employers affect our findings more than those of smaller employers. We  determined the number of employees at each employer by summing the  number of hourly and salaried workers that employers reported in  questionnaire responses. In addition to asking a direct question about  number of employees, the questionnaire asked respondents to complete a  separate table listing the number of employees at each wage or salary  level. Separate tables were required for hourly wage and salaried workers.  To apply the weights, we cross-multiplied the number of employees by the  employer response, then divided by the total number of employees in the  sample. For example, if three of five employers attributed an action to the  minimum wage to a moderate extent, the unweighted response would be  60 percent. However, if those three employers represented 300 of 400  employees, the weighted response that we report would be 75 percent.
For our analyses of the effect of minimum wage increases, we obtained  information on earnings and employment for both hourly wage and  salaried workers during the pay periods that included June 12, 2010, from  our questionnaire. We analyzed these responses in conjunction with data  we collected from the same employers in 2009 regarding the pay periods  that included June 12, 2007, 2008, and 2009. For hourly wage workers,  respondents were asked to provide the number of employees paid at each  wage rate, and the number of both regular and overtime hours worked  during the pay period. For salaried workers, respondents were asked the  number of full-time and part-time workers paid at each salary level.  However, we focused on the effect of minimum wage increases on hourly  wage workers. Hourly wage workers represented about 98 percent of  American Samoan workers and 90 percent of workers in the CNMI. One  employer, which represented fewer than 20 employees, did not provide  complete information on the distribution of hourly wage employees and so  was excluded from analyses requiring that information. To determine the  number of workers affected by each minimum wage increase, we assumed  that all workers employed by questionnaire respondents were legally  required to receive the minimum wage. If some are not covered or are  exempt, the minimum wage increases would affect fewer workers.
After recording the questionnaire data, we verified all keypunched records  by comparing them with the corresponding questionnaires and corrected  the errors we found. Less than 0.5 percent of the data items we checked  had random keypunch errors that would not have been corrected during  data processing. Analysis programs were also independently verified.  However, we did not independently verify that the wage and other  information provided to us was correct.
The questionnaire responses cannot be used to make inferences about all  employers and workers in each insular area, or about all employers and  workers in the covered industries. First, because the lists of employers  that received the questionnaire were intended to include only those in the  American Samoa tuna canning and CNMI tourism industries who had  responded to our 2009 questionnaire (with more than 50 employees), the  lists were not representative of all employers or of all employers in those  industries. Second, we were unable to survey employers that had closed  between 2007 and our questionnaire date, including those in the CNMI  garment industry. Third, some nonresponse bias may exist in some of the  questionnaire responses, since characteristics of questionnaire  respondents may differ from those of nonrespondents and nonrecipients  in ways that affect the responses (e.g., if those that employ a larger  number of workers would have provided different responses than those  that employ a smaller number). Last, it is possible that some employers’  views of the minimum wage increases may have influenced their  responses.
In addition, the one tuna cannery in American Samoa employed a large  percentage of workers employed by the two questionnaire respondents; as  a result, this employer’s responses substantially affected our reported  questionnaire data. Among CNMI employer responses, two hotels  accounted for more than half of workers employed by questionnaire  respondents, so those hotels’ responses substantially affected our  questionnaire results.
To study CNMI hotel minimum wage and payroll costs in relation to  operating costs, we analyzed data provided by CNMI tourism  questionnaire respondents on 2009 annual payroll before deductions for  taxes and benefits, Social Security and Medicare contributions under the  Federal Insurance Contributions Act (FICA), payments for employee  benefits, and other operating expenses. For this and other analyses in this  report, we excluded nonwage labor costs due to the minimum wage  increases, such as increases in employer payroll tax contributions under  FICA. For 2011, employers must contribute the equivalent of 6.2 percent of  employee wages to Social Security and 1.45 percent to Medicare, up to  $106,800 in employee wages.
section_title: SSA Data
paragraphs: We obtained 2009 SSA data (as of October 2010) on the earnings and  employment of individual taxpayers in American Samoa and the CNMI, to  update our analysis of data for 2005 to 2008 (as of August 2009) in the  previous report. While the SSA data cover all types of workers in American  Samoa and were sufficiently reliable for our purposes, three large groups  of people in the CNMI were not required to report earnings to SSA and  thus are excluded from the SSA data—CNMI government workers and  immigrant workers from the Philippines and Korea. In 2008, these three  groups represented approximately half of all CNMI workers, according to  CNMI government tax data. We have chosen not to report the CNMI SSA  data due to these coverage gaps.
For American Samoa, SSA told us that all employees were subject to SSA  withholding—no group was systematically excluded. In our prior report,  we determined that the data were generally consistent with information  from other sources, including local American Samoa W-2 data and our  questionnaire results. We used SSA data to review trends in employment  in American Samoa since the federal minimum wage increases were  implemented, including to determine two aspects of employment of  American Samoa workers from 2005 to 2009. First, we used SSA data to  determine the level of employment. Our count of employed people was  based on the number of people that had positive reported earnings to SSA.  Second, we reported the average earnings per employed person in  American Samoa (excluding those with zero earnings). In addition, we  estimated the proportion of employed persons that dropped out of our  sample in the following year.
Because of data limitations, we were unable to report earnings that had  not been reported to SSA, either because of a failure on the part of the  employer or because the earnings were not subject to SSA withholding.  We also were unable to report on earnings that exceeded the SSA  withholding cap. In addition, because our data was as of October 2010, our  sample did not include those individuals for whom W-2 records were  entered into Social Security files created after October.
To assess the reliability of the data, we interviewed agency officials at  SSA. To the extent possible, we compared employment counts from the  SSA data to counts from other sources. In addition, the counts of  American Samoa employment and earnings differ from those in our prior  report because of the inclusion of additional earnings from late W-2 filers.  We updated our analysis to better isolate the earnings of individuals  working in American Samoa. We determined that the available data were  adequate and sufficiently reliable for the purposes of depicting trends in  employment and earnings in American Samoa.
section_title: Discussion Groups
paragraphs: We conducted structured discussion groups with Chamber of Commerce  members in American Samoa and the CNMI to collect information on the  impact of the minimum wage increases on employers. Employers  represented a range of industries and sizes, and we determined that the  most effective and least burdensome method of collecting information  from smaller employers would be to conduct discussion groups. For each  discussion group, the Chamber of Commerce invited members to  participate. In the CNMI, we also held discussion groups with members of  the Hotel Association of the Northern Mariana Islands and with hotel  human resource managers. The number of participants in each group  ranged from 7 to about 18 business owners or managers.
To collect information on workers’ views of the minimum wage increases,  we conducted structured discussion groups with various worker and  community groups with different organizational affiliations. In each case,  we asked the organizations’ leadership to invite members to the discussion  groups. In American Samoa, we conducted two worker discussion groups  at the remaining cannery, one group with recipients of the U.S.  Department of Agriculture’s Women, Infants, and Children program, and  one group with participants in a nonprofit organization providing job  training to laid-off cannery workers. In the CNMI, we conducted one  discussion group with U.S. Department of Agriculture Nutrition Assistance  Program recipients and two discussion groups at the public library and  publicized to employers, including members of the Hotel Association of  the Northern Mariana Islands. The number of participants in each group  ranged from 4 to 11.
All discussion groups were moderated by a GAO employee following a  structured guide with open-ended questions about the minimum wage  increases and related topics. Discussion groups are generally designed to  obtain in-depth information about specific issues that cannot be easily  obtained from single interviews. Methodologically, they are not designed  to provide results generalizable to a larger population or provide  statistically representative samples or quantitative estimates. They  represent the views only of the participants in our groups and may or may  not be representative of the population of employers and workers in these  insular areas. Therefore, the experiences of other employers and workers  may be different from those who participated in our discussion groups. In  addition, the groups and participants in the groups were not random  samples of employers and workers in these insular areas.
section_title: Local Administrative Data
paragraphs: The U.S. Bureau of Labor Statistics collects CPI data on the U.S. 50 states  but not the insular areas. Therefore, we relied on other sources of data to  compare changes in earnings or wage rates to changes in prices.
We analyzed American Samoa administrative and survey data, including  CPI data. We analyzed CNMI administrative and survey data, including CPI  data and CNMI data on the number and earnings of workers from the  CNMI Department of Finance’s tax returns. The CNMI tax data provide  ranges of earnings for both public and private sector workers and for both  citizens and noncitizens in 2009, allowing us to update our analysis of data  for 2005 to 2008. The CNMI tax data provide ranges of earnings, including  all payments to employees such as overtime, shift differentials, cash  housing and meal allowances, bonuses, etc.
We obtained historical data on the CPI from both areas in order to  estimate inflation-adjusted earnings. For both American Samoa and the  CNMI, we used quarterly CPI data from the first quarter of 2006 to the  fourth quarter of 2009. To produce an annual CPI series, we averaged the  four quarters in each year. In addition, for American Samoa, because the  CPI was rebased in the fourth quarter of 2007, we recalculated the  quarterly index series from the fourth quarter of 2008 back to the fourth  quarter of 2007 by finding a rebasing factor such that the old and new  indexes in the fourth quarter of 2007 were identical.
For both CNMI and American Samoa, we interviewed agency officials and  contractors responsible for producing the quarterly CPI estimates. During  our interviews and review, we noted irregularities in the CNMI CPI data.  After we brought this to the responsible agency officials’ attention, they  determined that there had been an error in the published CNMI CPI, and  they provided to us a corrected index that did not exhibit the same  irregularities. The revised CPI’s inflation rate was approximately four  percentage points lower than the one previously published. The CNMI CPI  data cover the island of Saipan; CPI data for 2006 to 2009 were not  available for the islands of Tinian and Rota.
We also analyzed industry data. For example, to determine hotel room  prices and hotel occupancy rates in the CNMI, we collected data from the  Hotel Association of the Northern Mariana Islands and conducted related  interviews and correspondence. In addition, the Marianas Visitors  Authority provided data on flight seats and arrivals by country of  residence. We found the data used to be reliable and relevant for the  purposes of our report.
section_title: Data Reliability and Limitations
paragraphs: In general, to establish the reliability of the data that we used for reporting  trends and statistics for both American Samoa and the CNMI, we  systematically obtained information about the way in which data were  collected and tabulated. When possible, we checked for consistency  across data sources. While the data had some limitations, we determined  that the available data were adequate and sufficiently reliable for the  purposes of our review.
Our review had certain limitations in addition to those already noted. In  particular, although our approach yielded information on trends in  employment, wages, and earnings in both areas, it is difficult to distinguish  between the effects of minimum wage increases and the effects of other  factors, including the global recession beginning in 2009, fluctuations in  energy prices, global trade liberalization, and the application of U.S.  immigration law to the CNMI. In addition, our review of minimum wage  increases is limited to American Samoa and the CNMI, and we did not  study minimum wage increases in the U.S. economy more broadly.
We conducted our work from September 2010 to June 2011 in accordance  with all sections of GAO’s Quality Assurance Framework that are relevant  to our objectives. The framework requires that we plan and perform the  engagement to obtain sufficient and appropriate evidence to meet our  stated objectives and to discuss any limitations in our work. We believe  that the information and data obtained, and the analysis conducted,  provide a reasonable basis for the findings in this product.
section_title: Appendix II: Background
paragraphs: American Samoa comprises five volcanic islands and two coral atolls with  a combined land area of 76 square miles—slightly larger than Washington,  D.C.—located about 2,600 miles southwest of Hawaii (see fig. 1). In 2005,  American Samoa had a population of about 63,780. Its capital, Pago Pago,  is on the main island of Tutuila, which consists mostly of rugged terrain  with relatively little level land; most economic activity and government  operations in American Samoa take place in the Pago Pago Bay area.
U.S. interest in the Samoan islands began in 1872 with the efforts of the  U.S. Navy to establish a naval station in Pago Pago harbor. The  protectorate over all the Samoan islands established by the United States,  Britain, and Germany ended in 1899, when the islands composing  American Samoa were placed under U.S. control. The U.S. Naval Station  was established in 1900. From 1900 through 1904, the U.S. government  negotiated control over American Samoa,  and the U.S. Navy subsequently  took responsibility for federal governance of the territory. In 1951,  governance was transferred to the Secretary of the Interior. In 1960,  American Samoa residents adopted their own constitution. Amendments  to the constitution of American Samoa can only be made by the U.S.  Congress. Persons born in American Samoa are U.S. nationals but may  apply to become naturalized U.S. citizens. U.S. noncitizen nationals from  American Samoa have the right to travel freely, live, and work throughout  the United States. American Samoa exercises authority over its  immigration system and customs through locally adopted laws.
Additionally, the U.S. government has supported American Samoa’s  economy through trade and tax policies that, respectively, have provided  tariff-free access to the United States for tuna canned in American Samoa  and have reduced federal taxes on income earned by qualifying U.S.  corporations investing in American Samoa. However, changes to various  free trade agreements within the last decade have lowered U.S. tariffs on  tuna exported from several other countries, reducing the American Samoa  canneries’ competitive advantage. U.S. tax policies, designed to  encourage certain U.S. corporations to invest in the U.S. insular areas and  create jobs, expired and were recently extended through 2011.
subsections: section_title: Commonwealth of the Northern Mariana Islands
paragraphs: Part of the Mariana Islands Archipelago in Micronesia, the CNMI is a chain  of 14 islands in the western Pacific Ocean—just north of Guam and about  3,200 miles west of Hawaii (see fig. 5). Most of the CNMI population— 65,927 in 2005, with recent estimates of decline—resides on the island of  Saipan, with additional residents on the islands of Tinian and Rota.
The United States took control of the Northern Mariana Islands from  Japan during the latter part of World War II, and after the war the U.S.  Congress approved the Trusteeship Agreement making the United States  responsible to the United Nations for the administration of the islands.
Later, the Northern Mariana Islands sought self-government and  permanent ties with the United States. In 1976, after almost 30 years as a  trust territory, the District of the Mariana Islands entered into a covenant  with the United States establishing the island territory’s status as a self- governing commonwealth in political union with the United States. This  covenant grants the CNMI the right of self-governance over internal affairs  and grants the United States complete responsibility and authority for  matters relating to foreign affairs and defense affecting the CNMI. The  covenant initially made many federal laws applicable to the CNMI,  including laws that provide federal services and financial assistance  programs. The covenant preserved the CNMI’s exemption from certain  federal laws that had previously been inapplicable to the Trust Territory of  the Pacific Islands, including federal immigration laws, with certain  limited exceptions, and certain federal minimum wage provisions.  However, under the terms of the covenant, the federal government has the  right to apply federal law in these exempted areas without the consent of  the CNMI government.
Until recently, the CNMI retained legislative authority over most aspects of  immigration, regulating entry into the CNMI through a permit system. In  2008, federal legislation amended the U.S.-CNMI Covenant to establish  federal control of CNMI immigration; the law includes several provisions  affecting access to the CNMI by foreign workers, tourists, and foreign  investors that were implemented beginning in November 2009. As we  reported in August 2008, the potential impact of the legislation’s  implementation on the CNMI’s labor market will largely depend on  decisions that the U.S. Departments of Homeland Security (DHS) and DOL  make in implementing a program to provide foreign workers temporary  permits to work in the CNMI. Although modest reductions in CNMI-only  permits for foreign workers would cause minimal impact, any substantial  and rapid decline in the availability of CNMI-only work permits for needed  workers would have a negative effect on the economy, given foreign  workers’ prominence in key CNMI industries. As of May 2011, DHS had not  issued final regulations for workers, nor has it made a permanent decision  regarding access for visitors from Russia and China. It issued regulations  for foreign investors in December 2010.
subsections: section_title: CNMI Government Fiscal Condition
paragraphs: The CNMI government, excluding component units, spent approximately  $64 million in grants from several federal agencies in fiscal year 2009,  according to the most recent CNMI Report on the Audit of Financial  Statements. The CNMI has received federal funds under the American  Recovery and Reinvestment Act that temporarily supplement local  government revenues.
Excluding component units, local government spending exceeded  revenues each year from 2005 to 2009 (see fig. 6). From 2005 to 2009, the  CNMI government’s budget deficit averaged 15 percent of total revenues.  In October 2010, the CNMI government partially shut down due to a  budget impasse. The shutdown was in effect for 10 days, and the local  government has since enacted austerity measures, including eliminating  paid holidays for government employees and reducing full-time  employees’ schedules by 16 hours per 2-week pay period. Since June  2010, the local government has also occasionally delayed payroll and is  currently considering laying off employees.
Additionally, the CNMI government has struggled to make payments to  various local government departments and units. For example, the  Northern Mariana Islands Retirement Fund actuarial assessment for fiscal  year 2008 reported unfunded pension liabilities of about $530 million. In  December 2010, the CNMI government owed unpaid utility bills to the  Commonwealth Utilities Corporation, resulting in disconnected power and  water service for some local government departments, and the Marianas  Visitors Authority had unfunded liabilities of about $2 million. The  Commonwealth Utilities Corporation has been operating under a state of  emergency since August 2008.
BEA estimated that the CNMI’s GDP in 2007 was $962 million. From 2002  to 2007, real GDP decreased at an estimated average annual rate of 4.2  percent. Per capita real GDP increased at an estimated average annual rate  of 0.5 percent at least partly because of population loss.
For years, the garment and tourism industries were the mainstay of the  CNMI’s economy, generating employment and bringing revenue from  outside the CNMI. For example, in 1999, these two industries accounted  for about 85 percent of the CNMI’s total economic activity and 96 percent  of its exports.
Several developments in international trade caused the CNMI’s garment  industry to decline dramatically. In January 2005, in accordance with a  World Trade Organization 10-year phaseout agreement, the United States  eliminated quotas on textile and apparel imports from other textile- producing countries, exposing the CNMI apparel industry’s shipments to  the United States to greater competition. Subsequently, the value of  CNMI textile exports to the United States dropped from a peak of $1.1  billion in 1998 to close to zero in 2010 (see fig. 7). The number of licensed  CNMI apparel manufacturers decreased rapidly, from 34 firms in 1999 to 6  firms as of July 2008. By the end of the first quarter of 2009, the last  garment factory in the CNMI had closed.
In addition, the CNMI economy has been negatively affected by trends and  uncertainty in the tourism industry—the CNMI’s primary private sector  industry. For example, tourism in the CNMI declined after peaking in the  mid 1990s, beginning with the Asian financial crisis in the late 1990s. In  2003, according to CNMI officials, tourism slowed for several months in  reaction to the severe acute respiratory syndrome epidemic, which  originated in Asia, and the war in Iraq. Total visitor arrivals to the CNMI  dropped from a peak of 726,690 in 1997 to 368,186 in 2010, a decline of 49  percent, as shown in figure 8. Japan, Korea, Russia, and China are the  CNMI’s primary visitor markets, with Japan representing the largest share  of any country and Russia and China representing emerging markets.  CNMI government officials reported declines in Japanese visitor arrivals  following the March 2011 earthquake and tsunami in Japan, and they  expressed concern about the impact on the CNMI’s tourism industry. The  tourism industry also may be affected by the November 28, 2009,  implementation of a joint visa waiver program for visitors to the CNMI and  Guam, as part of the application of U.S. immigration law. While an  interim final rule currently governs the operation of the Guam-CNMI Visa  Waiver Program, DHS has not issued final regulations for this program.
During the expansion of the CNMI garment and tourism industries prior to  1995, the CNMI economy became dependent on foreign labor, as the CNMI  government used its authority over its own immigration policy to bring in  large numbers of foreign workers and investors. In 1995, two-thirds of the  CNMI working population were temporary residents, including about 93  percent of workers in the garment industry and slightly over 72 percent in  the tourism industry. In contrast, in the same year, U.S. citizens and  permanent residents of the CNMI held about 96 percent of jobs in the  public sector. As a result, the CNMI economy developed a two-tiered wage  structure, with U.S. citizens and permanent residents earning 3.5 times  more in 1995 than temporary residents. However, with the decline of the  garment and tourism industries, the number and proportion of noncitizens  in the CNMI labor force and population have decreased (see fig. 9). In  2005, noncitizen workers in the CNMI were predominantly from China or  the Philippines. As noted above, the application of U.S. immigration law  might result in further changes in the composition of the CNMI’s  workforce.
In addition, the CNMI’s economy may be affected in the future by the  planned build-up of the U.S. military in neighboring Guam. By 2014, the  U.S. Department of Defense intends to relocate 8,600 Marines and  additional military units, as well as an estimated 9,000 dependents from  Okinawa, Japan, to Guam, increasing Guam’s current population by an  estimated 25,000 active duty military personnel and dependents. The  Department of Defense plans to use the island of Tinian to conduct  training operations and construct firing ranges. Local government officials  expect the build-up to have a small positive impact on the CNMI in the  immediate future, with potentially greater positive impacts in the medium-  to long-term. However, while it is possible that the build-up will result in  new businesses and tourism opportunities for the CNMI, some local  private sector officials anticipate that the build-up will have little to no  economic benefit for the commonwealth.
In an effort to explore opportunities for future economic development, the  local government has identified potential growth industries, including call  centers, agriculture, and aquaculture. The CNMI’s Comprehensive  Economic Development Strategic Plan, 2009-2014 outlines a number of  developmental projects in various industries. However, the plan indicates  that many challenges exist to implementing these projects and notes that,  despite past studies and efforts to identify new industries, the CNMI has  had difficulty attracting new investors and developing new industries.
Personal Income and Poverty Rates  Current federal data on income and poverty levels in the CNMI do not  exist; however, the most recent available data show that the CNMI had  lower income and higher poverty rates than the mainland United States.  For example:  In 2004, the CNMI median household income was $17,138, while the  U.S. 50-state and District of Columbia median household income was  $44,334.
In 2004, the CNMI poverty rate for all persons was 53.5 percent, while  the U.S. 50-state and District of Columbia poverty rate for all persons  was 12.7 percent.
section_title: Minimum Wage Increases
subsections: section_title: U.S. Minimum Wage Law
paragraphs: The federal minimum wage was first enacted as part of the Fair Labor  Standards Act of 1938 (FLSA). That first federally mandated minimum  wage had repercussions in the U.S. Virgin Islands and Puerto Rico that led  the United States, in 1940, to revise the application of the law in those  territories; the overarching goal of the FLSA continued to be pursued  there, but at a slower pace than in the U.S. 50 states. As of July 2009, the  federal minimum wage was set at $7.25 per hour. Federal minimum wage  laws apply generally to any employee engaged in commerce, with limited  exceptions and exemptions. Certain employees who would otherwise be  covered under the FLSA definitions are exempted by law from the  minimum wage requirements—for example, employees involved with  seafood at sea are exempt. Employees not covered by FLSA include, for  example, individuals engaged in agriculture, if the employer is an  immediate family member.
DOL’s Wage and Hour division enforces a variety of U.S. labor laws,  including laws related to minimum wage, overtime pay, child labor, and  family medical leave. The division uses a number of enforcement  strategies, including investigations and partnerships with external groups,  such as states, foreign consulates, and employee and employer  organizations.
section_title: Minimum Wage Law in American Samoa
paragraphs: From the passage of the FLSA in 1956 to 2007, employers in American  Samoa were allowed to pay their employees at hourly rates less than the  federal minimum wage. During that period, rates were set by special  industry committees established by the U.S. DOL, through biennial reviews  conducted with the participation of island stakeholders that included  representatives of government, key industries, and workers. The special  industry committees system continued to exist until May 2007, when  Congress required an incremental increase in the minimum wage for all  industries in American Samoa, at $.50 per year in each industry, until it  reaches the full federal minimum wage. In 2010, the U.S. enacted a law  delaying the scheduled minimum wage increases for 2 years, providing for  no increase in 2010 or 2011. For example, if the current federal minimum  wage of $7.25 remains unchanged, the minimum wage for American Samoa  tuna canning industry workers will reach $7.25 in 2016 (see table 4).
Under the terms of the CNMI-U.S. covenant, the CNMI was exempt from  the minimum wage provisions of the FLSA and maintained control over its  own minimum wage system. Legislative changes to the federal minimum  wage in 2007 specified that the CNMI would be subject to the federal  minimum wage, through a staged $.50 incremental approach. The law  raised the CNMI minimum wage from $3.05 to $3.55 per hour in July 2007  and required a $.50 increase every year thereafter until the FLSA-CNMI  minimum wage equals the full federal minimum wage. In 2010, the U.S.  enacted a law delaying the scheduled minimum wage increase for 1 year,  providing for no increase in 2011 (see table 5).
section_title: Prior Studies of Minimum Wage Increases in American Samoa and the CNMI
paragraphs: The federal government has conducted or funded several reports on  minimum wage increases in American Samoa and the CNMI in recent  years.
In May 2007, DOL’s Wage and Hour Division issued a report on the  minimum wage in American Samoa as part of DOL’s biennial review  process under the special industry committees. The report analyzes  American Samoa’s wage and employment structure based on a 2006  employment and wage survey, and it provides the numbers of  employees in each industry who would be affected by a range of  possible minimum wage increases. The report stated that the average  hourly wage in the fish canning industry was $3.60 and in the American  Samoa government was $7.75. It found that 50 percent of American  Samoa workers were paid less than $4 per hour.
In January 2008, DOL issued a report on the economic impact of  minimum wage increases in both American Samoa and the CNMI, as  required by a 2007 law.
For American Samoa, the study noted concern that the tuna  canneries would close before the minimum wage reached the U.S.  federal minimum wage of $7.25 per hour, causing substantial job  losses. The report stated that over three-quarters of American  Samoa workers earned under $7.25 per hour and that if the U.S.  minimum wage were increased to the level of the 75th percentile of  hourly-paid U.S. workers, it would be raised to $16.50 per hour.
For the CNMI, the study found that although data were not  available to precisely quantify the impact of the scheduled  minimum wage increases, it seemed likely that the CNMI’s existing  economic decline would be made worse and that the CNMI  population would continue to decline.
DOI-funded studies of the American Samoa and CNMI economies,  including the minimum wage increases.
A February 2008 study assessing the relationships between different  sectors of the American Samoa economy found that a doubling of  American Samoa’s minimum wage in a 7-year period could result in  the end of the fish processing industry, which represented  approximately one-half of American Samoa’s economic base, and  serious consequences for the economy. The authors predicted that  costs would rise due to minimum wage increases in other  industries, and transportation, energy, and utility costs would  increase because the canneries would no longer be available to  share those costs. They found that, under a worst-case scenario,  American Samoa could lose 46 percent of all jobs in the territory. In  this scenario, rising minimum wages would cause a complete  closure of American Samoa’s tuna canneries. A long recovery  period would follow, with high unemployment rates, business  closures or cutbacks, and declines in local revenue collection. They  found that local government would be unable to adequately address  the situation, requiring outside assistance.
An October 2008 study of the CNMI economy examined the impact  of both federal immigration policy and the minimum wage  increases. In framing this analysis, the study found that lifting of  quotas on garment imports to the United States had rendered the  CNMI’s garment industry unfeasible and estimated that the loss of  16,800 garment jobs could ultimately cost the CNMI economy about  25,200 jobs, about 60 percent of peak employment in 2004. The  study projects the combined effect of the closure of the garment  industry with the implementation of the federal minimum wage and  an application of federal immigration policy, whereby almost the  entire foreign workforce is removed from the CNMI economy. In  this projection, the employment of U.S.-qualified residents  increases by 21 percent from 2005 to 2015, but real wages and  salaries of U.S.-qualified residents fall by 19 percent. In addition,  immigration-policy changes quickly remove foreign workers on  government-approved contracts from the economy, and U.S.- qualified residents take jobs in the tourism industry. Despite the  increased minimum wage, most of the jobs are projected to pay  lower wages than U.S.-qualified residents had come to expect. The  study also provides an alternative projection under which the  minimum wage is held at $4.05, foreign labor is not restricted, and  an aggressive promotion program successfully doubles visitor  arrivals by 2015. In this projection, the employment of U.S.-qualified  residents increases by 4 percent from 2005 to 2015, and real wages  and salaries of U.S.-qualified residents increase by 15 percent. The  authors suggested, among other recommendations, that the law  extending the minimum wage requires further analysis and notes  that officials are seeking to modify the scheduled increases.  Possible modifications discussed include lengthening the period  over which the minimum wage is increased, basing increases on  measures of worker productivity, or using a special program for  adjustment as had previously been done in American Samoa.
section_title: Appendix III: American Samoa
paragraphs: In American Samoa, SSA data show that total employment fell 19 percent  from 2008 to 2009 and fell 14 percent from 2006 to 2009, though it  increased in some years. Data from 2010 on total employment are not yet  available. Questionnaire responses show that tuna canning employment  dropped by 55 percent from 2009 to 2010, reflecting the September 2009  closure of one cannery and layoffs in the remaining cannery. In addition,  we estimated that from 2,000 to 3,000 temporary federal jobs funded  beginning in June 2009 will end when federal funding is no longer  available. Average inflation-adjusted earnings in American Samoa fell by 5  percent from 2008 to 2009 and by 11 percent from 2006 to 2009. However,  over both periods, the minimum wage increased by significantly more than  inflation. Private sector officials said the minimum wage was one of a  number of factors making it difficult to do business, and public officials  said they supported returning to biennial reviews of minimum wages or  other alternatives to the scheduled increases. In the tuna canning industry,  without a minimum wage increase in American Samoa in 2010, there was  no increase in the median wage of tuna canning workers, which was $4.76  in both 2009 and 2010. The most recent minimum wage increase in May  2009 affected the wages of 69 percent of hourly-wage cannery workers.  Future minimum wage increases would affect the wages of 99 percent of  current cannery workers. The two canning industry employers included in  our questionnaire reported taking cost-cutting actions from June 2009 to  June 2010, including laying off workers, reducing overtime hours, freezing  hiring, and decreasing benefits, as well as raising prices. The employers  reported plans to continue taking cost-cutting actions in 2011. The  employers attributed most of their past and planned actions largely to the  minimum wage increases. Cannery officials we interviewed expressed  concern about American Samoa’s dwindling competitive advantage in the  global tuna canning industry. Though the cannery faces some near-term  obstacles to relocating, our analysis suggests that relocating tuna cannery  operations from American Samoa to a tariff-free country with lower labor  costs would significantly reduce cannery operating costs and reduce  American Samoa jobs; however, maintaining some operations in American  Samoa would allow the facility to continue to compete for U.S.  government contracts. Some workers said they were disappointed to see  the minimum wage increase delayed in 2010 and 2011; however, more  workers expressed concern over job security than favored a minimum  wage increase with the potential for subsequent layoffs.
subsections: section_title: American Samoa Employment Fell Sharply in 2008-2009, and Employment and Average Inflation-Adjusted Earnings Were Lower than in 2006
subsections: section_title: American Samoa Employment Declined 2006-2009, though Employment Increased in Some Years
paragraphs: Overall American Samoa employment declined from 2006 to 2009, based  on Social Security data; however, employment increased in some years. As  shown in figure 10, employment grew from 2006 to 2008 but then fell in  2009 to a level lower than in 2006. Specifically, available data show that  from 2008 to 2009, the total number of people employed in American  Samoa fell by 19 percent (from 19,171 to 15,434) and that over the entire  period from 2006 to 2009, employment fell by 14 percent (from 17,852 to  15,434, with a peak of 19,171 in 2008).
Because Social Security data are not available for 2010, we are unable to  report on the overall level of employment for the year. However, the  cannery that closed in September 2009 employed approximately 2,000  workers, and there were layoffs in the remaining cannery—most of these  losses do not appear in the 2009 SSA data. For the tuna canning industry,  questionnaire responses from the remaining cannery and a closely related  business show that employment of their workers—most of whom are  foreign workers from independent Samoa—dropped by 55 percent from  2009 to 2010 (from 4,125 to 1,869) and dropped by 59 percent for the entire  period from 2007 to 2010 (from 4,593 to 1,869).
In addition, we estimated that from 2,000 to 3,000 jobs funded by the U.S.  Census Bureau, the Recovery Act, and recovery efforts after the 2009  tsunami were temporary and will end when federal funding is no longer  available. As a result, counts of the total number employed during this  period will be higher than the number of long-term positions. The  temporary jobs were funded beginning in June 2009, and the great majority  of those were disaster recovery positions related to the tsunami. In  addition, the Census Bureau employed enumerators and managers to  assist with collection of 2010 Decennial Census data, and Recovery Act  funds supported workers on infrastructure projects and in other fields.
In discussion groups, private sector employers generally opposed  additional minimum wage increases but said that a number of other  factors made it difficult to do business in American Samoa. For example,  they said increases in prices of utilities, shipping, and raw materials; an  outdated tax structure; low levels of investment; and business licensing  problems also make it difficult to establish and do business in American  Samoa. They said that federal tsunami recovery assistance, Recovery Act  funds, and Decennial Census employment provided relief and increased  business, particularly in the construction industry, temporarily obscuring  the full force of American Samoa’s economic downturn. As this temporary  relief period ends, employers expect that American Samoa’s economic  situation will worsen. They also said that, with fewer tuna exports, they  expect increases in shipping wait-times and costs. Many employers  supported the 2010 and 2011 delays in the minimum wage increases, and  some said it is important to use the 2-year delay to address business  challenges. For example, they said that while it is difficult to develop  tourism in American Samoa, it is important to try. They also said they were  concerned about the fiscal status of the local government and the  possibility of harmful tax increases.
An American Samoa government analysis found that the minimum wage  increases would raise the government’s wage and salary costs for its  employees by about 1 percent (about $9 million) over 7 years. Public  officials said they supported a return to biennial reviews of minimum wage  in American Samoa or other alternatives to the scheduled increases. In  January 2011, the American Samoa governor signed a letter saying that the  federal minimum wage increases had had devastating effects on American  Samoa employment and the economy. The letter urged consideration of  alternative methods of determining minimum wages in American Samoa,  including the previous DOL biennial review process or some modification,  or amending laws to specify the conditions to be considered in  determining the minimum wage.
section_title: Average Inflation-Adjusted Earnings of Those Employed Have Fallen Since 2006
paragraphs: Average earnings of workers who maintained employment rose from 2006  to 2009, but available data show that the increase was not sufficient to  overcome the increase in prices. As shown in figure 11, based on SSA and  consumer price data, from 2008 to 2009 (the most recent year available),  average inflation-adjusted earnings fell by 5 percent. This decline resulted  from a decrease in average earnings of 2 percent, and an increase in prices  of 3 percent. For the period from 2006 to 2009, average inflation-adjusted  earnings fell by 11 percent, due to a rise in average annual earnings of  about 5 percent with an 18 percent increase in prices.
While Social Security earnings data do not allow for a direct comparison  of average and minimum wage annual earnings or for tracking the earnings  of workers who lost their jobs or left the area, the hourly wage of  minimum wage workers increased by more than inflation. The inflation- adjusted earnings of minimum wage cannery workers who retained their  jobs and work hours rose by about 8 percent from 2008 to 2009 and by  about 23 percent for the entire period from 2006 to 2009.
section_title: American Samoa Tuna Canning Industry Has Continued to Lay off Workers and Has Considered Alternate Locations
subsections: section_title: Minimum Wage Increases through 2016 Would Affect Wages of Almost All Workers in American Samoa’s Tuna Canning Industry Employed in 2010
paragraphs: Minimum Wage Increases in 2007-2010 Increased Median Wage for  Tuna Canning Industry Employees  Without a minimum wage increase in American Samoa in 2010, there was  no increase in the median wage of workers in the tuna canning industry— in both 2009 and 2010, the median tuna canning worker wage was $4.76.  Consistent with our last report, the median hourly wage rose from $3.30 in  June 2007 to $4.76 in June 2010, a 44 percent increase, according to tuna  canning questionnaire responses (see table 6). During this period, the  minimum wage for canning workers increased three times from $3.26 to  $4.76, an overall increase of 46 percent.
Minimum Wage Increases in 2007-2010 Slightly Narrowed the Wage  Gap between Lower- and Higher-Paid Workers Employed by  Questionnaire Respondents in Tuna Canning Industry  Responses to our questionnaire indicate that the minimum wage increases  narrowed the gap between the wages of lower- and higher-paid workers in  American Samoa’s tuna canning industry (see fig. 12). Specifically, the gap  between the wages of the lowest- and highest- paid tuna canning workers  was $0.28 in June 2007 and $0.25 in June 2010, a small decline of 11  percent.
Minimum Wage Increases in 2010-2018 Would Affect Wages of  Almost All Workers in Tuna Canning Industry  As the minimum wage increases continue, they will affect a growing  percentage of workers in American Samoa’s tuna canning industry. Based  on questionnaire responses about workers’ wages as of June 2010, 69  percent of canning industry workers were at the minimum wage in 2009  and 2010. The future minimum wage increases would affect the wages of  99 percent of current canning industry workers by the time the minimum  wage reaches $7.25 in 2016. By 2016, the extra annual cost added by  minimum wage increases after June 2010 (reflecting the 2009 increase)  would be $4,660 per worker (see table 7). We identified the additional cost  by calculating the difference between the cost per worker in June 2010  and the cost per worker through 2016, based on the scheduled minimum  wage increases and averaged across all workers.
Tuna Canning Employers Reported Cutting Costs and Laying Off  Workers from 2009 to 2010, with Most Actions Attributed to  Minimum Wage Increases  The two employers in the tuna canning industry reported in our  questionnaire that they had taken cost-cutting actions from June 2009 to  June 2010. For example, the two respondents reported having taken cost- cutting actions affecting workers’ income, including laying off hourly and  salaried workers, reducing overtime hours for hourly workers, freezing  hiring, and temporarily closing. The employer representing the majority of  workers employed by questionnaire respondents also reported having  decreased hourly workers’ benefits and reduced regular work hours for  hourly workers. The two employers reported additional cost-cutting  actions, including reducing operating capacity or services offered and  implementing other cost- and labor-saving strategies or technology. The  employer representing the majority of workers employed by questionnaire  respondents also reported having delayed expansions. Both employers  reported that they had raised prices of goods or services. For most of  these actions, employers attributed their actions largely to the minimum  wage increases.
Tuna Canning Employers Reported Plans to Take Additional  Actions by Early 2012, with Most Planned Actions Attributed to  Minimum Wage Increases  The two questionnaire respondents in the tuna canning industry also  reported plans to take the same types of cost-cutting actions in the next 18  months, by early 2012. They reported planning to take cost-cutting actions  affecting workers’ income, including laying off additional hourly and  salaried workers and freezing hiring. The employer representing the  majority of workers employed by questionnaire respondents reported  planning to decrease benefits of both hourly and salaried workers and  reduce regular and overtime hours. The two employers also reported plans  to take additional cost-cutting actions, including implementing other cost-  and labor-saving strategies or technology. The employer representing the  majority of workers employed by questionnaire respondents reported  planning to delay expansions and reduce operating capacity or services  offered. The employer representing fewer workers employed by  questionnaire respondents reported planning to raise prices. Employers  attributed most of these plans largely to the minimum wage increases.  Employers in American Samoa’s tuna canning industry reported that any  actions by the larger employer will affect the smaller employer.
Tuna Canning Employers Attributed Their Actions to Minimum  Wage Increases More Often than to Other Factors  Employers attributed their actions largely to the minimum wage increases  more often than they attributed their actions largely to other factors, such  as transportation and shipping costs and changes in business taxes and  fees. However, they said a decrease in the number of customers, such as  wholesale customers, was another important factor affecting their past  and planned actions. Employers also attributed their past and planned  actions to increased utility costs to a moderate extent.
section_title: American Samoa Tuna Canning Industry Faces Challenges, and Relocating to Alternate Locations Would Significantly Reduce Business Costs but Eliminate American Samoa Jobs
paragraphs: Cannery Officials Are Concerned about American Samoa’s  Dwindling Competitive Advantage in Global Tuna Canning Industry  Cannery company officials we interviewed indicated that labor costs,  including the minimum wage increases, continued to place American  Samoa at a significant cost disadvantage compared with other canned tuna  exporting countries. As we previously reported, by raising the hourly  minimum wage for cannery workers in American Samoa from $3.26 in  2006 to $4.76 in May 2009 (remaining at $4.76 in 2010 and 2011)—a total  increase of 46 percent—the three minimum wage increases to date have  further widened the gap between American Samoa and production sites  with lower labor costs, such as Thailand, which has a minimum wage of  less than $1 an hour. Cannery officials continued to state that wage  increases were one of many factors affecting the tuna canning industry in  American Samoa. Officials from the remaining cannery said that in  previous years uncertainty regarding the minimum wage increases meant  they could not plan American Samoa operations further than months in  advance, impacting their ability to make a long-term commitment to  maintaining operations in American Samoa. They said that although they  continue to consider relocation or closure of the American Samoa facility  as one of many possible scenarios, knowing that wages would be stable  through 2012 had allowed them to better stabilize operations in American  Samoa.
In addition to higher wages, company officials noted that the continued  increases in shipping and utility rates—partly owing to increased fuel  costs in recent years—add to increased operating costs. Loss of eligibility  for certain U.S. tax benefits also contributed to rising costs. Furthermore,  as a result of the September 2009 cannery closure, the remaining cannery  has since been responsible for all maintenance costs—such as waste  disposal and water discharge—that the two canneries previously shared,  as well as increased power and water costs. Opportunities for shared  services between the remaining cannery and the newly acquired facility  will depend on the scope of operation at the new facility, which remains  unknown.
Officials at the remaining cannery noted that, while duty-free access to the  U.S. market for canned tuna exports from American Samoa once made  production in American Samoa advantageous, trade liberalization has  since significantly reduced tariff advantages. Additionally, cheaper  operating costs in alternative locations expand the cost gap between  canned tuna produced in American Samoa and canned tuna produced  elsewhere. As a result of the factors discussed, representatives from the  remaining cannery report that they have shifted a portion of production to  facilities outside of American Samoa and continue to report that it is no  longer cost-effective to operate a canning facility in American Samoa.
As we previously reported, cannery officials stated that minimum wage  increases were a significant factor in the closure of one of the two  canneries in American Samoa but that other factors also contributed to the  cannery’s closure. In addition to those mentioned above, cannery officials  said that factors that contributed to the cannery’s closing included an  attractive environment for investment in alternative locations and the high  costs associated with environmental regulations.
Although a new tuna facility operator acquired the facility that closed,  operations planned in the short-term are more limited than those before  the facility closed. Company officials indicated that they are considering  using the plant as a logistics and storage facility for handling fresh, and  potentially frozen, fish and for the company’s existing fleet in the Western  and Central Pacific Ocean. These operations would require between 50 to  100 employees. The company will continue to evaluate and reconstruct the  facility and has hired a small number of workers who had remained  employed at the facility after its closure. As of March 2011, the company  expected plant renovations to last 12 to 18 months, though some limited  operations may begin before renovations are complete. However,  company officials stated that all future employment and investment plans  will depend on several factors, most important of which are the scheduled  minimum wage increases. Specifically, officials said the opportunity to  produce canned tuna could depend on American Samoa’s labor cost  relative to alternate locations.
Industry Experts Said Prices and Other Factors Are a Constraint  as Tuna Canning Industry Becomes More Competitive  In addition to factors affecting American Samoa operations in particular,  industry experts noted that the global tuna industry is changing in many  ways. For example, various fishery management organizations and other  parties have increased restrictions on fishing some tuna target species,  including tuna used for canning, in the western and central Pacific Ocean.  Additionally, experts and industry officials said price dynamics are a major  constraint to the industry; as the industry becomes increasingly  competitive, profit margins decrease. The highly competitive global  market for tuna products makes it increasingly difficult to pass along  higher labor and operating costs to consumers by raising prices. For  example, industry officials note that it is difficult for companies to raise  prices when supermarket brands offer consumers very low prices.  Growing supermarket and consumer demand for assurances of social and  environmental responsibility also contributes to changing industry  dynamics.
Comparison of Four Tuna Canning Business Models  Although American Samoa is located near rich fishing grounds, its labor  costs are significantly higher than those in competing countries, both  before and after the minimum wage increases. Cannery officials said that  current operations in American Samoa were not competitive with other  models. We compared the labor and tariff costs associated with alternate  business models for tuna canning in order to illustrate how the costs differ  under each estimated model. The following analysis provides cost  estimates under four possible scenarios for cannery operations currently  located in American Samoa, assuming constant total production under  each model, and including two models presented in our previous report.   It considers only labor costs and tariffs, in order to show the effect of  variation in different countries. It excludes other associated costs,  including transportation, refrigeration, opening of a new plant (if needed),  and other costs associated with establishing multiple production locations.  It also excludes nonwage labor costs, such as the costs of employer  payroll tax contributions.
Model A (loining and canning located in American Samoa): Tuna  processing currently done in American Samoa remains entirely in  American Samoa. Canneries located in American Samoa hire local and  foreign workers to loin (clean, cook, and cut) and can the fish. In  addition, the plant processes some frozen loins imported from  countries with lower wages. The canned tuna from American Samoa is  exported directly to the United States and benefits from tariff-free  access to the U.S. market. With an estimated workforce of 1,500  employees in American Samoa, the associated labor cost is $14.9  million in 2010 and $23.4 million in 2016, with zero tariff costs.
Model B (relocating loining to Thailand or another country with  lower labor costs, and canning frozen loins in the U.S. 50  states): The loining operation—the most labor-intensive part of the  operation—moves to low labor-cost countries, such as Thailand,  Trinidad, Fiji, Mauritius, or Papua New Guinea, where the fish loin is  frozen. The frozen fish is exported to the United States, where it is  canned. The frozen fish carries a tariff of $11 per metric ton, and  workers are employed in a low labor-cost country at $0.75 per hour.  The combined labor and tariff cost in 2010 and 2016 of this model is  $11.4 million. No workers remain in American Samoa cleaning fish,  and 300 workers are employed in the U.S. 50 states at $14.00 per hour.  Tuna facilities in American Samoa are currently among few in the  United States that can meet the requirements of U.S. government  contracts, many of which require U.S.-sourced and -processed fish.  While facilities outside American Samoa may qualify for these  contracts based on their location, it is unclear whether their  production models meet the requirements, according to an industry  expert. Facilities under this model might not meet the requirements of  U.S. government contracts and could lose this business.
Model C (relocating all loining and canning to a tariff-free  country): Loining is done in a country with zero tariffs on canned tuna  exported to the United States. Workers are employed at $1 per hour.  The basis for tariff-free access to the United States—the Generalized  System of Preferences—expired at the end of 2010; however, the  Office of the U.S. Trade Representative is supporting reauthorization in  2011. Under this model, the American Samoa cannery closes, and all  1,500 positions are relocated to a tariff-free country. The cost is $3.1  million for 2010 and 2016, assuming no wage increases in the tariff-free  country. As with Model B, facilities under this model might not meet  the requirements of U.S. government contracts and could lose this  business.
Model D (hybrid, with one half of production, including for U.S.  government contracts, located in American Samoa and the  other half relocated to a tariff-free country): The American  Samoa cannery continues to supply canned tuna for U.S. government  contracts (20 percent of production from Model A), and another 30  percent of production remains in American Samoa. The remaining 50  percent of production moves to a country that exports canned tuna  tariff-free to the United States. For this model, we assume that the  workforce remaining in American Samoa will be 50 percent of the  current total workforce, and the other 50 percent will be in a tariff-free  country. The associated cost is $8.6 million in 2010 and $12.9 million in  2016, with zero tariff costs.
Considering only labor and tariff costs, figure 13 shows that a business  model in which all loins are processed in American Samoa (Model A) has  higher costs than the alternatives. The model that presents the highest  combined labor and tariff cost savings involves moving operations to a  tariff-free country and closing operations in American Samoa (Model C).  This model would result in approximately 1,500 fewer jobs in American  Samoa. The next cost-saving option is to move 50 percent of production to  a tariff-free country and keep 50 percent in American Samoa (Model D),  while retaining eligibility for U.S. government contracts. This model would  result in about 750 fewer jobs in American Samoa. Moving the loining  operations to a country with lower wages (Model B) presents significant  cost savings; however, under this scenario tariffs on imported frozen loins  are imposed, and the canning process is done in the U.S. 50 states at  higher wages than in competing tuna processing countries. Additionally,  lease obligations in American Samoa and the cost of building new facilities  may pose obstacles to near-term relocation.
While cannery company officials and industry experts continue to report  that American Samoa’s competitive advantage in the global tuna canning  industry is decreasing, they have also stated that the ability to qualify for  U.S. government contracts is one of the few remaining factors making  American Samoa an attractive location for tuna canning. Although the  comparison of labor and tariff costs under different business models  shows the greatest savings by moving operations to a tariff-free country  and closing operations in American Samoa (Model C), operations under  this model would lose eligibility for U.S. government contracts for canned  tuna. In addition, savings from moving the loining operations to a country  with lower wages (Model B) also would be partially offset by the loss of  U.S. government contracts. The model moving 50 percent of production to  a tariff-free country and keeping 50 percent in American Samoa (Model D)  would retain eligibility for these contracts.
section_title: American Samoa Tuna Canning Workers Generally Opposed the Minimum Wage Increases, While Other Workers Shared Mixed Views
paragraphs: In discussion groups, most participants working in the tuna canning  industry said they opposed further minimum wage increases. However,  some participants supported the increases, especially to help with cost-of- living increases.
Job insecurity. More tuna canning workers expressed concern over  job security than favored a minimum wage increase with the potential  for subsequent layoffs. Many workers said that their current wages are  enough and that they prefer to remain at the current wage and keep  their jobs. In addition, participants said that they fear the remaining  cannery will close with more minimum wage increases, causing more  job loss.
Minimum wage increase delays. Many participants supported the  delays to the 2010 and 2011 minimum wage increases. However, some  said they had looked forward to the 2010 minimum wage increase and  were disappointed to not receive an increase after they had expected  it. A few said they were tired of the process of considering the  minimum wage increases. Some supported waiting until 2012 to make  a decision about future increases.
Cost of living. Many participants said that the cost of living is  increasing substantially, including the prices of bus fare, food, water, electricity, and health care. Some of these workers said that the cost of  living increases as the minimum wage increases.
Cannery closure. Participants are concerned about the spillover  effects of cannery closures and layoffs on the rest of the American  Samoa economy. They said that the economy and other businesses rely  on the tuna canning industry and will suffer without canneries.  Participants noted that there is high unemployment in American  Samoa and that they fear additional unemployment.
Reduced benefits and work hours. Participants reported that their  benefits had been reduced, including paid holidays and vacations. In  addition to reductions in benefits, participants are concerned that  future wage increases will mean a reduction in hours.
Foreign workers. Discussion group participants noted that workers  from independent Samoa have fewer options for jobs and benefits.  They said that some who were laid off have stayed in American Samoa  and others have returned home.
Discussion group participants outside the tuna canning industry shared  mixed views on the minimum wage increases. Laid off workers said they  supported the minimum wage increases more than employed cannery  workers, though some were concerned about job loss and availability. Like  discussion group participants in the tuna canning industry, participants  outside the cannery fear that the remaining cannery will close with more  minimum wage increases and that other companies will not invest in  American Samoa. Participants said it is hard to find jobs and that  American Samoa needs new jobs. In addition to noting that the cost of  living is increasing, participants also said they thought that enrollment in  social services is increasing. Participants said that people leave American  Samoa in difficult times, but many return.
The text box lists some of the comments by discussion group participants.
American Samoa Workers’ Views Based on Discussion Groups  “I’m scared of the wage increases because I might lose my job  again.”  “It’s better to have something than nothing, better to have a job than  none. What’s the point of a minimum wage increase if you lose your  job?”  “What we have now  is enough. Add 50 cents and we lose  our jobs or the company closes. I don’t want to lose my job.”  “It’s a very good idea for this island and us people to stop minimum  wage for this year and next year.”  “It’s disappointing to think you’re going to get an increase and then  not get it.”  “As long as I have a job, I don’t mind the delay. I’ll wait until 2012.”  “The cost of food is sky high, and water and electricity is high also.” “As increases in wages come, so do price increases in everything— food, power.”  “Minimum wage is a problem—it is too high, and companies are  moving out.”  “I think minimum wage is the reason companies are failing.”  “The economy here depends on the cannery. Without it, the  economy falls apart.”
Reduced benefits and work hours  “There has been cost-cutting. They got rid of benefits. There’s no  annual leave or vacations.”  “If we have another 50 cent increase, hours are reduced—no more  eight hours a day, it’ll be six hours a day. So if the  rate goes  up, it doesn’t matter.  “If there’s no job for me, because I’m from Western Samoa, where  can I find work and money for my family?”  “Those that lost their jobs after  closed are staying at  home, doing nothing, went back home , or  they’re on social services.”
section_title: Appendix IV: CNMI
paragraphs: CNMI employment fell by about 13 percent from 2008 to 2009 and by about  35 percent from 2006 to 2009, largely reflecting the closure of the CNMI’s  last remaining garment factories. In addition, we estimate that less than  1,000 temporary federal jobs funded beginning in June 2009 will end when  federal funding is no longer available. Inflation-adjusted average earnings  of CNMI workers who maintained employment rose by 3 percent from  2008 to 2009 and remained largely unchanged, with a slight drop of .5  percent, from 2006 to 2009, according to CNMI government data. In  addition, over both periods, the minimum wage increased by significantly  more than inflation. 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. According to CNMI  government payroll data, about 17 percent of government workers are  paid at or below $7.25 and would be affected by the minimum wage  increases by 2016. In the tourism industry, close to three-quarters of  hourly-wage workers in June 2010 were at the current minimum wage, and  future scheduled increases through 2016 would affect 95 percent of those  workers. Tourism questionnaire employers reported that they took cost- cutting actions from June 2009 to June 2010, including reducing hours and  freezing hiring; employers also reported plans to take the same types of  actions by early 2012, as well as laying off workers. Few employers— weighted by numbers of employees—attributed their past cost-cutting  actions largely to the minimum wage increases, and one-half or less did so  for each of the planned actions. Due to the decline in visitors and to  competition from other destinations, hotels have generally absorbed  minimum wage costs rather than raise room rates, and they have  postponed other investments and renovations. Both visitor arrivals and  flight seats available to the CNMI declined from 2005 to 2010. Industry  data show that from 2006 to 2010 the CNMI hotel occupancy rate remained  between 58 and 65 percent, and inflation-adjusted room rates declined. If  observed trends continue, payroll will represent an increasing share of  total operating cost for hotels in the CNMI, due to the minimum wage  increases. In discussion groups, some tourism employers and managers  expressed concern about the minimum wage increases, but others said the  minimum wage increases were needed and manageable and that the  primary difficulty was the CNMI tourism industry’s general decline.  Workers participating in our CNMI discussion groups expressed mixed  views regarding the minimum wage increases and said they would like pay  increases but were concerned about losing jobs and work hours.
subsections: section_title: CNMI Employment Fell in 2008-2009 and Has Decreased Substantially Since 2006, and Average Inflation-Adjusted Earnings Have Remained Largely Unchanged
subsections: section_title: CNMI Employment Decreased Substantially 2006-2009
paragraphs: Overall CNMI employment fell substantially from 2006 to 2009, with drops  in the numbers employed in every year, based on CNMI tax data. As shown  in figure 14, based on CNMI tax data, from 2008 through 2009 the total  number of people employed fell by about 13 percent. For the entire period  from 2006 through 2009, the number employed fell 35 percent. A large part  of this decline, especially early in this period, is likely attributable to the  closure of the CNMI’s last remaining garment factories, which employed  many foreign workers.
Because CNMI tax data are not available for 2010, we are unable to report  on the overall level of employment for the year. Wage data from the 12  respondents to our 2010 tourism questionnaire show that hourly-wage  employment in the tourism industry (including hotels and other  employers, such as tour operators) fell 8 percent from 2009 to 2010 (from  1,703 to 1,567) and fell by 14 percent over the period from 2007 to 2010  (from 1,827 to 1,567).
In addition, we estimated that less than 1,000 jobs funded by the U.S.  Census Bureau and Recovery Act funds were temporary and will end when  federal funding is no longer available. As a result, counts of the total  number employed during this period will be higher than the number of  long-term positions. The temporary jobs were funded beginning in June  2009 and included Census enumerators and managers to assist with  collection of 2010 Decennial Census data, as well as jobs in infrastructure  and other areas supported by Recovery Act funds.
In interviews and discussion groups, private sector employers reported  declines in employment due to layoffs and hiring freezes, as well as cuts in  hours and benefits. Many discussion group participants said the minimum  wage increases were one of multiple factors in a “perfect storm” that made  it difficult to operate businesses in the CNMI. They expressed concern  about increases in crime and in poverty, including people without water  and power. They said the departure of the garment industry and the  inability to replace the industry had initiated a downward economic spiral  that hurt businesses, including by contributing to higher shipping costs  and reduced flights. The tourism industry has declined, and population  loss from people leaving the CNMI also has resulted in decreased sales. In  addition, businesses faced high and increasing costs of inputs, including  power and other utilities, gas, and food. They said the legitimate economy  was shrinking, while the underground economy—including some  employers that do not pay the minimum wage—was growing. Private  sector employers expressed particular concerns about changes to  immigration law and incomplete regulations, which created uncertainty  regarding access to needed foreign workers and to visitors. In general,  they said minimum wage increases imposed additional costs at a  particularly difficult time for CNMI businesses. They also expressed  concerns about instability and possible tax increases from the local  government, and some said that the federal government had made  insufficient efforts to improve living conditions and to collect and monitor  data on the CNMI.
According to CNMI government payroll data, about 17 percent of  government workers are paid at or below $7.25 and would be affected by  the minimum wage increases by 2016. In addition, after a partial  government shutdown in October 2010, the CNMI government made  significant cuts to government employees’ work hours.
section_title: CNMI Average Inflation- Adjusted Earnings of Those Employed Have Remained Largely Unchanged Since 2006
paragraphs: Average earnings for those who maintained employment rose from 2006 to  2009, but prices increased by about the same amount. As shown in figure  15, based on CNMI tax and consumer price data, from 2008 to 2009 (the  most recent year available) average inflation-adjusted earnings rose by 3  percent. This increase resulted from an increase in average earnings of 7  percent and an increase in prices of 3.5 percent. For the period from 2006  to 2009, average inflation-adjusted earnings remained largely unchanged,  with a slight drop of about 0.5 percent, due to a rise in average annual  earnings of about 19 percent and a 19.5 percent increase in prices.
Although CNMI tax data do not allow for a direct comparison of average  and minimum-wage annual earnings or for tracking the earnings of  workers who lost their jobs, the hourly wage of minimum wage workers  increased by more than inflation. The inflation-adjusted earnings of  minimum wage workers who retained their jobs and work hours rose by  about 9 percent from 2008 to 2009 and by about 25 percent for the entire  period from 2006 to 2009.
section_title: CNMI Tourism Industry Experienced Declines in Visitor Arrivals, and Hotels Have Absorbed Minimum Wage Increases Rather than Raising Room Rates
subsections: section_title: Minimum Wage Increases in 2007-2010 Increased Median Wage for Workers in Tourism Industry, and 2010-2018 Increases Would Affect Wages of Almost All Tourism Workers
paragraphs: Minimum Wage Increases in 2007-2010 Increased Median Wage for  Tourism Industry Employees  From June 2007 to June 2010, the median hourly wage in the CNMI  tourism industry rose from $3.65 to $4.60, a 26 percent increase, according  to our questionnaire responses (see table 8). During this period, the  minimum wage increased from $ 3.05 to $4.55, an increase of 49 percent.  Because our questionnaire collected wage data as of June of each year,  these data cover the first three minimum wages (in 2007, 2008, and 2009)  but do not reflect the September 2010 minimum wage increase.
Minimum Wage Increases in 2007-2010 Narrowed Wage Gap  between Lower- and Higher-Paid Workers Employed by  Questionnaire Respondents in Tourism Industry  Responses to our questionnaire indicate that the timing of minimum wage  increases corresponded to narrowing of the gap between the wages of  lower- and higher-paid workers in the CNMI’s tourism industry (see fig.  16). Specifically, the gap between the wages of the lowest- and highest-  paid hourly-wage workers of hotels and other tourism employers dropped  from $1.35 in June 2007 to $0.65 in June 2010, a decline of 52 percent.
Some hotel and other tourism employers said in interviews that the  compression of wages had resulted in lower morale for more senior  employees who now earned little more than new employees. Other  employers told us that their voluntary efforts to provide pay increases to  workers above the minimum wage had increased the total costs of the  minimum wage increases.
Minimum Wage Increases in 2010-2018 Would Affect Wages of  Almost All Workers in Tourism Industry  As the minimum wage increases continue, they will affect a growing  percentage of workers in the CNMI’s tourism industry. Based on  questionnaire responses about hotel and other tourism workers’ wages as  of June 2010, 73 percent of hourly-wage workers were at the current  minimum wage. The future minimum wage increases would affect the  wages of 95 percent of current workers by the time the minimum wage  reaches $7.25 in 2016. By 2016, the extra annual cost added by minimum  wage increases after June 2010 (reflecting the 2009 increase) would be  $4,707 per worker (see table 9). We identified the additional cost by  calculating the difference between the cost per worker in June 2010 and  the cost per worker through 2016, based on the scheduled minimum wage  increases and averaged across all workers.
Tourism Employers Reported Cutting Costs and Raising Prices  from 2009 to 2010, but Few Attributed Their Actions Largely to the  Minimum Wage Increases  Hotel and other employers in the tourism industry reported in our  questionnaire that they had taken cost-cutting actions, including those  affecting workers’ income or benefits, and had raised prices from 2009 to  2010. While few—weighted by numbers of employees—attributed their  actions largely to the minimum wage increases, some attributed hiring  freezes to the minimum wage increases.
Cost-Cutting Actions Affecting Workers’ Income or Benefits in 2009- 2010:    Reduced overtime hours. Employers representing 96 percent of all  workers employed by tourism questionnaire respondents reported that  they had decreased overtime work hours for hourly-wage workers. Of  these, employers representing 1 percent of workers employed by these  respondents attributed the action largely to the minimum wage  increases.
Reduced regular hours. Employers representing 91 percent of all  workers employed by tourism questionnaire respondents reported  having reduced regular work hours for hourly-wage workers. Of these,  employers representing 1 percent of workers employed by these  respondents attributed the action largely to the minimum wage  increases.
Froze hiring. Employers representing 79 percent of all workers  employed by tourism questionnaire respondents reported that they had  implemented a hiring freeze. Of these, employers representing 40  percent of workers employed by these respondents attributed the  action largely to the minimum wage increases.
Decreased benefits. Employers representing 50 percent of all  workers employed by tourism questionnaire respondents reported that  they had decreased the level of hourly-wage workers’ benefits, while  employers representing 56 percent reported that they had decreased  the level of salaried workers’ benefits. Of those that reported reducing  benefits of hourly-wage workers, employers representing 3 percent of  workers employed by these respondents attributed the action largely  to the minimum wage increases. Of those that reported reducing  benefits of salaried workers, employers representing 2 percent of  workers employed by these respondents attributed the action largely  to the minimum wage increases.
Additional Cost-Cutting Actions in 2009-2010:  Implemented other labor- and cost-saving strategies or  technology. Employers representing 95 percent of all workers  employed by questionnaire respondents reported that they had  implemented other labor- and cost-saving strategies or technology. Of  these, employers representing 4 percent of workers employed by these  respondents attributed the action largely to the minimum wage  increases.
Reduced capacity or services. Employers representing 63 percent of  all workers employed by questionnaire respondents reported that they  had reduced their operating capacity or customer services. Of these,  employers representing 5 percent of workers employed by these  respondents attributed the action largely to the minimum wage  increases.
Price Increases in 2009-2010:    Raised prices. Employers representing 76 percent of all workers  employed by tourism questionnaire respondents reported that they had  raised prices of goods or services. Of these employers, none attributed  the action largely to the minimum wage increases.
Tourism Employers Reported Plans to Take Cost-Cutting Actions  by Early 2012, and One-Half or Less Attributed Each Action  Largely to the Minimum Wage Increases  Hotel and other employers in the tourism industry reported in our  questionnaire plans to take additional cost-cutting actions in the next 18  months, by early 2012. More employers—weighted by numbers of  employees—attributed their future actions than their past actions to the  minimum wage increases. Specifically, one-half or less attributed each  planned action largely to the minimum wage increases.
Planned Cost-Cutting Actions Affecting Workers’ Income or Benefits:    Reduce overtime hours. Employers representing 93 percent of all  workers employed by questionnaire respondents reported planning to  decrease overtime work hours for hourly workers. Of these, employers  representing 35 percent of workers employed by these respondents  attributed the planned action largely to the minimum wage increases.
Reduce regular hours. Employers representing 87 percent of all  workers employed by tourism questionnaire respondents reported  planning to reduce regular work hours for hourly-wage workers. Of  these employers, none attributed the planned action largely to the  minimum wage increases.
Freeze hiring. Employers representing 83 percent of all workers  employed by tourism questionnaire respondents reported planning to  freeze hiring. Of these employers, none attributed the planned action  largely to the minimum wage increases.
Decrease benefits. Employers representing 63 percent of all workers  employed by questionnaire respondents reported planning to decrease  benefits of both hourly and salaried workers. Of those that reported  planning to reduce benefits of hourly-wage workers, employers  representing 1 percent of workers employed by these respondents  attributed the planned action largely to the minimum wage increases.  Of those that reported planning to reduce benefits of salaried workers,  none attributed the planned action largely to the minimum wage  increases.
Lay off workers. Employers representing 62 percent of all workers  employed by tourism questionnaire respondents reported planning to  lay off hourly-wage workers, and employers representing 61 percent  planned to lay off salaried workers. Of these employers, none  attributed the planned action largely to the minimum wage increases.
Additional Planned Cost-Cutting Actions:  Implement other cost-saving strategies. Employers representing  88 percent of all workers employed by questionnaire respondents  reported planning to implement other cost-saving strategies. Of these,  employers representing 44 percent of workers employed by these  respondents attributed the planned action largely to the minimum  wage increases.
Implement labor-saving strategies or technology. Employers  representing 81 percent of all workers employed by questionnaire  respondents reported planning to implement labor-saving strategies or  technology. Of these, employers representing 40 percent of workers  employed by these respondents attributed the planned action largely to  the minimum wage increases.
Reduce capacity or services. Employers representing 62 percent of  all workers employed by tourism questionnaire respondents reported  planning to reduce operating capacity or customer services. Of these,  employers representing 51 percent of workers employed by these  respondents attributed the planned action largely to the minimum  wage increases.
Raise prices. Employers representing 80 percent of all workers  employed by tourism questionnaire respondents reported planning to  raise prices of goods or services. Of these employers, none attributed  the planned action largely to the minimum wage increases.
Tourism Industry Employers Attributed Past and Planned Actions  Largely to Factors Other than Minimum Wage Increases  Hotel and other tourism industry questionnaire respondents reported that  factors other than the minimum wage increases largely contributed to  their past and planned actions. For example, employers representing 32  percent of workers employed by questionnaire respondents cited changes  to U.S. immigration laws, and employers representing 55 percent of  workers cited the decrease in numbers of customers. Employers noted  that these factors contributed to their future plans as well. Specifically,  employers representing 57 percent of workers employed by questionnaire  respondents cited changes to U.S. immigration laws, and employers  representing 25 percent of workers cited the decrease in numbers of  customers.
section_title: CNMI Hotel Occupancy Has Stagnated, and Hotels Have Generally Absorbed Costs of Minimum Wage Increases
paragraphs: Due to the decline in visitors and to competition from other destinations,  hotels have generally absorbed minimum wage costs rather than raising  room rates, and they have postponed other investments and renovations  that could make their properties more attractive to potential visitors. Both  visitor arrivals and flight seats available to the CNMI declined from 2005 to  2010, particularly those from Japan. Industry data show that from 2006 to  2010 the CNMI hotel occupancy rate remained between 58 and 65 percent,  and inflation-adjusted room rates declined. If observed trends in room and  occupancy rates continue, payroll will represent an increasing share of  total operating costs for hotels in the CNMI, due to the minimum wage  increases. Payroll costs as a percentage of total operating costs will  increase from approximately 29 percent in 2010 (with minimum wage  increases representing about 1 percent of total operating costs) to 34  percent in 2016 (with minimum wage increases representing 8 percent),  assuming other costs remain constant. In discussion groups, some tourism  employers and managers expressed concern about the minimum wage  increases, but others said the minimum wage increases were needed and  manageable and that the primary difficulty was the CNMI tourism  industry’s general decline.
Both CNMI Visitor Arrivals and Flight Seat Availability Have  Declined  Visitor arrivals to the CNMI have decreased 31 percent—from 529,557 in  2005 to 368,186 in 2010. Seats available on flights to the CNMI have  decreased 27 percent—from 740,673 in 2005 to 541,399 in 2010, as shown  in figure 17. Arrivals account on average for 71 percent of overall flight  seat capacity during this period.
Airline service to the CNMI has fluctuated in recent years and remains  unpredictable. For example, in September 2005, Japan Airlines  discontinued service to the CNMI. Other flights have been added and  subsequently removed; for example, Northwest Airlines added routes from  Narita and Osaka, Japan, to the CNMI in 2005, but the Osaka flight was  suspended the next year. Flights from these cities are now only available  seasonally throughout the year, and the local government passed a bill  providing financial incentives to travel agents in an effort to stabilize this  service. A new airline, Fly Guam, established flights between the CNMI  and Hong Kong in March 2011. Because of the lack of flights to and from  China, Chinese visitors arrive largely on charter flights instead of regularly  scheduled flights.
The CNMI’s greatest declines in both visitors and flight seats by country  were from Japan, which represents the largest share of visitors of any  country. The Japanese market share dropped from 71 percent of the  tourist arrivals in 2005 to 50 percent in 2010. In particular, the Japanese  arrivals decreased 51 percent from 2005 to 2010 (from 376,263 to  182,820). Korean arrivals increased from 65,049 in 2005 to 108,079 in  2010, and the Korean market share increased from 12 percent to 29  percent in the same period. Some visitors may arrive on airlines to or from  countries other than their own. For example, Korean visitors may arrive  on flights from Japan. In addition, there are no flights from Russia to the  CNMI; Russian travelers arrive on flights through other countries. China  and Russia still have a combined share of less than 10 percent of the total  tourist arrivals, but they are emerging markets, and Russia accounts for a  disproportionate percentage of tourism expenditures.
Due Partly to Stagnant Occupancy Rates and Declines in Inflation- Adjusted Room Rates, CNMI Hotels Have Absorbed Costs of  Minimum Wage Increases  Due to competition from other vacation destinations, such as Guam, and  to declining visitor arrivals and occupancy rates remaining between 58 and  65 percent, economic reasoning suggests that hotels in the CNMI have  limited ability to raise prices, as shown in recent stagnation in nominal  hotel room rates and decline in inflation-adjusted room rates. If CNMI  hotels had more flexibility in pricing, some of the costs of minimum wage  increases could be passed on to consumers. However, due to the decline  in visitors, hotels have generally absorbed these costs, and hotel managers  said they have postponed other investments and renovations that could  make their properties more attractive to potential visitors.
Occupancy. Data from the Hotel Association of the Northern Mariana  Islands, which covers 12 CNMI hotels, show that from 2009 to 2010, the  overall occupancy rate increased by 7.5 percent, as shown in table 10. For  the overall period from 2006 through 2010, the occupancy rate has no  significant changes, with a slight decrease of 1.5 percent, and remained  between 58 and 65 percent.
Room rates. Room rates decreased by 8 percent from 2009 to 2010, as  shown in table 10. For the overall period from 2006 to 2010, room rates  decreased slightly, by 2 percent. When adjusted for inflation in the CNMI,  real room rates declined by almost 12 percent from 2006 to 2009.
Number of workers. Our questionnaire responses show that for the  period from 2007 to 2010, the number of hourly hotel workers declined by  13 percent.
Scheduled Minimum Wage Increases and Payroll Will Represent an  Increasing Percentage of Total Operating Costs  If observed trends in room rates and occupancy rates continue, payroll  will represent an increasing share of total operating costs for hotels in the  CNMI, due to the minimum wage increases. We estimate that for the hotels  that responded to our questionnaire, the minimum wage increases from  2010 through 2016 will raise average annual payroll costs by  approximately $160,528 and $983,076, respectively, from their average  payroll costs in 2009. As a result, payroll costs as a percentage of total  operating costs will slightly increase from approximately 28 percent in  2009, to 29 percent in 2010 (with minimum wage increases representing  about 1 percent of total operating costs), to 34 percent in 2016 (with  minimum wage increases representing almost 8 percent). Figure 18 shows  the estimated average impact of the minimum wage increases on these  hotels’ payroll costs in 2010 and 2016 (assuming that the number of  employees and other operating costs remain constant).
Hotel and Other Tourism Employers Said Multiple Factors Made It  Difficult to Attract Increased Numbers of Visitors  In discussion groups, some hotel and other tourism employers and  managers expressed concern about the minimum wage increases, saying  that the CNMI competed with similar tourism destinations with lower  wages and was very different from the U.S. economy. Others said the  minimum wage increases were needed and manageable and that the  primary difficulty was the general decline in the CNMI tourism industry.  Some said they had taken steps to reduce regular and overtime hours— including cutting operating hours—and to reduce the cost of benefits.  They also described other cost-saving measures, including consolidating  office space and cutting utility costs by reducing phone lines. Employers  said CNMI tourism business had decreased, with fewer visitor arrivals and  expenditures, including substantial loss of the Japanese market. They said  that too few flights from key tourism countries and frequent changes in  flight availability deterred visitors and led travel agents to send clients to  other destinations. In addition, employers expressed concern about  whether the CNMI tourism industry would retain access to foreign  workers, including those with needed language and other skills, and  access to visitors from China and Russia under U.S. immigration law. They  expressed concern that the quality of the destination had declined and that  the CNMI needed investment in new or updated attractions and hotel  renovations. However, they said uncertainty about immigration rules,  flight availability, and visitor arrivals had discouraged new investment.  Employers said the CNMI needed more tourism promotion, possibly  including incentives for airlines and assistance from the federal  government.
section_title: Tourism and Other Workers Said They Would Like Pay Increases but Were Concerned about Job Availability
paragraphs: Workers participating in our CNMI discussion groups expressed mixed  views regarding the minimum wage increases and said they would like pay  increases but were concerned about losing jobs and work hours. Workers  in the tourism industry generally expressed greater concern about the  minimum wage increases than other workers and unemployed workers.
Price increases. Participants said they wanted to receive minimum  wage increases to help them meet rising prices, including for utilities  such as power and water and for food and other consumer goods.
However, they said the minimum wage increases had not kept pace  with changes in the price of goods, and some said the minimum wage  increases had not made a difference.
Job insecurity. Workers were concerned about the impact of the  wage increases on their ability to find and retain jobs, which was  already difficult. They said they had observed that while some workers  received pay increases, others lost their jobs or work hours. Several  said they would rather keep their jobs and work hours and stay at the  current wage. They also said that many people were leaving the CNMI  to find work.
Poverty and crime. Some said that with or without the minimum  wage, people in the CNMI were suffering from poverty. People who  have lost jobs or had their hours reduced rely on food stamps and  other benefits, though some said they would like to find jobs rather  than relying on benefits. One said he planned to find and sell cans from  the street to generate income. Participants also expressed concern  about rising crime rates resulting from decreased employment, and  several said they had been victims of theft.
Immigration. Participants said that both workers and employers were  worried about the transition to U.S. immigration law, including  increased immigration fees and the status of foreign workers.
The text box lists some of the comments by discussion group participants.
CNMI Workers’ Views Based on Discussion Groups  “Groceries here are pretty expensive. Prices keep going higher and  higher.”  “It’s very hard to pay for everything just with our salary. Power is  expensive.”  “The minimum wage that was raised is good for people working. We  want to try that minimum wage ourselves.”  “Every time the minimum wage goes up, I notice stores raise the  price of commodities.” “Minimum wage going up to $7.25 is great for workers, but at the  same time is a big burden to employers.”  “Minimum wage increases are useless. They cut hours so, in the  end, our paychecks are the same.” “When minimum wage increased I was laid off and up to now have  not been able to find a job.”  “With minimum wage some are getting a benefit of higher wages,  but others are losing their jobs.”  “I’d rather wait for my increase than be laid off.” “Crime is skyrocketing—I’m not ok with that, but it’s because of the  cost of living going up.”  “Nothing changes, even with the delay in the minimum wage.
People are suffering.” “Federal immigration is hurting foreign workers now that we have  to pay fees to go back.”  “Employers and employees are scared of the transition in the next  few years. They’re all just waiting.”
section_title: Appendix V: GAO Questionnaire Used in Report
subsections: section_title: Other tourism-related
section_title: Appendix VI: Comments from the Department of Commerce
subsections: section_title: GAO Comment
paragraphs: 1.  The Department of Commerce provided technical comments in  addition to the signed letter. In discussions with the Department of  Commerce, we agreed to include only the signed letter and not the  technical comments.
section_title: Appendix VII: Comments from the American Samoa Government
subsections: section_title: GAO Comments
paragraphs: 1.  The American Samoa government developed its own estimates of  employment loss based on the information included in our report. It  concluded that American Samoa employment fell by 3,737 in 2009 and  by 7,993 in 2010-2011. Our report does not include an estimate of total  employment losses in 2009 because the data come from multiple  sources that cannot be combined. Specifically, it is unclear the extent  to which the SSA data reflect some losses of cannery jobs in addition  to other job losses, so these cannot be added to cannery job losses  from our industry questionnaire. In addition, the SSA data count the  number of employed people, while the questionnaires count the  number of jobs held at each firm. It is possible that the same person  could hold positions at multiple firms. Moreover, the SSA data include  workers who had earnings in American Samoa at any point in the year,  while the questionnaire reflects the number of jobs in the tuna canning  industry as of June of each year. Furthermore, because many of the  temporary federal jobs began after our SSA counts of employment in  American Samoa, and because workers can hold multiple jobs, it is  unclear how the temporary federal jobs will affect employment counts  based on SSA data. 2.  The American Samoa government recommended in its written  comments and in a January 2011 letter that GAO explore alternative  methods for setting minimum wage levels in American Samoa. The  government provided several alternative methods for consideration.  While we considered these suggestions and summarized them in the  report, our research objectives and methodology were developed in  response to the legislative mandate and in discussions with  Congressional requesters. These objectives and methodology were  designed to provide sufficient information and analysis to support  congressional deliberation on minimum wage in American Samoa and  the CNMI. 3.  The American Samoa government provided statements comparing the  economy and minimum wage increases in American Samoa to those in  the U.S. states. We agree that the minimum wage applies to a much  larger proportion of American Samoa (and CNMI) workers than of  workers in the U.S. states. Our report states, “In our April 2010 report,  we found that before the first minimum wage increase in July 2007, 37  percent of all workers and about three-quarters of private sector  workers employed by American Samoa questionnaire respondents  earned wages close enough to the minimum wage to be directly  affected by the first increase. In the CNMI, 18 percent of all workers  and about a third of private sector workers were directly affected by  the first increase. For both areas, we found that most private sector  workers would be directly affected by the increases once the minimum  wage reached $7.25. In contrast, according to Bureau of Labor  Statistics estimates, in 2006 approximately 2.2 percent of all hourly  workers in the U.S. states earned the federal minimum wage of $5.15  or less.” The report also states, “Current federal data on income and  poverty levels in American Samoa do not exist; however, the most  recent available data show that American Samoa had lower income  and higher poverty rates than the mainland United States.”
section_title: Appendix VIII: Comments from the Commonwealth of the Northern Mariana Islands Government
subsections: section_title: GAO Comments
paragraphs: 1.  The CNMI government provided information on decreases in CNMI  visitor arrivals from Japan following the earthquake and tsunami in  Japan. We have added this information to the existing statements on  this topic in our report. 2.  The CNMI government questioned that for some key past and future  actions, such as reducing regular work hours and freezing hiring, no  CNMI employers attributed the actions to the minimum wage  increases. We note that, as stated in the report, we present the  weighted percentage of employers who attributed each action to the  minimum wage increases “to a large extent” (not those who attributed  the action to the minimum wage increases “to a small extent” or “to a  moderate extent”). 3.  The CNMI government cited several limitations of the tourism industry  questionnaire, as we described in this report, and recommended that  the reporting method be improved to gather a clearer picture regarding  minimum wage increases and to improve data integrity. However, for  any questionnaire based on self-reported data, we cannot eliminate the  possibility that some employers’ views of the minimum wage increases  may have influenced their responses. 4.  The CNMI government stated that the analyses of CNMI residents’  living standards should be strengthened, as required by congressional  mandate. Although the original mandate (Pub. L. No. 111-5, § 802, 123  Stat. 115, 186, Feb. 17, 2009) specifically required us to study minimum  wage effects on living standards, the current mandate (Pub. L. No. 111- 244, 124 Stat. 2618, Sep. 30, 2010) does not. However, the report  includes qualitative findings related to living standards based on  discussion groups with employers and with workers, as well as  quantitative findings on the inflation-adjusted earnings of average and  minimum wage workers.
section_title: Appendix IX: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above, Emil Friberg, Assistant Director;  Mark Speight, Assistant General Counsel; Marissa Jones, analyst-in-charge;  Ashley Alley; Pedro Almoguera; Benjamin Bolitzer; David Dayton; Etana  Finkler; Jill Lacey; Luann Moy; Nalylee Padilla; and Vanessa Taylor made  key contributions to this report. Technical assistance was provided by  Holly Dye, Patrick Dudley, Kay Halpern, Dave Hancock, Michael Hoffman,  Rhonda Horried, Michael Kendix, Courtney LaFountain, John Mingus, Jena  Sinkfield, and Wayne Turowski.