American Samoa and the Commonwealth of the Northern Mariana Islands: Economic Indicators Since Minimum Wage Increases Began
Released: 2014-03-31T00:00:00

Letter

American Samoa Earnings, Employment, and Status of Key Industries

The minimum wage in American Samoa has increased three times since 2007, most recently on May 25, 2009. Unlike the United States, American Samoa has separate minimum wages for 18 separate industries, currently ranging from $4.18 to $5.59 per hour. The tuna canning industry, American Samoa’s largest source of private sector employment, has a current minimum wage of $4.76 per hour and mostly employs foreign There is currently one labor from the neighboring islands of Samoa.operating cannery, Star-Kist, and its associated can manufacturer in American Samoa. An additional fish company has begun limited operations in American Samoa while renovating and planning to re-open the former Chicken of the Sea cannery in 2015. Each minimum wage in American Samoa will next be increased by $.50 per hour on September 30, 2015, with further increases every 3 years. Under current law, the minimum wage in the tuna canning industry will reach the U.S. minimum of $7.25 per hour in 2027.

American Samoa Employment and Earnings Declined from 2007 to 2012

Economy. American Samoa’s real gross domestic product (GDP) and population have both declined in recent years. American Samoa’s 2012 real GDP of $504 million was 4.5 percent below the 2006 real GDP, and also slightly lower than the 2009 real GDP. Real GDP per capita increased 12.5 percent to $9,164 from 2006 to 2012. American Samoa’s population declined from 57,291 in 2000 to 55,519 in 2010.

Employment. American Samoa tax combined with GAO questionnaire data show that the total number of employees in American Samoa increased 1.5 percent from 2011 to 2012 (from 15,552 to 15,790).

However, from 2007 to 2012, employment declined 11 percent (from 17,677 to 15,790, with a peak of 19,229 in 2008).responses from the tuna canning industry show that their employment of hourly workers dropped by 13 percent from 2012 to 2013 and by 58 percent from 2007 to 2013.

Earnings. Earnings analysis based on American Samoa tax, GAO questionnaire, and consumer price data show that, from 2011 to 2012, average inflation-adjusted earnings of those employed in American Samoa fell by 2 percent. The decrease resulted from average earnings increasing by 2 percent while prices increased 4 percent. For the overall period from 2007 to 2012, average inflation-adjusted earnings fell by about 5 percent; average annual earnings rose about 27 percent but local prices rose by about 34 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 who retained their jobs and work hours has not increased by more than inflation since 2007. The inflation-adjusted earnings of minimum wage cannery workers who retained their jobs and work hours fell by about 4 percent from 2011 to 2012 and by about 5 percent from 2007 to 2012.

Employer, government, and worker views. The discussion group of private sector employers we met with generally opposed additional minimum wage increases, citing American Samoa’s reliance on the tuna canning industry and fears about the effect of further increases on the industry and the economy. The American Samoa government, American Samoa’s largest employer, anticipated it would have to cut six employees to offset the 2015 minimum wage increase, with additional budget impacts resulting from any further increases. The Governor of American Samoa has stated that he would pursue changes in U.S. law to allow American Samoa to take control of its minimum wage. Star-Kist workers who participated in our discussion group generally opposed further minimum wage increases rather than supported future increases. Workers expressed concerns that any increase would result in lost jobs or a closure of the cannery. Some workers we spoke with also expressed concerns that future increases in the minimum wage would lead to an increase in prices in American Samoa, as they said occurred as a result of previous minimum wage increases.

American Samoa’s Tuna Canning Industry Faces Challenges from Minimum Wage Increases and Other Factors.

Tuna canning industry wages. Without a minimum wage increase in American Samoa from 2011 through 2013, there was no increase in the $4.76 median wage of tuna canning workers in that time. Since 2007, as a result of previous minimum wage increases, the median wage among workers in the tuna canning industry employed by questionnaire respondents has risen from $3.30 to $4.76 per hour (44 percent). Based on questionnaire responses about workers’ wages as of June 2013, the future minimum wage increases would affect the wages of 92 percent of the current workers in the canning industry by 2018, when the minimum wage reaches $5.76. Based on the wages workers currently earn, minimum wage increases would increase the average annual cost per worker in 2018 by an average annual cost of $1,723 per worker. By 2027, when the tuna canning minimum wage reaches $7.25, 98 percent of current workers in the tuna canning industry would be affected, increasing the average annual cost per worker by $4,710.

Tuna canning employer actions. Two of the three employers in the tuna canning industry in American Samoa reported that they had taken cost-cutting actions from June 2010 to June 2013 including labor- and cost-saving strategies, and reduced overtime. The third employer, which was just beginning operations in American Samoa at that time, considered the questions not applicable. The two employers attributed all but one of their actions to a moderate or large extent to minimum wage increases. In addition to minimum wage increases, these two employers also attributed their actions to a moderate or large extent to increased utility and material costs. Two of three employers stated that they planned in the next 18 months to introduce labor- and cost-saving strategies, delay business expansion, relocate business, and reduce overtime hours. The two employers attributed all of these plans to a moderate or large extent to the minimum wage increases, but also to increased utility and material costs and business factors.

Tuna canning industry analysis. Cannery officials stated that wage increases are one of many factors affecting the tuna canning industry in American Samoa, but that its labor costs, including the minimum wage increases, place American Samoa at a significant cost disadvantage in comparison with other canned tuna exporting countries. Both canneries cited congressional action to defer the next minimum wage increase to 2015 as encouraging their ability to invest in American Samoa. Cannery officials said that there is a spectrum of possible actions in response to increasing costs. For example, canneries could lower the staffing level or close certain production lines.

See table 1 for key findings and appendix III for detailed findings and tables on American Samoa.

CNMI Earnings, Employment, and Status of Key Industries

The minimum wage in the CNMI has increased five times since 2007, with the most recent increase on September 30, 2012, bringing the minimum wage to $5.55 per hour. Under current law, the next minimum wage increase will occur on September 30, 2014, and the CNMI will reach the current U.S. minimum wage on September 30, 2018. The CNMI’s sizeable garment industry has left the territory, leaving tourism as its key industry. Tourists are primarily from Japan, Korea, China, and Russia. Chinese and Russian tourism has been supported by the Secretary of Homeland Security’s decision to exercise parole authority, allowing tourists from those countries to enter the CNMI. The CNMI economy heavily relies on a foreign workforce to support its economy; as of the 2010 decennial census, noncitizens comprised 43 percent of the CNMI population. Since the 2009 assumption of U.S. control over CNMI immigration, the Department of Homeland Security has annually reduced the number of permits for the CNMI’s foreign workforce in keeping with the requirement to bring the number of such permits down to zero by the end of 2014.

CNMI Employment and Earnings Declined from 2006 to 2012

Economy. The CNMI’s population and real GDP have both declined in recent years. In real terms, CNMI GDP decreased by approximately 36 percent overall from 2006 to 2012 though it has remained relatively flat since 2009. The CNMI’s real GDP per capita decreased approximately 24 percent from 2006 to 2012. The CNMI population declined from 69,221 in 2000 to 53,883 in 2010.

Employment. The total number of people employed fell from 25,229 to 23,720 (about 6 percent) from 2011 to 2012 according to CNMI government tax data. For the entire period from 2006 to 2012, the number employed has fallen from 43,036 to 23,720 (45 percent), with most of the overall decrease occurring from 2006 to 2009. Decreases before 2009 reflect closure of the CNMI’s garment factories, which employed many foreign workers.

Earnings. From 2011 to 2012, inflation-adjusted average earnings of those employed rose by 1 percent, according to CNMI government tax data and consumer price data. The increase in earnings resulted from a 3 percent increase in average earnings offset by a 2 percent increase in prices. Over the entire period from 2006 to 2012, average inflation-adjusted earnings fell by about 2 percent, with an about 29 percent increase in average earnings offset by an about 31 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 who retained their jobs and work hours has increased by more than inflation since 2006. The inflation-adjusted earnings of minimum wage workers who retained their jobs and work hours rose by about 7 percent from 2011 to 2012 and by about 39 percent from 2006 to 2012.

Employer, government, and worker views. CNMI employers we spoke with supported the 2013 postponement of minimum wage increases.

Participants in our discussion groups stated that businesses, particularly small businesses, could not absorb another minimum wage increase. However, the minimum wage was not as important a concern for discussion group participants as the potential loss of the foreign labor force. For hotel representatives we spoke with, providing easier access for Russian and Chinese tourists by having the Department of Homeland Security continue to parole these individuals into the CNMI was a greater concern than the minimum wage. According to the CNMI Department of Commerce, the Governor of the CNMI supported the 2013 postponement of the minimum wage increase. Workers we spoke with on Tinian island saw future minimum wage increases as an opportunity to increase the amount they could remit to their families living elsewhere. Workers on both Saipan and Tinian islands feared that prices would increase along with the minimum wage, as they said had occurred at the time of previous increases.

Hotel Industry Has Rebounded in Recent Years; Most Hotel Workers Will Be Affected by Minimum Wage Increases

Hotel industry wages. From June 2011 to 2013, the median wage among workers employed by CNMI hotel industry questionnaire respondents rose from $5.33 to $5.86 (10 percent). Based on questionnaire responses about workers’ wages as of June 2013, the future minimum wage increases would affect the wages of 94 percent of current workers in the CNMI hotel industry by the time the minimum wage reaches the U.S. minimum wage of $7.25 in 2018. Based on the wages workers currently earn, minimum wage increases would increase the average annual cost per worker in 2018 by $3,051 since June 2013. For the hotels that responded to our questionnaire, if observed trends continue, scheduled minimum wage increases will increase the share of hotels’ total operating costs attributable to payroll from approximately 26 percent of operating costs in 2012 (with minimum wage increases representing about 1 percent of total operating costs) to 31 percent in 2018 (with minimum wage increases representing about 5 percentage points of the 31 percent increase).

Hotel employer actions. Hotels representing the majority of all workers employed by questionnaire respondents took cost-cutting actions and raised prices from 2010 to 2013. Although employers attributed a number of actions to the minimum wage increases, they also attributed them to other factors, such as increased costs and changes to U.S. immigration law. Hotels representing 90 percent or more of all workers employed by questionnaire respondents stated that they planned to introduce labor or cost-saving strategies and raise prices in the next 18 months, with hotels representing all or almost all workers employed by questionnaire respondents attributing that plan to minimum wage increases to a moderate or large extent. As with their past actions, employers attributed their future plans to a moderate or large extent to increasing utility, material, and transportation costs in addition to minimum wage increases.

Hotel industry analysis. In 2012 and 2013 hotel occupancy rates increased from previous years. After adjusting for inflation, yearly average room rates increased by 11 percent between 2010 and 2013. In addition, according to the Mariana Visitors Authority, two closed hotels may re-open and there are current proposals for the construction of two new hotels. While acknowledging the recent upturn in tourism, industry representatives characterized the growth as an opportunity to recover from several down years and reinvest in their properties. They attributed the recent growth in tourism to the Chinese and Russian markets and feared the loss of Russian and Chinese market if the parole program for these tourists is not maintained.

See table 2 for key findings and appendix IV for detailed findings and tables on the CNMI.

Concluding Observations

Both American Samoa and the CNMI have experienced decreases in employment and earnings since minimum wage increases began in 2007. Although minimum wage increases play a role in each economy, factors beyond minimum wage increases will also continue to play a role. Both American Samoa and the CNMI have short-term potential to grow their primary sectors–American Samoa through the opening of a new cannery in 2015 and the CNMI through the opening of new hotels. However, according to cannery officials we spoke with, changes in tariffs applicable to other countries exporting tuna or competition from low-wage foreign competitors could compel the tuna canning industry to leave American Samoa. In the CNMI, the projected decrease in the permitted foreign labor force remains a concern for CNMI employers. In addition, CNMI tourism faces competition from other locations and is susceptible to economic trends in its tourist markets and the continuing use of parole to support Chinese and Russian tourism.

Agency Comments and Our Evaluation

We provided a draft of this report to officials at the Department of Commerce, Department of the Interior, Department of Labor, the Social Security Administration, and the governments of American Samoa and the CNMI for review and comment. We received written comments from the governments of American Samoa and the CNMI, which are reprinted in appendixes VI and VII, respectively. We also received technical comments from the Departments of the Interior, Commerce and Labor; and SSA, which we incorporated as appropriate. We also shared excerpts of the draft with several private sector entities and incorporated their comments as appropriate.

Following are summaries of the written comments from American Samoa and the CNMI, with our responses.

The government of American Samoa noted that our draft report captured the consensus among American Samoan stakeholders to postpone the 2015 minimum wage increase, but expressed a number of concerns about the information sources we used. The government stated that there is significant evidence that the 2010 U.S. census grossly undercounted the American Samoa population. We have edited the footnote in the report to further describe American Samoa’s concerns and have reprinted their assertions in the Appendix VI of the report, but the employment counts we present are not based on Census data and would not be affected by an underestimate in the 2010 decennial census.

The government next expressed concern that, given the challenges to collecting validated data in American Samoa, the data presented in our report did not include a wide enough scope of data from other sources and, as a result, yielded misleading statements and findings. In Appendix I of our report, we reported and evaluated alternative data sources. We have worked with the American Samoa Office of Taxation to review and verify their data and believe that the use of its data, in conjunction with cannery employment data from our questionnaire, is appropriate for determining the changes in employment and earnings in American Samoa.

The government additionally stated that our report failed to capture the multiplier effect of employment cutbacks in other industries in addition to tuna canning and the significant number of business closures during this period. However, each of the data series we present in Appendix I covers employment in all sectors and so would capture employment and earnings throughout the economy.

The government of American Samoa also restated its opposition to further minimum wage increases and proposed that American Samoa set its own minimum wage schedule. In expressing its opposition, the government cited American Samoa’s vulnerability to elements of the international and national market place and U.S. international trade and national budget policies. The government additionally stated that tethering the American Samoa minimum wage to that of the United States is misguided; because of the differences between the U.S. and American Samoa economies, American Samoa can never attain equality with the U.S. minimum wage. The government proposed instead that American Samoa be allowed to develop its own minimum wage schedule with appropriate guidance and oversight provided by the U.S. Department of Labor and U.S. Department of the Interior. See the full text of American Samoa’s comment in Appendix VI.

The government of American Samoa also provided us with technical comments that included updated CPI data correcting calculation errors made by their staff. Correcting these errors slightly changed the reported CPI. For example, the CPI for the 4th quarter of 2012 increased from 130.5 to 131.1. We have recalculated the inflation-adjusted wages accordingly in this report. Additionally, during the comment period, data reviews by American Samoa Office of Taxation and GAO resulted in corrections to American Samoa employment and wage data for 2007- 2009. We have incorporated this corrected data.

Comments from the Department of Commerce of the CNMI stated that the indicators provided an objective overview of CNMI economic conditions and the report captured the general condition of what is happening in the CNMI. The CNMI comment letter additionally reiterated challenges faced by the CNMI from uncertainty regarding the phase-out of foreign worker permits, the cost of fuel and utilities, and increases in health care costs. The Secretary of Commerce additionally stated that he hoped the report will elevate the CNMI’s discussion with federal agency partners regarding baseline assessments and data, and how a wage increase may affect enrollment and eligibility for public assistance programs, such as Medicaid.

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 website 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. 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 VIII.

Appendix I: Objectives, Scope, and Methodology

This report updates our previous reports on the impact of minimum wage increases in American Samoa and the Commonwealth of the Northern Mariana Islands (CNMI) and discusses for each territory (1) changes in employment and earnings and (2) changes in key industries since the most recent federal minimum wage increase and since the increases began.

To describe employment and earnings, we analyzed tax data from the American Samoa and CNMI governments and earnings data from the U.S. Social Security Administration (SSA) through 2012. 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 hotel 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 reviewed data and interviewed officials from the U.S. Departments of the Interior, Commerce, and Labor, as well as from SSA. During visits to American Samoa and the CNMI in November 2013, we conducted interviews and discussion groups with government officials, employers, other private sector representatives, and workers to obtain views and information on the minimum wage increases. We also reviewed U.S. minimum wage laws and other relevant laws and regulations. We did not review the extent to which laws were properly enforced or implemented. The scope of our study also does not include workers in the underground economy, which would include any employers that may not comply with laws, including tax, minimum wage, immigration, and other laws. We did not review compliance with laws as part of this study.

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 American Samoa or the CNMI. Because these data sources were unavailable, we collected our own data in each area.

Employer Questionnaire

In American Samoa and the CNMI in 2013, we collected updated data on employment, wage structure, and past and planned employer actions covering 2010 through 2013 from the CNMI’s hotels and the American Samoa tuna canning industry.

For our 2013 questionnaire, we defined a large hotel as one that employed 50 or more workers in recent years. We sent the questionnaire only to hotels with 50 or more workers because we could contact only a limited number of hotels in each area, given available resources. We confirmed our list of hotels with the Saipan Chamber of Commerce and the Hotel Association of the Northern Mariana Islands. We initially sent the questionnaire to 15 hotels. Two who responded had less than 50 employees and were not included in our analysis, bringing the total number of hotels in our survey to 13. All but 2 hotels responded.

In accordance with other federal employment surveys and with our 2009 and 2010 questionnaires, our 2013 employer questionnaire asked for wage data for the pay period containing June 12 of 2011, 2012, and 2013. 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 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.)

Before sending the 2009 questionnaire to employers in 2009, 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 questions in our 2010 and 2013 questionnaires, revisions to remaining questions were minor and did not require additional pretesting.

We administered the questionnaire between September 2013 and December 2013. Employers received the questionnaire by e-mail in an attached form that they could return electronically after marking checkboxes or entering responses in open-answer boxes. We conducted nonresponse follow-up while in the CNMI. 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 2013, all three of the American Samoa employers that received our questionnaire provided responses, resulting in a response rate of 100 percent. Based on American Samoa tax data, our respondents represented, in 2012, about 14 percent of the total workforce. Based on CNMI tax data, our respondents represented, in 2012, about 7 percent of the total workforce.

In reporting the percentages for questionnaire responses in the CNMI, 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. 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 multiplied the number of employees by the employer response, then divided that number 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. Among CNMI employer responses, two hotels accounted for almost half of workers employed by questionnaire respondents, so those hotels’ responses substantially affected our questionnaire results.

For our analyses of the effect of minimum wage increases, we obtained information from our questionnaire on employment and earnings for both hourly wage and salaried workers during the pay periods that included June 12, 2011, 2012, and 2013. We analyzed these responses in conjunction with data we collected from the same employers for previous reports regarding the pay periods that included June 12, 2007, 2008, 2009, and 2010. For hourly wage workers, respondents were asked to provide the number of employees paid at each wage rate. For salaried workers, respondents were asked the number of full-time and part-time workers paid at each salary level. Hourly wage workers represented about 98 percent of American Samoan cannery workers and 90 percent of CNMI hotel workers. 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. We did not independently verify that the wage and other information provided to us were correct. After recording the questionnaire data, we verified all keypunched records by comparing them with the corresponding questionnaires and corrected the errors we found.

The questionnaire responses cannot be used to make inferences about all employers and workers in the CNMI and American Samoa, or about all employers and workers in the CNMI hotel industry. First, because the lists of employers that received the questionnaire included only those in the American Samoa tuna canning and CNMI hotel industries (with more than 50 employees), the lists were not representative of all employers or of all employers in the CNMI hotel industry. Second, 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.

To study CNMI hotel minimum wage and payroll costs in relation to operating costs, we analyzed data provided by CNMI hotel questionnaire respondents on 2012 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. In 2011, for example, employers contributed 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.

Employment and Earnings Data

To report on overall employment and earnings, we relied on local government data. The CNMI Department of Finance provided tax data for 2006 to 2012 with counts of the number of individuals in different ranges of earnings for both public and private sector workers and for both citizens and noncitizens. For the CNMI, this data source and use is the same as in the two prior GAO reviews of minimum wage changes. To calculate mean wages in the CNMI, we divided the total sum of earnings by the number of workers with non-zero wages.

In the case of American Samoa, we used a combination of local government data and business responses to GAO’s questionnaire to report on employment and earnings. The American Samoa Office of Taxation provided tax data with the number of workers employed by each employer from 2007 to 2012, and the total sum of earnings over the year. However, the American Samoa tax data excluded cannery employees in some years. To address this gap, we added counts of cannery workers from our questionnaire. The American Samoa tax data has a count of persons employed during the tax year by the employer. The cannery employment figure, from GAO’s questionnaire, is a count of employees at the canneries as of a specific pay period in June of the given year. To calculate mean wages for the American Samoa tax data, we divided the total sum of earnings by the number of workers across all employers. To calculate the mean wages for cannery workers, we assumed that all cannery workers earned the minimum wage and worked full-time over the year. To calculate the overall mean wage for American Samoa, we averaged these estimates, weighting by the number of workers in each category.

The initial data provided by the Office of Taxation had a number of gaps, such as missing numbers of employees or wages for several employers. At our request, the Office of Taxation researched and provided updated data that was far more complete, but lacked employee counts for some employers in 2007 and 2010. We used the reported number of employees in the adjacent year or years to estimate these missing values. In 2007, the American Samoa tax data were missing the number of employees for 39 of the 408 employers. We were able to estimate the number of employees in 2007 for 34 of these 39 by using their reported number of employees in other years. This estimation added 391 employees to the 2007 total. Similarly, in 2010, we added 499 employees to the total by interpolating the 2010 number of employees for the American Samoa Community College from the reported number of employees in 2009 and 2011. The data in 2008, 2009, 2011, and 2012 did not require estimation of such missing values.

In addition to the tax data, we obtained SSA data (as of November 15, 2013) on the employment and earnings of individual taxpayers in American Samoa to update our analysis of data for the previous report. While the SSA data cover all types of workers in American Samoa, three large groups of people in the CNMI were not required to report earnings to SSA and thus were excluded from the SSA data—CNMI government workers and immigrant workers from the Philippines and Korea. In 2012, these three groups represented approximately 40 percent 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.

To perform the analysis of SSA data, we first identified American Samoa workers by using the recorded territory or state code for the worker. However, we determined that, in 2011 and 2012, this method resulted in implausibly large counts. After consultation with SSA officials, we found that data entry issues had resulted in a number of extra entries with the American Samoa state code of “AS.” For example, some entries for addresses in Texas had entered the last two letters of the state, “AS” in the state field. Consequently, we additionally checked the American Samoa data to exclude those entries that, though they had an American Samoa state code, had a city or zip code that did not match American Samoa. We performed an additional inspection of the records that had blank city and zip code fields and concluded that the vast majority of persons with an “AS” state code but missing city and zip code entries had characteristically Samoan names. We therefore also included those records that had an “AS” state code and a blank city and zip code field. These additional checks reduced the count for 2011 and 2012 and also slightly reduced the reported count based on SSA data in earlier years. SSA officials attributed these data errors in 2011 and 2012 to intermittent data entry errors by employers and data submitters.

We compared our counts of employees based on American Samoa tax data and GAO questionnaire responses to employment counts based on SSA data. In addition, we compared these series to employment counts in the American Samoa Statistical Yearbook (based on a combination of government sources for public sector employers and business license applications for private sector employers). There are some differences between the data. For example, a person (as counted in the Social Security data) could have multiple positions (as counted in the other sources). As table 3 shows, all three employment counts fell from 2007 to 2012 and also had roughly comparable changes from 2007 to 2009— years covered by our previous report on the minimum wage in American Samoa. However, the trend in the Social Security data was much larger in magnitude overall from 2007 to 2012. Specifically, the drop in employment from 2007 to 2012 was approximately 41 percent based on SSA data but about 11 percent based on combined American Samoa tax and GAO questionnaire data and 13 percent in the Statistical Yearbook.

The smaller drop was more in keeping with the Bureau of Economic Analysis’s calculation of a flat or slightly declining real GDP in those years.

We could not determine an explanation for the divergence among the data sources. Because the drop was larger when persons were counted, some of the difference could reflect the loss of cannery workers, who may have been less likely than other workers to hold multiple positions. However, there were also cases where the year-to-year changes differed. For example, from 2011-2012, both the Social Security and the Statistical yearbook show decreases of about 16 percent and 18 percent, respectively, but the figure based on American Samoa tax and GAO questionnaire data remained largely unchanged. We determined that the data from the American Samoa Office of Taxation were more reliable than SSA data for our purpose of describing employment and earning trends in more recent years.

Because the U.S. Bureau of Labor Statistics collects CPI data on the U.S. 50 states but not on American Samoa or the CNMI, we relied on other sources of data to compare changes in earnings or wage rates to changes in prices. We obtained historical data on the CPI from both areas to estimate inflation-adjusted earnings.the CNMI, we used quarterly CPI data from the first quarter of 2006 to the fourth quarter of 2012. 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 responsible for producing the quarterly CPI estimates.

Discussion Groups

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. For each discussion group, the Chamber of Commerce invited members to participate. In the CNMI, we also held a discussion group with members of the Hotel Association of the Northern Mariana Islands and interviewed hotel human resource managers. The number of participants in each group ranged from 4 to 20 business owners and representatives.

To collect information on workers’ views of the minimum wage increases, we conducted structured discussion groups with worker groups in the CNMI and American Samoa. In American Samoa, we arranged, in cooperation with Star-Kist, a worker discussion group at the Star-Kist cannery. In the CNMI, we conducted one discussion group with employees of hotels in Saipan, arranged by Hotel Association of the Northern Mariana Islands and another with employees of the Tinian Dynasty, arranged through that hotel. The number of participants in each group ranged from 3 to 10.

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. The views represented are those only of the participants in our groups and may or may not be representative of the population of employers and workers in the CNMI and American Samoa. 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.

Other Local Data

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 follow-up. In addition, the Marianas Visitors Authority provided data on arrivals by country of residence. We found the data used to be reliable and relevant for the purposes of our report.

Data Reliability and Limitations

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, we were not able 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 this performance audit from July 2013 to February 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Minimum Wage Increases in American Samoa and CNMI

The federal minimum wage was first enacted as part of the Fair Labor Standards Act of 1938 (FLSA). It 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 50 U.S. 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 who meets certain conditions, with limited exemptions. Certain employees who would otherwise be covered under certain requirements of the FLSA may be exempt. For example, individuals engaged in agriculture, if their employer is an immediate family member, or those catching seafood at sea are exempt from FLSA minimum wage and overtime requirements.

Application of Federal Minimum Wage Law to American Samoa and CNMI

In 2007, the United States enacted legislation that incrementally applies the U.S. minimum wage to American Samoa and the CNMI. The legislation raised the federal minimum wage in the 50 U.S. 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 beginning in July 2007 to the minimum wages in both American Samoa and CNMI that would eventually bring them to parity with the federal minimum wage.

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 50 U.S. states. Prior to the 2007 law, American Samoa’s minimum wages were set for each of 18 industries through biennial reviews by special industry committees established by the U.S. Department of Labor. American Samoa’s minimum wages in 2006 ranged from $2.68 to $4.09. Under the 2007 law, American Samoa retained its separate minimum wages by industry, with each to be increased by $.50 per hour until it reaches the U.S. minimum wage. The CNMI had authority to set its own minimum wage under its 1976 Covenant with the United States; its minimum wage in 2006 was $3.05.

Minimum Wage Law in American Samoa

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. The most recent minimum wage increase in American Samoa was on May 25, 2009. In 2010, the U.S. enacted a law delaying the scheduled American Samoa minimum wage increases for 2 Further changes to the years, providing for no increase in 2010 or 2011. law in 2012 provided for no increases in 2012, 2013, and 2014 and changed the interval of the increases from every year to every 3 years.Under current law, therefore, the next minimum wage increase will occur on September 30, 2015, and the minimum wage in the American Samoa tuna canning industry will reach the current U.S. minimum wage of $7.25 on September 30, 2027. Under current law, the minimum wage for American Samoa’s lowest-paid workers will reach the U.S. minimum wage on September 30, 2033 (see table 4). If the original 2007 law increasing the minimum wage had not been subsequently amended, the minimum wage in the tuna canning industry would have reached the U.S. minimum wage in May 2014.

Congress 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 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. On September 30, 2012, the scheduled annual increase raised the CNMI minimum wage to the current $5.55 per hour. In September 2013, additional legislation cancelled the scheduled 2013 and 2015 annual increases. Under current law, therefore, the next minimum wage increase will occur on September 30, 2014, and the CNMI will reach the current U.S. minimum wage on September 30, 2018 (see table 5). If the original 2007 law increasing the minimum wage had not been subsequently amended, the minimum wage in the CNMI would have reached the U.S. minimum wage in May 2015.

CBO Study of Options to Increase the Minimum Wage in the United States

In February 2014, the Congressional Budget Office (CBO) issued a study of two options for raising the federal minimum wage. The first option would raise the minimum wage to $10.10 per hour and the second would raise it to $9.00 per hour. To perform its study, CBO identified the number of workers who would be affected by these options from Census data. CBO then reviewed existing research findings on the elasticity of employment and minimum wage increases—that is, the percentage change in employment induced by a percentage change in the minimum wage—and estimated the effect of each option on employment, income, and poverty. CBO chose the value of the elasticity for each option based on estimates of this elasticity from previous research. However, because there is considerable uncertainty about the effect of minimum wage increases, CBO developed a range of estimates.

The two options of the CBO study each assumed increases in the minimum wage that are smaller in size than those that occurred from 2007 to 2009 in American Samoa and the CNMI. CBO also found that the two options would affect a much smaller percentage of U.S. workers than we found would be affected by future minimum wage increases for workers in the key industries of American Samoa and the CNMI.

Appendix III: American Samoa

Background

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).

The 2010 decennial census found American Samoa’s population to be 55,519, a decrease of 2.5 percent from its 2000 population. Approximately 98 percent of the population lives on the main island of Tutuila, and most economic activity and government operations take place in and around the harbor of the capital of Pago Pago. Most of Tutuila, however, consists of rugged terrain, with relatively little level land (see fig. 2).

From 1900 through 1904, the U.S. government negotiated control over American Samoa,federal governance of the territory. In 1951, governance was transferred and the U.S. Navy subsequently took responsibility for 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 policies that have provided tariff-free access to the United States for canned tuna and tax policies that have reduced federal taxes on income earned by qualifying U.S. corporations investing in American Samoa. Changes to various free trade agreements within the last decade, however, have lowered U.S. tariffs on tuna exported from several other countries, reducing the American Samoa canneries’ competitive advantage. In addition, the potential Trans-Pacific Partnership includes one tuna producing country, Vietnam, which could pose additional competition if granted tariff-free access to the U.S. market. Under the Internal Revenue Code, qualifying American Samoa tuna canneries have received a tax credit for U.S. corporate income taxes. Canneries in American Samoa have also benefited from exemptions from local taxes.

American Samoa Economy

The U.S. Department of Commerce’s Bureau of Economic Analysis estimated American Samoa’s 2012 gross domestic product (GDP) at $725 million. In 2005 dollars, the real 2012 GDP was $504 million, 4.5 percent below the real GDP of 2006, the last full year prior to minimum wage increases and also slightly lower than the 2009 real GDP (see fig. 3). Real GDP per capita has increased, however, as the American Samoa population has declined. American Samoa’s 2012 real GDP per capita of $9,164 was a 12.5 percent increase over the 2006 real GDP per capita of $8,148.

The 2010 decennial census reported that American Samoa’s median household income remained well below that of the United States, and its poverty rate well above. American Samoa’s 2009 median household income of $23,892 was 47 percent of that of the United States, a decline from 2004 when it was about 52 percent of that of the United States. American Samoa’s 2009 poverty rate of 57.8 percent far exceeded the U.S. rate of 15.1 percent. Based on the 2010 decennial census, American Samoa’s unemployment rate was 9.2 percent in April 2010.

According to the Bureau of Labor Statistics’ Current Population Survey, the U.S. unemployment rate was 9.9 percent at that time.

Key Industries

The tuna canning industry and the government sector have historically employed the most workers in American Samoa. In 2012, about 36 percent of American Samoa’s workforce worked in the government sector and about 12 percent worked for the canneries. Noncitizens, mostly from the independent state of Samoa, comprised approximately 36 percent of American Samoa’s 2010 population (see fig. 4) and, according to Star-Kist, approximately 85 percent of their labor force. Many citizens of the independent state of Samoa reside in American Samoa on a long- term basis, including spouses and relatives of American Samoans.

Despite recent declines, in 2012 tuna exports represented more than 99 percent of American Samoa’s approximately $416 million in commodity exports to the United States. However, the tuna canning industry faces competition from other countries. From 1995 to 2003, the value of canned tuna imported into the United States from American Samoa exceeded that of tuna imported from all other countries combined. Since 2003, however, foreign imports have exceeded those from American Samoa. In addition, U.S. per capita consumption of canned tuna fell by 23 percent from 2003 to 2011. From 2008 to 2011, tuna exports from American Samoa to the United States declined, rebounding somewhat in 2012 (see fig. 5).

Chicken of the Sea International, which operated one of the two canneries in American Samoa, closed its cannery operations in the territory at the end of September 2009, contributing to the decline of tuna exports that began that year. Chicken of the Sea relocated canning facilities to the U.S. state of Georgia while outsourcing the more labor- intensive processes, including cleaning and cooking the tuna loins (a low- tariff U.S. import), to countries with lower labor costs. While the Star-Kist cannery has been in American Samoa for more than 50 years, it also has production facilities in place or in process in Ecuador, Senegal, Thailand, and Papua New Guinea (see fig. 6).

In addition to the closure of Chicken of the Sea in 2009, American Samoa suffered another blow on September 29 of that year when a tsunami following a strong earthquake left 34 people dead. Although the two tuna canneries were mostly spared, the tsunami caused severe damage. The federal government issued a disaster declaration and assisted with tsunami recovery efforts, including providing direct cash assistance to those affected and temporary employment in support of recovery efforts. In 2009 and 2010, other temporary jobs included Census Bureau enumerators and managers assisting with collection of 2010 decennial census data, and workers on infrastructure projects and in other fields supported by funds made available in the American Recovery and Reinvestment Act of 2009.

On October 5, 2010, Tri Marine International acquired the former Chicken of the Sea facility in American Samoa, located adjacent to the Star-Kist cannery (see fig. 7). As of November 2013, Tri Marine had completed construction of a new cold-storage facility on the site and is actively constructing other facilities for expanded operations. According to Tri Marine officials, the company plans to begin processing sashimi-grade tuna in early 2014 and to re-open the tuna cannery in 2015. When the cannery becomes operational, Tri Marine expects to employ 1,200 people.

American Samoa Employment and Average Inflation- Adjusted Earnings in 2012 Were Lower Than in 2007

Employment Declined Overall from 2007 to 2012, but Increased in Some Years

Overall American Samoa employment declined from 2007 to 2012; however, employment increased in some years. As shown in figure 8, employment grew from 2007 to 2008 but by 2012 had fallen to a level lower than in 2007. Specifically, the total number of employees in American Samoa increased by 1.5 percent from 2011 to 2012 (from 15,552 to 15,790) but fell over the entire period from 2007 to 2012 by 11 percent (from 17,677 to 15,790, with a peak of 19,229 in 2008). Because American Samoa tax data are not yet available for 2013, we are unable to report on the overall level of employment for that year. However, based on our survey of cannery employers, the number of hourly workers at the canneries fell by about 13 percent from 2012 to 2013 (from 2,193 to 1,915) and 58 percent overall from 2007-2013.

Employment figures are based on our analysis of combined employee data from the American Samoa Department of Treasury, Office of Taxation, and responses from tuna canning industry employers to our questionnaire. The American Samoa tax data are a count of persons employed at any point during the tax year by the employer. The cannery employment figure, from GAO’s questionnaire, is a count of hourly employees at the canneries as of a specific pay period in June of the given year. See appendix I for a full discussion our methodology.

Average Inflation-Adjusted Earnings of Those Employed Have Fallen Since 2007

Average earnings of workers who maintained employment rose from 2007 to 2012, but the increase was not sufficient to overcome the increase in prices. As shown in figure 9, based on American Samoa tax and GAO questionnaire data, and consumer price data, from 2011 to 2012, average inflation-adjusted earnings fell by 2 percent. This decline resulted from an increase in average earnings of 2 percent and an increase in prices of 4 percent. For the overall period from 2007 to 2012, average inflation-adjusted earnings fell by about 5 percent due to an increase in average annual earnings of about 27 percent and a 34 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 who retained their jobs and work hours has not increased by more than inflation since 2007. The inflation-adjusted earnings of minimum wage cannery workers who retained their jobs and work hours fell by about 4 percent from 2011 to 2012 (a period that did not include a minimum wage increase) and also decreased by about 5 percent overall from 2007 to 2012.

Employers, the American Samoa Government, and Workers Generally Oppose Minimum Wage Increases

The discussion group of private sector employers we met with generally opposed additional minimum wage increases and stated that previous minimum wage increases had been harmful to the economy. These employers called the minimum wage the most important issue impacting businesses and cited American Samoa’s reliance on the tuna canning industry and fears about the effect of further increases on the industry and the American Samoa economy. In addition, these employers said that federal tsunami recovery assistance had cushioned the impact of the 2009 closure of the Chicken of the Sea cannery, so its full impact had not yet been felt. Finally, the business representatives we spoke with expressed frustration with American Samoa’s lack of success in attracting alternative businesses to the territory. Business representatives we spoke with said that the American Samoan government had not fostered economic development and that its tax policies had created a poor business environment.

The American Samoan government, American Samoa’s largest employer, continues to report that any increases in the minimum wage will result in reduced government employment. The government anticipates that it will reduce staff or hours as part of its response to any future increases. It further stated that the scheduled 2015 increase would raise its wage bill by approximately $140,000. The government anticipated it would have to cut six employees to offset this increase. Future increases beyond 2015, it stated, would have a drastic budget impact and contribute to the government’s already critical cash flow problem. In his January 2014 State of the Territory address, the Governor of American Samoa stated that he had instructed the American Samoa Department of Commerce to prepare and justify a request to Congress to permanently remove American Samoa from the application of the federal minimum wage. According to the Governor, the justification will include a presentation of a locally developed “living wage” to address what it described as congressional fears that the American Samoa minimum wage does not provide for basic living needs in American Samoa.

Star-Kist workers who participated in our discussion group generally opposed further minimum wage increases rather than supported future increases.in lost jobs or a complete closure of Star-Kist. Workers we spoke with said that hours and opportunities for overtime have been reduced at the cannery. In addition, workers we spoke with said that prices for essentials such as rent, food, and utilities are high and difficult for them to afford. Some workers we spoke with expressed concerns that future increases in the minimum wage would lead to an increase in prices in American Samoa, which they said had occurred as a result of previous minimum wage increases.

Minimum Wage Increases through 2018 Would Affect Wages of Almost All Workers Employed in American Samoa’s Tuna Canning Industry in 2013

From 2011 to 2013, there was no increase in the median wage of workers in the tuna canning industry—in all years, the median hourly wage for tuna canning workers was $4.76. During this period, the minimum wage for canning workers also remained unchanged at $4.76. Since 2007, as a result of previous minimum wage increases, the median wage among workers in the tuna canning industry employed by questionnaire respondents has risen from $3.30 to $4.76 per hour (44 percent).

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 2013, 79 percent of canning industry hourly workers would be affected by the scheduled increase of the minimum wage to $5.26 in September 2015. Future minimum wage increases would affect the wages of 92 percent of current cannery hourly workers when the minimum wage reaches $5.76 in September 2018, and 98 percent of current canning industry hourly workers when the minimum wage reaches $7.25 in 2027. By 2027, the extra annual cost added by minimum wage increases after June 2013 would be $4,710 per worker (see table 6). We identified the additional cost by calculating the difference between the cost per worker in June 2013 and the cost per hourly worker through 2027, based on the scheduled minimum wage increases and averaged across all workers.

Tuna Canning Employers Cut Costs Due to Minimum Wage Increases and Other Factors

Two employers in the tuna canning industry in American Samoa reported in our questionnaire that they had taken cost-cutting actions from June 2010 to June 2013 including labor- and cost-saving strategies and reduced overtime. All but one of the employer actions were attributed to a moderate or large extent to minimum wage increases by one or both respondents (see table 7).

In addition to minimum wage increases, both respondents from the tuna canning industry who took cost-cutting actions attributed their actions to a moderate or large extent to increased utility and material costs (see table 8).

When asked about future planned actions, two of the three tuna canning industry respondents stated that they planned to take future actions to introduce labor- and cost-saving strategies, delay business expansion, and reduce overtime hours. One of the three respondents did not plan to take any of these actions. Both respondents who planned to take these actions attributed them to a moderate or large extent to the minimum wage increases (see table 9).

In addition to the minimum wage increases, the two respondents to the tuna canning industry questionnaire who planned to take future cost- cutting actions attributed their plans to a moderate or large extent to other increased costs and business factors (see table 10).

Tuna Canning Industry Faces Challenges; Relocation Could Reduce Business Costs

Cannery officials stated that wage increases are one of many factors affecting the tuna canning industry in American Samoa. Both Star-Kist and Tri Marine cited American Samoa’s proximity to Pacific fisheries as a key advantage for the American Samoa tuna canning industry, as well as tariff-free access to the U.S. market. Star-Kist also cited Pago Pago’s protected deep-water harbor. However, 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. In June 2011, we concluded that the three minimum wage increases to date had further widened the gap between American Samoa and production Star-Kist estimated the sites with lower labor costs, such as Thailand.total differential in the annual wage bill between American Samoa and an equivalent number of employees in Thailand at approximately $17.4 million. In addition, Star-Kist also cited disadvantages for American Samoa from U.S. regulations, high fuel and re-provisioning (net repairs, ship maintenance, crew provisions, and fishing bait) costs, an outdated shipyard, and the lack of sufficient dock space.

Both canneries cited congressional action to defer the next minimum wage increase to 2015 as encouraging their ability to invest in American Samoa. According to Star-Kist officials, deferring the next minimum wage increase helped the company to better plan for future activity at the cannery (to better train its workforce, plan procurement, negotiate supply contracts, and compete for business that requires pricing guarantees for multiple years). Tri Marine stated that it carefully considered all of its current and projected costs before deciding to invest in American Samoa and that its decision to move forward came only after the deferral of increases in the minimum wage.

In our June 2011 report on the minimum wage in American Samoa, we modeled four alternative scenarios for the American Samoa tuna industry.however, we discussed them with Star-Kist officials, and Star-Kist and Tri Marine each provided additional written comments on the options available to the tuna industry. Star-Kist officials said that the four options are all still possible, but that there is a spectrum of possible actions in response to increasing costs. For example, Star-Kist could lower the staffing level or close certain production lines. Star-Kist reiterated its position that the cost savings between a fully U.S. manufacturing process and an outsourced manufacturing process is substantial and places American Samoa at a disadvantage. Tri Marine stated that any increase in direct costs, related to wages or not, will erode the competitiveness of American Samoa with a number of low-cost sources, including Thailand, Vietnam, Indonesia, and the Philippines, as a source of canned tuna for the U.S. market.

Appendix IV: Commonwealth of the Northern Mariana Islands

Background

Part of the Mariana Islands Archipelago, 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. 10). Most of the CNMI population 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. In 1976, 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. However, 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.

CNMI Economy

The U.S. Department of Commerce’s Bureau of Economic Analysis estimated CNMI’s GDP in 2012 at $701 million. However, in real terms, GDP decreased by approximately 36 percent from 2006 to 2012. After 4 years of consistent decline, the CNMI real GDP has remained relatively flat since 2009 (see fig. 11). The CNMI’s 2012 real GDP per capita of $11,537 was an approximately 24 percent decrease from the 2006 real GDP per capita of $15,157.

The 2010 decennial census reported that CNMI’s median household income remained well below that of the United States, and its poverty rate well above. CNMI’s 2009 median household income of $19,958 was 39 percent of that of the United States, approximately the same percentage as in 2004. CNMI’s 2009 poverty rate of 52.3 percent far exceeded the U.S. rate of 15.1 percent. Based on the 2010 decennial census, CNMI’s unemployment rate was 11.2 percent in April 2010. According to the Bureau of Labor Statistics’ Current Population Survey, the U.S. unemployment rate was 9.9 percent at that time.

Key Industries

For years, the garment and tourism industries were the mainstay of the CNMI’s economy. In 1999, these two industries accounted for about 85 percent of the CNMI’s total economic activity and 96 percent of its exports. However, 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 $677 million in 2005 to close to zero in 2010.

After years of decline, fiscal years 2012 and 2013 showed an increase in visitor arrivals. However, total visitor arrivals to the CNMI have dropped from a peak of 726,690 in fiscal year 1997 to 433,925 in fiscal year 2013, a decline of 40 percent, as shown in figure 12.

Japan, Korea, China, and Russia are the CNMI’s primary visitor markets, with Japan representing the largest share of any country and China and Russia representing emerging markets. In fiscal year 2013, 34 percent of visitors were from Japan, 31 percent from South Korea, 26 percent from China, and 3 percent from Russia (see fig. 13). The Department of Homeland Security has exercised parole authority to allow, on a case-by- case basis, eligible nationals of China and Russia to enter the CNMI The temporarily as tourists where there is significant public benefit.

Consolidated Natural Resources Act of 2008 required the establishment of a joint visa waiver program for the CNMI and Guam by amending the authority for an existing visa waiver program for Guam visitors. The Guam-CNMI Visa Waiver Program exempts tourism and business visitors from certain countries who are traveling to the CNMI and Guam for up to 45 days from the standard U.S. visa documentation requirements.

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. The number and percentage of noncitizens in the CNMI population have decreased since 2000, when they were 57 percent of the population, to approximately 43 percent as of the 2010 decennial census (see fig. 14).

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 (using permits referred to as conditional worker, or CW-1, permits), tourists, and foreign investors that were implemented beginning in November 2009. The law mandated an annual reduction in the number of CW-1 permits that results in zero permits by the end of a transition period, but the law did not mandate specific reductions. The current CW-1 transition period expires December 31, 2014; however, the Secretary of Labor is authorized to extend the program for up to 5 years. The Secretary’s decision to extend the program beyond 2014 must be made no later than July 4, 2014.

The Department of Homeland Security annually determines the numerical limitation, terms, and conditions of the CW-1 permits. The department set the numerical limitation at 22,417 for fiscal year 2011; 22,416 for 2012; 15,000 for 2013, and 14,000 for fiscal year 2014. As we concluded in August 2008, although modest reductions in CNMI-only permits for foreign workers would cause minimal impact, any substantial and rapid decline in the availability of work permits for needed workers would have a negative effect on the economy, given foreign workers’ prominence in key CNMI industries. As of August 13, 2013, employers in the CNMI had requested a total of 7,323 nonimmigrant transitional worker permits during fiscal year 2013.

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; however, those impacts will likely be smaller than originally anticipated. Under original plans, the Department of Defense intended to relocate approximately 8,000 Marines and their 9,000 dependents from Okinawa, Japan, to Guam by 2014. Current plans are to relocate approximately 5,000 personnel and 1,300 dependents. DOD is in the process of determining what military and public infrastructure facilities and live-fire training ranges are necessary to support the proposed reduced realignment plan on Guam, as well as Tinian Island in the CNMI.

CNMI Employment Fell from 2011 to 2012 and Has Decreased Substantially Since 2006; Average Inflation-Adjusted Earnings Have Declined

CNMI Employment Decreased Substantially from 2006-2012

Overall CNMI employment dropped every year from 2006 to 2012, according to CNMI tax data. As shown in figure 15, from 2011 through 2012 the total number of employed fell by about 6 percent (from 25,229 to 23,720). For the entire period from 2006 through 2012, the number employed fell 45 percent (from 43,036 to 23,720). 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. CNMI tax data show that U.S. citizen (combining those that the CNMI tax office labels as “U.S.” or “CNMI”) employment fell by less than 1 percent from 2011 to 2012 (10,006 to 9,934), and by almost 9 percent from 2006 to 2012 (10,882 to 9,934).

Because CNMI tax data are not available for 2013, we are unable to report on the overall level of employment for the year. Data from the respondents to our 2013 hotel questionnaire show that hourly employment in the responding hotels rose by 3 percent from 2012 to 2013 (from 1,715 to 1,763). Overall hourly employment at hotels that responded to both our first survey in 2009 and our most recent survey in 2013 fell by 21 percent over the period from 2007 to 2013 (from 1,590 to 1,252).recent survey but did not respond to our first survey.

CNMI Average Inflation- Adjusted Earnings of Those Employed Have Fallen Since 2006

Average earnings for those who maintained employment rose from 2006 to 2012, but prices increased by a similar amount. As shown in figure 16, based on CNMI tax and consumer price data, average inflation-adjusted earnings rose by 1 percent from 2011 to 2012. This increase resulted from an increase in average earnings of 3 percent and an increase in prices of 2 percent. For the period from 2006 to 2012, average inflation- adjusted earnings dropped about 2 percent due to a rise in average annual earnings of about 29 percent and a 31 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 7 percent from 2011 to 2012 and by about 39 percent for the entire period from 2006 to 2012.

Employers and the CNMI Government Supported the 2013 Postponement of the Minimum Wage Increase; Workers Had Mixed Views

CNMI employers we spoke with supported the 2013 deferral of minimum While participants in our discussion groups stated that wage increases.businesses in general could not absorb another minimum wage increase, they in particular cited the effect of the increases on smaller businesses rather than the effect on hotels. However, employer discussion group participants also identified minimum wage increases as only one of multiple factors affecting the CNMI economy. The minimum wage was not as important a factor for discussion group participants as the potential loss of the foreign labor force if the conditional worker permit program is not extended. For hotel business representatives we spoke with, the U.S. Department of Homeland Security’s continued use of parole to permit access for Russian and Chinese tourists to the CNMI was a greater concern than minimum wage increases. Participants asserted that the CNMI economy is still weak and cited a general uncertainty about future conditions in the CNMI that has caused some businesses to withhold investment. Participants also cited the high costs of utilities, imported goods, and shipping, as well as restrictions on foreign ownership of land, among other factors in expressing their outlook on the CNMI economy.

According to CNMI government payroll data we reviewed, about 177 government workers in the three branches of government and the Commonwealth HealthCare Corporation would have been affected by the postponed 2013 minimum wage increase.not include other autonomous or semi-autonomous agencies of the government. According to the CNMI Department of Commerce, the CNMI Governor supported the 2013 postponement of the minimum wage This figure, however, does increase. However, the CNMI Commerce Secretary noted that there could be additional challenges to the CNMI economy from increases in health insurance costs, which could make absorbing future minimum wage increases more difficult for the CNMI.

Workers participating in our CNMI discussion groups expressed mixed views regarding the minimum wage increases. Workers we spoke with said they were helped by previous minimum wage increases, but some were concerned about losing jobs and work hours due to future increases, as they had in the past. Workers we spoke with stated that prices for staples in the CNMI were high, citing in particular high costs for electricity and gasoline. Workers we spoke with reported regularly turning off air conditioning in the CNMI’s tropical climate and foregoing the use of electric stoves because of the high cost of electricity. There is minimal public bus transportation in Saipan. In Tinian, some workers at the Tinian Dynasty (see fig. 17) we spoke with lived in staff housing, and one saw future minimum wage increases as an opportunity to increase the amount remitted to family living elsewhere. Workers we spoke with in both Saipan and Tinian expressed fear that prices would increase along with the minimum wage, which they said had occurred at the time of previous increases.

The 2012 Minimum Wage Increase Increased Median Wage for Hotel Workers; Further Increases Would Affect Wages of Almost All Hotel Workers

From June 2011 to June 2013, the median hourly wage in the CNMI hotel industry rose from $5.33 to $5.86, a 10 percent increase, according to our questionnaire responses. During this period, the minimum wage increased from $5.05 to $5.55, also an increase of 10 percent.

As the minimum wage increases continue, they will affect a growing percentage of hourly workers in the CNMI’s hotel industry. Based on questionnaire responses about hotel workers’ wages as of June 2013, at the current distribution of wages, the future minimum wage increases would affect the wages of 84 percent of current hourly wage workers when the minimum wage reaches $6.05 in September 2014, and 94 percent by the time it reaches $7.25 in 2018. By 2018, the extra annual cost added by minimum wage increases after June 2013 would be approximately $3,051 per worker (see table 11).

If other costs remain stable, 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 2013 through 2018 will raise average annual payroll costs by approximately $527,823 at the average hotel of 173 employees. As a result, payroll costs as a percentage of total operating costs will increase from approximately 26 percent in 2012 to 31 percent in 2018 (with minimum wage increases representing about 5 percentage points of the 31 percent).

Hotels Cut Costs and Raised Prices Due to Minimum Wage Increases and Other Factors

Hotels representing the majority of all workers employed by questionnaire respondents reported in our questionnaire that they had taken cost- cutting actions and raised prices from 2010 to 2013. Hotels representing nearly all workers employed by questionnaire respondents stated that they used cost-saving strategies (99 percent) or raised prices (95 percent) and attributed that action to a moderate or large extent to the minimum wage increases. While hotels representing a smaller proportion of workers employed by questionnaire respondents introduced labor- saving measures (76 percent), decreased regular hours for hourly workers (36 percent), or decreased hourly employee benefits (18 percent), all or nearly all hotels attributed those actions to a moderate or large extent to the minimum wage increases (see table 12).

Though hotels attributed a number of cost-cutting actions to the minimum wage increases, they also attributed their actions to a number of other factors. Hotels representing nearly all workers employed by questionnaire respondents also attributed their cost-cutting actions to a moderate or large extent to increased utility, material, and transportation costs. Employers representing 60 percent or more of workers employed by questionnaire respondents cited other factors, including changes to U.S. immigration law, as contributing to their actions to a moderate or large extent (see table 13).

Looking to the future, hotels representing 90 percent or more of workers employed by questionnaire respondents stated that they planned to take further actions to introduce labor- or cost-saving strategies and to raise prices, with nearly all of these hotels attributing that plan to minimum wage increases (see table 14). Hotels representing smaller than 90 percent of workers employed by questionnaire respondents planned to reduce operations, delay expansion, lay off hourly employees, reduce hours, or reduce overtime. However, 100 percent of hotels that planned to take these actions attributed that plan to minimum wage increases to a moderate or large extent.

As with past actions, employers attributed their future planned actions to a moderate or large extent to factors other than minimum wage increases. All respondent hotels attributed their plans to a moderate or large extent to other increasing costs. Other factors also contributed to the plans of hotels representing 75 percent or more of workers employed by questionnaire respondents to a moderate or large extent (see table 15).

CNMI Hotel Occupancy and Room Rates Have Increased in Recent Years

Data from the Hotel Association of the Northern Mariana Islands (HANMI), which, prior to November 2013, covered 12 CNMI hotels, show that in 2012 and 2013 occupancy rates for its member hotels have increased over average rates between 2006 and 2011. Occupancy rates in the January to March peak season topped 90 percent in 2013 (see table 16).

As occupancy has increased in recent years, room rates have also risen. After adjusting for inflation, yearly average room rates increased by 11 percent between 2010 and 2013 (see table 17).

According to the Marianas Visitors Authority, CNMI tourism is dependent on the availability of air service and hotel accommodations. According to the Marianas Visitors Authority (citing 2013 data), there is at present a good balance between the number of flight seats and the number of resort hotel rooms in the CNMI. In 2011 Saipan began receiving twice- weekly direct flights from Beijing, China. According to tourism industry representatives, there is currently no international jet service to Tinian, making Tinian visitors and residents dependent on “air taxis” that run several daily flights from Saipan, as well as charter flights (see fig. 18). There is no ferryboat service between the two islands. Similarly, according to the Marianas Visitors Authority, the island of Rota receives only charter flights from Japan at the end of the calendar year.

According to the Marianas Visitors Authority, there are approximately 667 daily hotel rooms in the CNMI that are currently off-line or closed, which could support an additional 133,400 visitors.that the currently closed Palms (see fig. 19) and Riviera Resort Hotels will soon re-open. In addition, there are requests for proposals for development of two tracts of land on Saipan that could, according to the Authority, add 800 to 1,000 daily rooms, accommodating an additional 160,000 to 200,000 annual visitors.

Appendix V: GAO Questionnaire

Appendix VI: Comments from the Government of American Samoa

GAO Comments

1. The government of American Samoa stated that there is significant evidence that the 2010 U.S. Census grossly undercounted the American Samoa population. We have edited the note in the report to expand on the American Samoa government’s concern about a population undercount in the census. However, an undercount of the American Samoa population by the Census would not affect the employment counts we include in our report. Our employment counts are not based on Census data but on data from the American Samoa Office of Taxation and from responses to the questionnaire we submitted to tuna canning industry employers. 2. The government of American Samoa stated that it is very concerned that GAO’s findings are derived from a narrow spectrum of information sources and, as a result, yield misleading statements and findings not supported by available data. As noted in the report, U.S. territories are not included in some federal data collection that is routinely done for the 50 U.S. states. We have carefully reviewed the available data from the American Samoa Office of Taxation and have worked with the office to review and verify its data. As a result of our review, the office has also reviewed its data for completeness and accuracy. We believe that the use of these data is appropriate for determining the changes in employment and earnings in American Samoa over time. We recognize that different data series can provide different specific numbers because of their varied methodologies or coverage; therefore we have reported other data series to provide full disclosure, and have included a discussion of potential reasons for the differences. Because we reviewed and discussed the alternate data sources, and included our analysis of the GAO questionnaire and interviews with multiple stakeholders in American Samoa, we do not believe that we are presenting a misleading picture of the impact of minimum wage increases in American Samoa.

With the exception of the County Business Patterns data, each of the data sources included in Attachment C of the American Samoa letter was included in our report’s Appendix I as part of our discussion of the different data sources and was included in the draft report. County Business Patterns data have limitations in their coverage for American Samoa. For example, County Business Patterns data do not include most government employees. Government employees were approximately 29 percent of total employment in American Samoa in 2012 according to the data from the American Samoa Office of Taxation. In addition, the County Business Patterns data are currently available for only 2008 to 2011 and are not available for 2007 or 2012. The other series we report are available for 2007 through 2012. The American Samoa government has used the 2007 Economic Census to substitute for the missing County Business Patterns data for 2007, but these data have a different basis. For example, according to Census Bureau officials, the Economic Census includes FICA and non-FICA workers, while County Business Patterns data include only FICA workers. In addition, the 2012 data the American Samoa government presents assume that there was no change in private sector employment from 2011 to 2012. 3. The American Samoa government stated that our report does not capture the severity of employment decreases since 2007 and the government presents an estimation of the 2012 unemployment rate by the American Samoa Department of Commerce stating that the unemployment rate in 2012 was 18 percent, up from 12 percent in 2011. We have added unemployment rates to the report that were calculated based on the 2010 decennial census to the report, for reference. The 2012 unemployment rates calculated by American Samoa are based on an extrapolation of 2000 and 2010 census data, and American Samoa Statistical Yearbook data, and therefore do not include actual data from 2012. Therefore, the American Samoa government’s 2012 unemployment calculation may not capture changes in the actual labor force during this period, which would affect the unemployment rate. For example, in their responses to our questionnaire, cannery employers reported a 6 percent increase in hourly employment from 2011 to 2012. Additionally, if some portion of the unemployed individuals leaves American Samoa, the unemployment rate would be less than that estimated by the American Samoa government. 4. The American Samoa government comments that more emphasis should be placed on the multiplier effect of percentage changes in GOP, however small, to employment. Each of the three data series we present in Appendix I covers employment in all sectors, therefore any change in employment and wages that occurred as a result of the 2009 cannery closure would also be captured in data we present. We agree that it is likely that a major closure such as that of the cannery in 2009 will have larger effects on the economy. 5. The American Samoa government presents employment data labeled as from the American Samoa Government Office of Taxation. The Office of Taxation data presented by the American Samoa government are from our draft report and are a combination of data from that office and from our questionnaire of cannery employers. As a result of data reviews by the American Samoa Office of Taxation and GAO during the report comment period, we made corrections to American Samoa employment and wage data for 2007-2009 that revised these employment data slightly downward for those years in the final report. 6. The American Samoa government presents employment data from the SSA. We prepared these data as part of an analysis of SSA data undertaken specifically for this report. As Appendix I of our report notes, the SSA data had data entry errors for 2011 and 2012 that resulted in implausibly large counts. While we took steps to account for these errors, we determined that the data from the American Samoa Office of Taxation were more reliable than SSA data for our purpose of describing employment and earning trends in those years. 7. The American Samoa government presents employment data labeled as being from the U.S. Department of Commerce County Business Patterns. However, the County Business Patterns data from 2007 are U.S. Economic Census data, which have a different basis for the count than the County Business Patterns data. In addition, the 2012 data presented by the American Samoa government assume no change in private sector employment between 2011 and 2012. However, there is likely to have been a change in total employment between those years. For example, in their responses to our questionnaire, cannery employers reported a 6 percent increase in hourly employment from 2011 to 2012.

Appendix VII: Comments from the Government of the CNMI

Appendix VIII: GAO Contact and Staff Acknowledgments

GAO Contact

David Gootnick, (202) 512-3149 or gootnickd@gao.gov.

Staff Acknowledgments

In addition to the contacts named above, Emil Friberg, Assistant Director; Ashley Alley; Benjamin Bolitzer; Karen Deans; Jon Fremont; Jill Lacey; Michael Simon; Vanessa Taylor; and Eddie Uyekawa made key contributions to this report. Technical assistance was provided by Lynn Cothern and C. Etana Finkler.