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

Summary: In 2007, the United States enacted a law incrementally raising the minimum wages in American Samoa and the Commonwealth of the Northern Mariana Islands (CNMI) until they equal the U.S. minimum wage. American Samoa's minimum wage increased by $.50 three times, and the CNMI's four times before legislation delayed the increases, providing for no increase in American Samoa in 2010 or 2011 and none in the CNMI in 2011. As scheduled, American Samoa's minimum wage will equal the current U.S. minimum wage of $7.25 in 2018, and the CNMI's will reach it in 2016. Recent economic declines in both areas reflect the closure of one of two tuna canneries in American Samoa and the departure of the garment industry in the CNMI. GAO is required to report in 2010, 2011, 2013, and biennially thereafter on the impact of the minimum wage increases. This report updates GAO's 2010 report and describes, since the increases began, (1) employment and earnings, and (2) the status of key industries. GAO reviewed federal and local information; collected data from employers through a questionnaire and from employers and workers through discussion groups; and conducted interviews during visits to each area. In American Samoa, employment fell 19 percent from 2008 to 2009 and 14 percent from 2006 to 2009. Data for 2010 total employment are not available. GAO questionnaire responses show that tuna canning employment fell 55 percent from 2009 to 2010, reflecting the closure of one cannery and layoffs in the remaining cannery. Average inflation-adjusted earnings fell by 5 percent from 2008 to 2009 and by 11 percent from 2006 to 2009; however, the hourly wage of minimum wage workers who remained employed increased by significantly more than inflation. Private sector officials said the minimum wage was one of a number of factors making business difficult. In the tuna canning industry, future minimum wage increases would affect the wages of 99 percent of hourly-wage workers employed by the two employers included in GAO's questionnaire. The employers reported taking cost-cutting actions from June 2009 to June 2010, including laying off workers and freezing hiring. The employers attributed most of these actions largely to the minimum wage increases. Cannery officials expressed concern in interviews about American Samoa's dwindling global competitive advantage. Available data suggest that relocating tuna canning operations to a tariff-free country with lower labor costs would significantly reduce operating costs but reduce American Samoa jobs; however, maintaining some operations in American Samoa would allow continued competition for U.S. government contracts. Some workers said they were disappointed by the 2010 minimum wage increase delay; however, more workers expressed concern over job security than favored a wage increase with potential for layoffs. In the CNMI, employment fell 13 percent from 2008 to 2009 and 35 percent from 2006 to 2009. Average inflation-adjusted earnings rose by 3 percent from 2008 to 2009 and remained largely unchanged from 2006 to 2009. Over the same periods, the hourly wage of minimum wage workers who remained employed increased by significantly more than inflation. In discussion groups, private sector employers said minimum wage increases imposed additional costs during a time in which multiple factors made it difficult to operate. In the tourism industry, scheduled minimum wage increases through 2016 would affect 95 percent of workers employed by questionnaire respondents. Tourism employers reported that they took cost-cutting actions from June 2009 to June 2010 and planned to take additional actions, including laying off workers. Few of these tourism employers attributed past actions largely to the minimum wage increases, and one half or less did so for each of the planned actions. Available data suggest that hotels generally absorbed minimum wage costs rather than raise room rates. Hotel payroll will represent an increasing share of total operating costs due to the minimum wage increases. In discussion groups, some tourism employers expressed concern about the minimum wage increases, but others said the increases were needed and manageable and that the primary difficulty was the CNMI tourism industry's decline. Workers participating in GAO's CNMI discussion groups expressed mixed views regarding the minimum wage increases and said they would like pay increases but were concerned about losing jobs and work hours. GAO shared the report with relevant federal agencies and the governments of American Samoa and the CNMI. While generally agreeing with the findings, they raised a number of technical concerns that have been incorporated as appropriate.