V. The American Samoa Minimum Wage - FLSA Requirements

A. Achieve Minimum Standard of Living by Reaching the Mainland Federal Minimum Wage as Rapidly as is Economically Feasible

Section 2(a) of the Fair Labor Standards Act states that the primary objective of the Act is:

“Eliminating labor conditions detrimental to the maintenance of the minimum standards of living necessary for health, efficiency, and general well being of workers…without substantially curtailing employment and earning power.”

FLSA wage policy for American Samoa, in Sec. 8(a) of the FLSA, states that the minimum wage is to reach the single mainland minimum wage as rapidly as is economically feasible, without substantially curtailing employment. Although the mainland minimum wage has not kept pace with the rate of inflation, the American Samoa minimums have increased even more slowly than the mainland minimum wage. As Figure 18 shows, for tuna canneries, the minimum dropped from about 84 percent of the mainland's minimum wage in the mid and late 1980s to 63 percent in 2001-2004. American Samoa government minimums dropped from just under 59 percent of the mainland rate in the mid to late 1980s to 54 percent in 2002-2004.

Between 1977 and 1985, the gap between the cannery and mainland minimum wage first widened then narrowed substantially. In 1978, the cannery minimum was 68 percent of the mainland minimum (Figure 18), but by 1985 the percent had increased to 84. Although the cannery minimum wage has increased slowly since 1990, the gap between it and the mainland minimum wage has widened. This is largely the result of robust increases in the mainland minimum wage rate during the years 1989-1991 and 1995-1997.

Figure 19 and the corresponding Appendix C table present the ratio of the minimum wage for selected American Samoa industries to the U.S. minimum wage. Note that the year 2004 tuna cannery wage ratio of 63 percent of the U.S. rate was lower than the comparable ratio for finance and insurance (77 percent), or construction (70 percent), but somewhat higher than retailing (60 percent), and significantly higher than government (54 percent) and miscellaneous industries (50 percent).

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B. Do Not Raise Minimum Wages to a Level that Substantially Curtails Employment in the Industry

The American Samoa Industry Committee is required to recommend to the Secretary industry minimums that will not be so high as to "substantially curtail employment in the industry." The Committee is required to recommend the mainland federal minimum wage unless evidence "establishes that the industry, or a predominant portion thereof is unable to pay that wage due to such economic and competitive conditions." 38

American Samoa industry committees in recent years have focused primarily on that part of the FLSA wage policy that advises against establishing wage minimums that might substantially reduce employment. The committee suggests that increases in the minimum wage, specifically in the tuna industry, would result in the tuna companies relocating elsewhere.39

Measuring Ability to Pay

Measuring employers' ability to pay higher minimum rates is critical to meeting the second requirement in a way that still satisfies the first requirement of reaching the mainland minimum wage as rapidly as possible. Two key factors in such measurements are 1) the percent of the total production costs that wages represent, and 2) the percent increase of the total wage bill resulting from a given percent increase in the minimum wage.

According to the U.S. International Trade Commission40 the production of canned fish products is capital-intensive.41 For fish canning, labor costs are about 13 percent of the value of shipped product.42 Investments are required for buildings and space, machinery, and other equipment. Raw fish and other materials account for the remaining cost.

For tuna canneries, the largest private sector employer, it is informative to estimate by how much total production costs would rise, given a five percent increase in the minimum wage. A rough answer is found by multiplying the percent that labor costs are of total (mostly raw fish) costs-8.0 percent43 -times the percent increase in the hourly wage bill, 2.5 percent (assuming that a minimum wage increase will not impact other workers).44 The result (0.025 X 0.08) is 0.2 percent, i.e., one-fifth of one percent. (A more thorough discussion of these issues may be found in Chapter VI, under Low Ratio of Labor Costs to Product Costs.)

In the past, tuna cannery officials have explained that increases in the minimum wage have spill-over effects.45 In other words, minimum wage increases lead to increases at all wage levels in order to avoid wage compression and to reward higher skilled employees. Still, assuming direct labor is eight percent of total tuna production costs, a five percent increase in all hourly wages would increase total costs by less than one-half of one percent.

Appendices B and D provide more detailed information on the wage impact of alternative minimum wage increases.

Impact of Higher Productivity

When productivity increases, an employer can raise wages by a like percent without increasing prices (or taxes, if the government is the employer) and also without decreasing employment and profits. Figure 20 shows one estimate of productivity increase in American Samoa tuna canneries from 1995 to 2003-68 percent.

Clearly, American Samoa canneries have realized increases in worker productivity over the past several years. Taken alone, productivity increases could allow firms to absorb higher wage rates without necessarily eroding profit margins. However, in a thorough economic analysis, other factors that could potentially mitigate the effects of productivity increases must also be taken into consideration. For American Samoa canneries, retail prices received for finished products, and the prices paid for raw whole tuna, are two important economic variables that impact economic returns.

As Figure 21 demonstrates, U.S. retail canned tuna prices have fluctuated since 1996. Specifically, retail prices fell considerably in 2000 and 2001, after having risen in 1998. In 2002, retail prices rose slightly, but they were still below 1998 levels and, in 2003, remained close to the 2002 retail prices. Obviously, falling retail tuna prices negate some of the economic benefit occurring as a result of productivity increases.

Figure 21 also illustrates a decreasing ratio of the price of the raw whole fish paid by the cannery to the fishing vessel ("exvessel price") to the retail price, for the latest year for which the latter data are available. Since 2001 the price paid to the fishing vessels has dropped to an 8-year low. Lower exvessel prices may also be an indirect indicator of an increasing ability of canneries to absorb a higher minimum wage rate. In terms of percentage change, exvessel prices rose considerably between 2000 and 2001; however, there has been downward pressure on exvessel prices and, in 2003, they were at their lowest point in recent years.

Before 1999, the tuna industry encouraged an increased supply of raw tuna to lower prices and increase sales. The result, however, was a worldwide glut of raw fresh frozen tuna offloaded from fishing vessels, causing steep declines in exvessel prices from 1997 to 1999. In response, widespread actions were taken by such vessels to stay in port for long periods of time to lower supply and boost exvessel prices. Canneries competed by cutting prices to retailers. Price reductions were further encouraged by only modest growth in U.S. consumer demand for canned tuna, and competitive pressure caused by currency devaluation in Thailand and other canned tuna exporter nations.

C. Set Minimums that Do Not Give a Competitive Advantage Over Counterpart U.S. Industries

As reflected in Table V A, from 1974 to 1987, the mainland U.S. percentage of total U.S. tuna cannery employment dropped from 45 percent to approximately 7.6 percent, while American Samoa's portion increased from nine percent to more than 30 percent. This shift in production came about as seven out of eight canneries in California shut down, eliminating more than 5,000 of its 6,000 tuna processing jobs. At the same time, Puerto Rico increased its tuna cannery jobs from about 6,000 to 8,000, and American Samoa increased from about 1,200 to almost 4,000. The total increase in the two territories was 4,800 jobs, just 200 fewer than jobs lost on the U.S. mainland.

From 1987 to 1998, American Samoa’s tuna processing employment continued to grow, while Puerto Rico’s industry employment fell significantly. Specifically, the American Samoa portion of the U.S. total increased from 31 percent to about 72 percent, while Puerto Rico’s total fell from 62 percent to about 14 percent. The transfer of processing employment coincides with the increase of Puerto Rico’s minimum wage to the mainland’s rate in the late 1980s. This made American Samoa a more attractive location to process tuna due to the cost benefits associated with lower labor costs and duty-free status on canned tuna. Thus, between 1974 and 1998, American Samoa’s tuna processing employment as a percent of the U.S. total has gained by a multiple of eight times, while the mainland and Puerto Rico employment have been drastically reduced.

By 2002, only a small number of tuna cannery workers were employed in Puerto Rico or on the U.S. mainland. By comparison, the number of tuna processing workers employed in American Samoa had remained almost constant since 1998. Canneries in American Samoa now account for more than 85 percent of total U.S. tuna cannery employment.

Minimum Wages and Tuna Competition

The incentive to relocate to American Samoa became more significant after the mid to late 1980s, as Puerto Rico phased out of the industry committee process and became part of the uniform Federal wage system. At about the same time, American Samoa minimum wage increases became smaller and less frequent than they were previously. A very large relocation of jobs from Puerto Rico to American Samoa occurred as the wage gap between American Samoa and the U.S. minimum wage (now covering Puerto Rico) widened. In 1974, the wage gap between the two locations was 53 cents, or 41 percent of the American Samoa wage rate. By 1998, the wage gap had widened to $1.98 or 62 percent of the American Samoa wage. Since 2001, due to the wage rates of both the U.S. and American Samoa remaining unchanged, the wage gap stands at $1.89 or 58 percent of the American Samoa tuna industry minimum wage rate.

Furthermore, wage levels higher than the minimum were set by collective bargaining in some unionized Puerto Rico plants. At the same time, and of major importance, was the inferior fishing for tuna in the Eastern Pacific compared to the Western Pacific, due to El Nino weather changes. Prior to the announced closure, such factors led StarKist, for example, to cut its Puerto Rican workforce in the late 1990s from 2,500 to 1,000, a 60 percent reduction. Some of the 1,500 jobs were relocated to its Western Pacific, nonunion American Samoa cannery, with a minimum wage near $3.00 hourly. As a result, employment in lower-wage American Samoa increased from 4,200-4,300 in the mid-1990s to more than 5,000 by 2000.

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Total U.S. Supply

The total supply of canned tuna available in the U.S. includes the pack from the continental operations (California), the pack from the offshore canneries (American Samoa and Puerto Rico), and the amount of imported canned tuna. As presented in Figure 22 and the corresponding Appendix C table, U.S. supply dropped to 419 thousand tons in 1997 before climbing to 514 thousand tons in 1999.46 However, in 2001, U.S. supply was below 400 thousand tons. Since 2001, the U.S. supply has increased, nearing 500 thousand tons in 2003.

U.S. production remained relatively stable from 1998 to 2000, between 335 and 346 thousand tons. This was greater than U.S. production in 1994 and 1997, which was 304 and 313 thousand tons, respectively. The percentage of U.S. supply from imports (the import penetration ratio), accordingly, was relatively high in 1994—29 percent—dropping to 22 percent in 1996, and climbing since. By 2001 the import penetration ratio was at 36 percent, although the quantity of tuna imports had declined since 1999. Also in 2001, the U.S. production fell to 253 thousand tons, a drop of more than 25 percent from 346 thousand tons just two years earlier. Reduced production in 2001 resulted in the lowest U.S. pack since at least 1987. In 2002 the percentage of U.S. supply coming from imports was at 40 percent. Imports in 2003 rose six percent to 46 percent of total U.S. supply.

Although imports have been a significant part of total U.S. supply of tuna, domestic production remained relatively constant throughout the 1990s. Except for 2001, domestic production either increased slightly or held steady. This occurred as U.S. production from California and Puerto Rico moved to American Samoa, and while significant minimum wage increases first affected the mainland, then Puerto Rico. U.S. production has remained fairly constant from 2001 to 2003, while the amount of imports rose from 146 thousand tons in 2001 to 229.5 million tons in 2003.

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Bank of Hawaii Economic Report

The difficulty in applying the three basic policies to determine increases in the minimum wage in American Samoa may reflect the fact that their tuna industry is in a "state of flux," as the Bank of Hawaii concludes in its American Samoa Economic Report.47 On the one hand, the bank notes that American Samoa has an excellent harbor at Pago Pago, giving the territory a natural advantage with respect to landing fish for processing. American Samoa is exempt from the Nicholson Act, which prohibits foreign ships off-loading fish in U.S. ports. American Samoan products with less than 50 percent market value from foreign sources enter the United States duty free. (In Chapter VII the tariff savings for tuna canneries, due to their location in a U.S. territory rather than another country, is estimated and compared with an estimate of the industry's total wage costs.) The report also notes that the minimum wage, which is set by industry committee every two years, is far below the Federal minimum.

On the other hand, the report concludes that the well-being of American Samoa's tuna industry depends on this continued mix of …

"duty-free status, tax exemption and a viable wage scale, as well as on continued use of the harbor by fishing vessels taking their catch in other parts of the ocean. Changing requirements for landing of catch by other Pacific island-states [e.g., no longer prohibiting foreign vessels from doing so] could mean fewer fish for American Samoa. Both NAFTA and GATT present problems for the territory, NAFTA because it may mean competition from Mexican processors in the future, GATT because it may prevent preferential entry into the United States of processed tuna from American Samoa, or from Mexico for that matter. Tax exemptions for foreign based subsidiaries are under pressure in the U.S. Congress and are no longer assured for cannery owners. And low labor costs in Thailand make for serious pressure for foreign competition."

The extent to which these and other views of American Samoa's future are supported by the facts and may be affected by a given increase in wage minimums will be discussed in the remainder of this report.

38.American Samoan employers have generally not made available profit information that would assist the Committee in making this determination. See 29C.F.R. Part 511.10 (a).
39.Report of American Samoa Industry Committee Number 25, June 2003.
40.U.S. International Trade Commission, Industry and Trade Summary: Canned Fish except Shellfish, Publication 3083, January 1998.
41.Although the Commission report summarized canned fish production in general, it stated that canned tuna comprised almost 75 percent of the canned fish industry in 1996.
42.U.S. International Trade Commission, Industry and Trade Summary: Canned Fish except Shellfish, Publication 3083, January 1998.
43.U.S. International Trade Commission, Industry and Trade Summary: Canned Fish except Shellfish, Publication 3083, January 1998.
44.A five percent increase in the minimum wage will increase direct labor costs 2.5 percent. This assumes only those workers at or below the previous minimum wage are impacted. See Appendix B.
45. Prehearing Statement of StarKist Samoa, Inc., Special Industry Committee No. 24, June 2001.
46.U.S. Department of Commerce, Fisheries of the United States, various years, NOAA.
47.See http://www.boh.com/econ/pacific/as/10.asp.