VI. Economic Factors for Consideration that May Favor Minimum Wage Increases

America Samoa Government Possible Balanced Budgets

The government plays an important role in the American Samoan economy. Government employment accounts for over one-third of total covered employment, and government payroll and other expenditures cause a "multiplier effect" to impact on the workings of the overall economy. The American Samoa Government in Fiscal Year 1997 received revenues totaling $182.2 million and expended about $182.4 million,48 resulting in a deficit of $0.2 million. The cumulative deficit totaled $17.9 million by the end of fiscal year 2001. Local contributions (taxes and fees) accounted for 25 percent of total revenue in 2001.

Grant revenues of $89 million accounted for about 50 percent of all government revenues in 2001. This proportion was lower from previous years due to $46 million dollars in revenue for insurance claims from hurricane relief.

Adding to the deficit problem is the decrease (in real dollars) in Department of the Interior (DOI) operating grants. For more than a decade these grant amounts remained virtually unchanged ($23.2 million in 1993 to $22.8 million in 2004).49 However, capital improvement project grants issued by the DOI have increased during the same time period (from $508 thousand in 1993 to $5.1 million in 2001). In 2003 capital improvement grants totaled $10 million.50

Capital improvement grants are used to supplement revenue when a lack of local funding poses a threat to health or safety or when improvements are necessary for economic development.51 In addition to DOI operating and capital improvement grants, U.S. federal expenditures to American Samoa exceeded $1 billion for FY 1995-2001.52

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Government Policies Reducing Business Costs

Tariff Savings

Territories such as American Samoa are outside the customs territory of the United States. Their products, however, are accorded duty-free entry into U.S. commerce if they meet the criterion of not more than 50 percent foreign component value. Canned tuna, regardless of the origin of the raw fish, easily meets this exemption. General Note 3(a) of the Harmonized Tariff Schedule of the United States provides this benefit.

A rough estimate can be made of the two American Samoa fish processors' tariff savings due to their location in a tariff-free U.S. Territory. If the threat of processors to relocate some or all production to another country were carried out, some locations might be relatively satisfactory for tuna fish processing, but the processors would no longer be exempt from U.S. tariffs. Ghana, for example, is an underdeveloped nation with very low labor costs, and for whom certain designated products are given preference via an absence of tariff, pursuant to the GSP (Generalized System of Preferences). But canned tuna is not one of those designated products. (In fact, StarKist already has a processing plant in Ghana that exports to European markets.) Thailand and the Philippines--the two leading exporters of canned tuna to the U.S.--are also in prime tuna fishing locations where labor costs are low, but where tariff savings would be lost. As was already mentioned, Ecuador, under ATPA, can export certain products to the United States without paying tariffs; however, canned tuna does not enter duty-free.

In 2003, more than $5.7 million in tariff savings would be lost for every 10 percent of processed canned tuna production reallocated to such low labor cost countries. For those countries mentioned above, the 6 percent tariff for exports below the quota, and 12.5 percent tariff for exports above it, is not, or not about to be, removed.

• Tuna not in oil: American Samoa shipped $408 million (144 million kilograms) of canned tuna not packed in oil to the United States mainland in 2003. The tariff savings lost on this amount would range from $40.5 million to $45.8 million. The lower end of the range assumes all of the $80.7 million of imports below quota were from the two tuna processors relocating from American Samoa and were dutiable at only 6 percent. The higher end of the range assumes that none of these imports were below quota. 53
• Tuna in oil: For the $59.6 million of tuna in oil shipped to the U.S., there would be a single rate of 35 percent. Tariff savings lost would be (0.35 x $59.6 million) = $20.8 million.
• Total tariff savings lost: $52.3 million to $57.6 million.

As in most types of economic projections, other factors might come into play to make these estimates too low or too high. But all else being equal, the above scenario would total $5.2 to $5.7 million loss of tariff savings, for every 10 percent of production relocated. In any case, the total annual wages of the American Samoan tuna processor’s workers is estimated to be about $34 million (4639 workers x $3.60 average hourly wage x 40 hour week x 50 weeks), which is more than covered by the current annual tariff savings of over $50 million.

One factor that is changing is the gradual phasing out of the tariff barrier for Mexico and other South American countries. As of 2004, it had a tariff rate for canned tuna not in oil of only 1.6 percent below the quota and 3.3 percent above the quota. These rates are being phased out altogether pursuant to NAFTA and will be zero by January 1, 2008. Meanwhile, the NOAA Fisheries’ “affirmative finding” for Mexico and other countries allow them to meet U.S. dolphin-safe requirements on tuna imports. In addition, changes in weather patterns appear to indicate that tuna may again be more plentiful in the eastern Pacific, although the western Pacific will continue to be an abundant area for tuna.

The same NAFTA phase-out schedule for canned tuna will apply to Caribbean Basin countries, which were eligible to apply for NAFTA rates in October 2000. As of March 2001, 12 of the 24 eligible countries had applied54. Also, to offset adverse effects of the Caribbean phase-out on the Andean countries of Bolivia, Colombia, Ecuador and Peru, Congress may also bring such countries under a similar tariff phase-out schedule in the future (ATPA, which, unlike NAFTA, has no tariff phase-out).55 Ecuador thus could join Mexico as a major canned tuna exporter with increasingly lower tariffs in its U.S. exports in the coming decade.

Under the Generalized System of Preferences canned tuna may also be shipped duty-free by countries designated as least-developed nations. This group includes many of the poorest African nations (but not Ghana), along with Haiti, Bangladesh and a few others. Canada and Israel are also allowed to export canned tuna duty-free to the U.S. but are not significant exporters.

Tax Treatment

The U.S. tuna industry in American Samoa enjoys Federal and local tax benefits that apply to U.S. territories. Pursuant to Section 936 of the Internal Revenue Act (26 U.S.C. 936) a domestic corporation is allowed a tax credit equal to the taxable income from the active conduct of a trade or business in the U.S. territories. Thus, income derived from operations in American Samoa is effectively exempted from U.S. corporate income taxes.

Section 936 is scheduled to expire effective January 1, 2006. The loss of this advantage has the potential to be a damaging blow to the profits of the American Samoa cannery causing possible relocation. Congressman Faleomavaega announced on February 8 2005 that he introduced legislation H.R. 629 to extend or make permanent the benefits of Section 936 to American Samoa56. At the time of this report, no timeline of congressional review is known.

American Samoa provides substantial exemptions from its own tax laws to the tuna processing industry and some other employers. The Tax Exemption Board of the Government of American Samoa may provide temporary income tax exemption to activities that will further the economic development of the Territory. The two U.S. canneries located in American Samoa are among the firms with such exempt status. Tax rates imposed by American Samoa against corporate income are the same as those of the U.S. Government, when they are applied.

With the exception of American Samoa and Guam, foreign-flag fishing vessels are not permitted to land their catch in United States ports under the Nicholson Act. Tuna canneries outside of American Samoa may purchase tuna from foreign fishing vessels through regular commercial channels in the form of transshipment to a cargo ship at some transshipment point. Canneries in American Samoa can buy directly from foreign fishing fleets and the foreign vessels are permitted to land their catch on the cannery docks. Much of the tuna processed at Samoan canneries is from U.S.-flag purse seiners. Fish are also obtained from foreign longline vessels, mainly Korean and Taiwanese.

America Samoa canneries usually pay lower prices for raw fish than Southeast Asia competitors. The latter buy raw fish from carrier boats that have purchased the tuna from fishing vessels. America Samoa canneries buy directly from the fishing boats due to its location and excellent harbor side facilities.

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Low Ratio of Labor Cost to Product Cost

Raw tuna is the single largest cost for U.S. canned tuna production, accounting for 70 to 75 percent of total costs. Other raw materials (consisting of cans, labels and packaging material) represent 10 to 15 percent. The direct labor costs, as a percent of labor plus materials, is about 8 percent.

It is less than the average for other seafood products, as the table VIA shows.57

As calculations in Chapter V showed, if the tuna cannery minimum wage in American Samoa were increased 5 percent, assuming no spill-over effects, it would result in a 2.5 percent increase in total hourly earnings for all workers. Multiplying that in turn by 8 percent gives a total increase of labor and materials cost in hourly earnings of 0.2 percent, or less than one-third of one percent. Even if all wages increased by a full 5 percent, the increase in total costs for labor and materials would be approximately 0.4 percent.

The value of tuna shipped in airtight containers from American Samoa canneries to the U.S. mainland was approximately $467 million in 2003.58 In November of 2002, American Samoa canneries employed slightly more than 4,700 covered workers at a direct cost of approximately $34 million.59 This simple analysis indicates that the wages of covered employment accounts for almost 7 percent of the value of tuna shipments. Assuming some positive profit level, the cost of direct labor was more than 7 percent of total costs.

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Employment and Output Increasing Faster than Minimum Wage60

It should be noted that the tuna industry warned at industry committee public hearings throughout the 1990's that an increase in the minimum wage would cause a decrease in employment, either through relocation of at least some production to a lower-wage country, or increased use of frozen loin technology. These predicted effects never occurred and were not evident when the minimum wage increased at faster rates, prior to the decade of the 1990s.

Ordinarily, such increased demand for workers, along with the industry's new technology/capital investment, likely would have resulted in significantly more skilled jobs, higher increases in wages, and much less wage compression. The increased demand for tuna workers by the two canneries in American Samoa did in fact push the wage ceiling somewhat higher, i.e. "decompressed" it. For example, in 1998, 13.2 percent of workers earned more than 20 percent higher than the minimum wage, compared to 9.2 percent in 1992, while employment increased by 20 percent. But the major technology advances described below would seem to have allowed even more wage decompression in that six-year period.

In economic terms, the tuna processing industry is by far the largest buyer of private sector semi-skilled labor in American Samoa. Competition for the large numbers of such workers is insignificant. The absence of a very competitive labor market gives the industry greater influence in setting wages for those kinds of jobs. In addition, a large tuna cannery labor supply from Western Samoa, with much lower average wages, reinforces downward pressure on American Samoa wages.61

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Limited Use of Frozen Loins in American Samoa

Although StarKist has expanded its production capacity with new technology that allows the processing of frozen loins, there has been little reduction in use of whole fish. The primary reason is the relative abundance of fresh or frozen raw whole tuna in the region. Also, StarKist and Chicken of the Sea have developed methods of maximizing yield (the amount of edible tuna meat) based on experience at relatively long-established production facilities, reflecting sizable capital investment. These processors have also had long-term relationships with vessels providing whole fish with known fishing methods and quality records.

StarKist's production for the U.S. market is centered on the American Samoa cannery. Conversion to using loins involves an initial lowering of output, as well as retraining of the labor force, that has led to reluctance by StarKist to shift a major share of production to loin processing.62 In American Samoa, StarKist has used microwave technology for cooking frozen loins as an add-on, rather than as a replacement for all of its whole-fish processing. (The result has been about 10 percent greater output.)

American Samoa is in an ideal location for whole fish. The dolphin-safe policy of U.S. canners drastically reduced their use of tuna from the eastern Tropical Pacific and shifted it to the western Pacific. (However, potential modifications in the dolphin-safe standard could increase tuna fishing in the ETP.) This also coincided with a more plentiful supply of tuna in the region due to weather and environmental factors. Direct delivery from foreign fish vessels (with no prohibition on buying from foreign vessels, unlike for the U.S. mainland) minimizes delivery costs.

The principal disadvantage to processing frozen tuna loins is related to quality--the consistency of the tuna meat after it has been frozen and thawed. The use of loins requires two stages of freezing and thawing. First, the raw fish are frozen on board the fishing vessel. The fish are later thawed and the loins removed at the first processing site, e.g., Thailand. Then, the loins are frozen and shipped to the cannery, e.g. Puerto Rico, California, and American Samoa. Processors have sometimes noted less firm consistency, as ice crystals form in the meat cells during freezing and damage the cell structure. In addition, since the loins are frozen and generally transported relatively long distances, additional measures must be taken to ensure adequate handling to prevent spoilage and breakage of the solid fish meat.

StarKist's size and tradition of international operations have given it an advantage over its competition with respect to procurement of raw whole tuna supplies, whereas other U.S. processors generally have relied more heavily on U.S. vessels for their raw tuna requirements and have imported mainly from the spot market as a supplement. StarKist generally has contracted a larger share of its requirements with both U.S. and foreign vessels because of its larger size and larger raw tuna needs. Its dominant position, with American Samoa the largest tuna cannery in the world, has allowed it to have some bargaining power over prices. This has come about as the number of U.S. fishing vessels has decreased and the group representing them in negotiations with canneries became inoperative.

Use of loins by U.S. plants in American Samoa is discouraged to some extent by the U.S. tariff treatment of products of insular possessions. Such products are subject to U.S. duties if their inputs are imported, dutiable and exceed 70 percent of the total value of the finished product. Imported frozen tuna loins, if used exclusively as an input (compared to frozen whole tuna) likely would exceed the 70-percent threshold and thus shipments of canned tuna from American Samoa would be subject to duties. However, the use of a mix of domestic and imported frozen whole tuna by the two American Samoa canneries mitigates this disincentive.

There are major differences between Puerto Rico and American Samoa with regard to labor costs and supply. StarKist processed loins in its Puerto Rican plant due to the substantial reduction of raw tuna supplies from the eastern Tropical Pacific Ocean (due to the dolphin-safe policy and natural forces) and relatively high labor costs in Puerto Rico. In contrast, the StarKist plant in American Samoa enjoys access to ample raw fish supplies and relatively low labor costs.

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Increases in Productivity

Ever increasing competition has compelled tuna processors to innovate to improve edible yield and quality from the fish at every stage, from thawing the frozen fish offloaded from boats to transporting the product. Technological advances in thawing have been made using automatic fish sizers that group incoming raw tuna by size, improving control of the thawing process. Also, circulation of the water bath in the thaw tanks has improved quality via more uniform thawing. More efficient cooking and conditioning have resulted from use of pressure cookers and uniform fish sizing. The use of vacuum cooking and conditioning has minimized waste and superficial oxidation of the flesh and facilitated easier peeling of the skin during the cleaning process. A dramatic increase in product flow has resulted, lowering cooking/conditioning time from 18-22 hours to 3 hours. "Curing" time (mainly affecting flavor) of sterilized canned tuna has been cut from 40 to 20 days, allowing inventory to be shipped twice as quickly, sharply increasing productivity.

The canning/retort stage is the most mechanized link in the tuna canning process. Automatic can filling and sealing machines have been used for decades. Innovations have improved the accuracy of the fillers, handling the cans more gently so as not to break the fibers of the tuna meat and improving the flow of the cans from the can sealers to the retorts. Computerized controls and automated equipment have reduced manual labor needed to place the sealed cans into a retort for heating. In addition, processors are increasing the yield from raw tuna by using more of the fish. For example, processors increased the proportion of tuna flakes in their packs. These efficiencies have also increased productivity.

It takes less time to clean one large fish than a number of small fish with the same weight. Therefore, shifting to larger fish in 1996 resulted in higher productivity compared to 1993-95, a trend expected to continue. On the other hand, cleaning the fish after thawing has been the most difficult challenge to using new technology. Despite longstanding efforts to mechanize this process, tuna cleaning is typically still done manually. While this stage could be skipped entirely by use of frozen loins rather than whole fish, doing so may not be desirable for other reasons described above.

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Measuring Productivity Improvements

The term productivity refers to the amount of goods and services that are produced per unit of input. Increase in productivity results from achieving more output while inputs are held steady. For countries, productivity is an important determinant of living standards experienced by the populace. In general, higher levels of productivity lead to increases in living standards for both workers and consumers. For companies, increased productivity will often generate increased profits margins. As mentioned in Chapter V, companies benefiting from productivity increases can raise wages (assuming no change in output prices or other costs), without a negative impact on profit.

One approach for measuring productivity divides the quantity of output63 by the number of cannery workers, as shown in past biennial Economic Reports on American Samoa.64 Using data first presented in Chapter V (Figure 20), average annual output per worker for 2003 was 56 percent higher than in 1995, or more than 6 percent higher annually. It should be noted that, unlike the other approaches, only the number of workers, not total hours are measured here, making these estimates less precise.

Figure 23 plots the indexes of labor productivity growth from Table IV B, U.S. retail price for canned tuna and minimum wage rate for the tuna industry for the years 1995 through 2003. The changes in retail price of tuna and changes in minimum wages have been minimal to the increase in productivity over the years 1995-2003. It is not known when and what type of productivity improvements were made to each of the two canneries as they are often proprietary, but based on the increases in productivity there appears to be little effect of the foreign pressure on the canned tuna prices to curtail such improvements. Between 1999 and 2001, there was a decrease in both the price of canned tuna and the productivity output. However, between 1998 and 1999 and again in 2002 to 2003, there were large increases in labor production when the price of tuna remained essentially constant.

48.American Samoa Department of Treasury, Territory of American Samoa Comprehensive Annual Financial Report, 2001.
49.Grant amounts for 2004 from DOI Fiscal Year 2005 Budget.
50.From Samoa News (on samoanews.com) on 6/3/2003.
51.U.S. Department of the Interior, A Report on the State of the Islands 1999, available at http://www.doi.gov/oia/pdf/oldislands.pdf.
52.Summary of Federal Expenditures to American Samoa for Fiscal Year 1995 to 2001.
53.Calculations for the lower range: Assume all below-quota imports are from the relocated processors. Then multiply 6 percent times the $80.7 million quota, to get $4.8 million in below quota duties. Subtract $80.7 million from $367 million total imports to get $286.3 million in imports above quota at 12.5 percent, or $35.7 million in above-quota duties. Under this assumption, total duties for canned tuna not in oil are approximately $40 million. On the other hand, if it were assumed that none of the imports were shipped in time to benefit from the below-quota tariff, there would be a flat 12.5 percent above-quota duty for total imports of $367 million, or $45.8 million. Given the large market share that StarKist and Chicken of the Sea have of the U.S. market, it is likely that much of their shipments would come in under quota. Sources: U.S. Department of Commerce, U.S. Trade with Puerto Rico and U.S. Possessions, 2003, and U.S. Department of Commerce, Fisheries of the United States, 2003, NOAA.
54.Caribbean Basin Trade Partnership Act, http://www.mac.gov/CBI/WebMain/intro.htm.
55.ATPA was renewed in August of 2002 and canned tuna is still exempt from duty-free status.
56.Press Release from Congressman Faleomavaega, February 17, 2005.
57.Data from U.S. Bureau of the Census, Annual Survey of Manufacturers, 2001.
58.U.S. Department of Commerce, U.S. Trade with Puerto Rico and U.S. Possessions, 2003.
59.U.S. Department of Labor, Wage and Hour Division, American Samoa Economic Survey, 2003, Assuming 40-hour weeks, 50 weeks per year, and an average wage of $3.60.
60.For a general discussion of trends in the America Samoan population and labor force, see Chapter II.
61.A venture to input low-wage Vietnamese workers for an American Samoa garment plant ended recently after labor standards and human rights violations were claimed. The plant has since closed.
62.See 1992 Report of ITC.
63.U.S. Department of Commerce, U.S. Trade with Puerto Rico and U.S. Possessions, various years.
64.Data are based on Wage Hour Surveys of employment in years 1995 through 2002, published in biennial reports.