Setting up for the Coming Debates over Minimum Wage – Some History and Examples

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

With rallies in Los Angeles and Bay Area cities seeking a $15 minimum wage for fast food workers and Senator Mark Leno introducing a bill to increase the state minimum wage over the recent boost the legislature approved, the debate on the minimum wage is sure to heat up across the state.

Arguments over increasing the minimum wage have been going on for a long time.

Massachusetts first offered a minimum wage for workingwomen in 1912. It did not set an actual wage. Rather, a panel was established to study complaints of low wages and if it found a company paid inadequately to cover the cost of living ($10.60 weekly for a single woman, the commission calculated) then companies were reprimanded by having their names published in local newspapers!

The United States Supreme Court originally ruled the minimum wage unconstitutional in 1923 but reversed itself in 1937. The next year, President Franklin D. Roosevelt signed the Fair Labor Standards Act setting the minimum wage at 25-cents an hour and capping the work week at 44 hours. On one of his fabled fireside chats the day before signing the bill, President Roosevelt said, “Do not let any calamity-howling executive with an income of $1,000 a day, …tell you…that a wage of $11 a week is going to have a disastrous effect on all American industry.”

But there is no question raising the minimum wage can have an effect on jobs. And, even today there are few $1,000 a day small business people. Small businesses often employee workers at the minimum wage. Even the strikes against fast food companies involve small business franchisees.

As I wrote previously on this page, “The Congressional Budget Office laid out the consequences of raising a federal minimum wage from $7.25 an hour to $10.10 an hour. Most workers would receive higher pay, some would lose their jobs, and the share of low-wage workers who are employed would fall.”

An outside economic advisor to the Los Angeles City Council warned that a steep increase in the minimum wage for hotel workers could result in a sharp decline in the number of jobs in the hotel industry.

Just last week a veterinarian I know told me if the minimum wage were raised to $15 an hour he would probably have to cut his staff of eight in half.

In Berkeley, the University of California is ignoring the City of Berkeley’s minimum wage requirements for students involved in their work study program. The UC is attempting to meet student-worker needs while living within a budget, much like businesses.

Testifying before congress last year, James Stark, senior policy analyst in Labor Economics for the Heritage Foundation, said, “Supporters of the minimum wage intend it to lift low-income families out of poverty. Unfortunately, despite these good intentions, the minimum wage has proved ineffective at doing so. … Higher minimum wages both reduce overall employment and encourage relatively affluent workers to enter the labor force. … Minimum wage positions are typically learning wage positions—they enable workers to gain the skills necessary to become more productive on the job.”

Proponents of an increased minimum wage, however, argue that many of the minimum wage workers are not entry-level workers but workers who have the job to support their families.

A possible outcome of the minimum wage debate may produce a third way. Call it job wage classification: for example, increasing pay for some minimum wage jobs but keeping a lower cap on other jobs for new workers so they can enter the job market.

While states were once called “laboratories of democracy,” we look to American Samoa as a laboratory conducting an experiment in the effects of a big minimum wage increase. Below is a summary of that experiment offered in the testimony of James Stark before the United States Senate Health, Education, Labor, and Pensions Committee last year.

American Samoa

The recent experience of American Samoa dramatically illustrates how wage increases reduce employment. The tiny Pacific island chain has been an American territory for over a century. However, American Samoans have a largely separate economy and considerably lower incomes than residents of the continental United States: the average Samoan worker made $12,000 in 2009. The tuna canning industry makes up a significant portion of their private sector.

Until recently American Samoa had a different minimum wage schedule than the continental United States. A committee within the Department of Labor set Samoan wage minimums according to local economic conditions. In January 2007 the minimum wage in the canning industry stood at $3.26 an hour. Unfortunately for American Samoa, Congress applied the 2007 federal minimum wage increase to the territory. The legislation aligned the Samoan minimum wage with the U.S. rate of $7.25 an hour in 50 cent annual increments.

Almost every hourly worker in the tuna canning industry makes less than $7.25 an hour. At that level the minimum wage would cover 80 percent of the islands’ hourly workers. This would be the economic equivalent of raising the minimum wage to $20.00 an hour in the continental U.S.

By May 2009 the third scheduled minimum wage increase in Samoa took effect, rising to $4.76 an hour and covering 69 percent of canning workers. This did not increase purchasing power, stimulate demand, and raise living standards, as many minimum wage proponents theorize. Instead StarKist—one of the two canneries then located in Samoa—laid off workers, cut hours and benefits, and froze hiring.[ The other cannery—Chicken of the Sea—shut down entirely in September 2009.

The Government Accountability Office reports that between 2006 and 2009 overall employment in American Samoa fell 14 percent and inflation-adjusted wages fell 11 percent. Employment in the tuna canning industry fell 55 percent. The GAO attributed much of these economic losses to the minimum wage hike.

The Democratic Governor of American Samoa, Togiola Tulafona, harshly criticized this GAO report for understating the damage done by the minimum wage hike. Testifying before Congress Gov. Tulafona objected that “this GAO report does not adequately, succinctly or clearly convey the magnitude of the worsening economic disaster in American Samoa that has resulted primarily from the imposition of the 2007 US minimum wage mandate.” Gov. Tulafona pointed out that American Samoa’s unemployment rate jumped from 5 percent before the last minimum wage hike to over 35 percent in 2009. He begged Congress to stop increasing the islands’ minimum wage:

“We are watching our economy burn down. We know what to do to stop it. We need to bring the aggressive wage costs decreed by the Federal Government under control. But we are ordered not to interfere …Our job market is being torched. Our businesses are being depressed. Our hope for growth has been driven away…Our question is this: How much does our government expect us to suffer, until we have to stand up for our survival?”

Samoan employers responded to higher labor costs the way economic theory predicts: by hiring fewer workers. Congress hurt the very workers it intended to help. Fortunately, Congress heeded the Governor’s plea and suspended the future scheduled minimum wage increases.

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