Impact of Increased Minimum Wages on the Economies of American Samoa and the Commonwealth of the Northern Mariana Islands

Section 3. The Commonwealth of the Northern Mariana Islands

The Commonwealth of the Northern Mariana Islands (CNMI) is the American territory closest to eastern Asia.[28]  It is 1,500 miles from Japan, 1,400 miles from Taiwan, and 2,000 miles from Korea.  The CNMI consists of 14 islands, with a total land area of 176.5 square miles, spread over 264,000 square miles of ocean.  Only five of the islands are inhabited, and the largest, Saipan, accounts for over 90 percent of the population.  The next two largest islands are Rota and Tinian, which between them nearly equally split the remaining 10 percent of the population.  The smaller islands are not considered habitable by large populations.

The covenant that created the CNMI “in political union with and under the sovereignty of the United States of America” became law in 1978.  Previously, the islands were administered by the United States under the terms of a United Nations territorial trusteeship.  Citizens of the CNMI are U.S. citizens as well, although they do not vote in Federal elections and do not pay Federal taxes.  Nor are they represented in the Congress of the United States.  The Commonwealth receives the same types of general Federal aid as do states and other territories, some of them in the form of capital improvement and technical assistance grants.  The Federal government also assists the Commonwealth in dealing with special issues, such as human trafficking and other human rights violations.  CNMI residents enjoy the full protection of U.S. institutions.  The covenant establishing the Commonwealth provided potential exemption or relaxation of some U.S. legal requirements affecting employment and immigration law:

Section 503. The following laws of the United States, presently inapplicable to the Trust Territory of the Pacific Islands, will not apply to the Northern Mariana Islands except in the manner and to the extent made applicable to them by the Congress by law after termination of the Trusteeship Agreement:
(a) except as otherwise provided in Section 506, the immigration and naturalization laws of the United States;
(b) except as otherwise provided in Subsection (b) of Section 502, the coastwise laws of the United States and any prohibition in the laws of the United States against foreign vessels landing fish or unfinished fish products in the United States; and
(c) the minimum wage provisions of Section 6, Act of June 25, 1938, 52 Stat. 1062, as amended.[29]

The minimum wage in CNMI was set at $3.05 per hour in 1996 when the U.S. minimum wage was $4.75 per hour.[30]  P.L. 110-28, which raises the U.S. minimum wage (in three steps) to $7.25 per hour, specified an increase in the CNMI minimum wage to $3.55 per hour effective July 25, 2007 and scheduled further increases of fifty cents per year to take effect May 26 of each subsequent year until parity with the U.S. minimum wage is reached.[31]  The schedule will result in the CNMI minimum wage rising to $7.05 per hour on May 26, 2014 and to $7.25 per hour on May 26, 2015.  The Commonwealth has evolved economically, financially, and socially since its establishment in 1978.    Per capita income rose from $3,298 in 1980 to $9,151 in 2000, a larger increase than was seen among other Pacific island nations.[32]  Despite absolute improvements, CNMI remains relatively poor by U.S. standards:  per capita income remains less than one-third of U.S. per capita income.  In 1980, the CNMI per capita income of $3,298 was 32.5 percent of U.S. per capita income of $10,134, and in 2000, the CNMI per capita income of $9,151 was 30.7 percent of U.S. per capita income of $29,855.[33]  Along with economic development, the population grew from 16,780 in 1980 to 69,221 in 2000. 

The Garment Industry

An important factor which contributed to economic development of CNMI in the 1980s and 1990s has been the ability to export locally manufactured goods tariff-free to U.S. markets.  Combined with a low minimum wage and local immigration policies that facilitated entry of guest workers, CNMI developed a growing garment manufacturing industry that exported finished apparel to the U.S. and other markets.   The garment industry in CNMI was able to compete with garment manufacturers in countries with lower wages than the CNMI minimum wage because of the advantage provided by tariff-free access to the U.S. market.  During the period of expansion of the industry in CNMI, tariff barriers remained in effect for many of the lower-wage countries in Asia.  The relatively higher minimum wage in CNMI (compared to wages in other Pacific islands, China, India, Nepal, Bangladesh, and elsewhere) served to attract foreign workers to temporary employment in the CNMI garment factories.  Even though paid less than the U.S. minimum wage rate, foreign temporary workers in CNMI have been able to earn more money than if they worked in their home countries.

The expansion of the garment industry in CNMI had a significant impact on both the population and the labor force.  The Commonwealth became the only Pacific island entity in which foreign-born residents (mostly temporary workers) outnumber indigenous residents.  When the population reached 69,220 in 2000, temporary residents (mostly participants in the garment industry guest worker program) totaled 34,740, equal to 50.2 percent of the total population.  By comparison, 24,820 (35.9 percent) had been born in CNMI, and 18,093 (26.1 percent) reported that their mothers had been born in CNMI.  Table 5 summarizes CNMI population trends by citizenship status from 1980 through 2003. 

Population growth in CNMI over the past 25 years has been paralleled by employment growth.  Also according to the 2000 census, 42,753 persons, or 61.8 percent of the population, were employed.[34]  This employment-to-population proportion was higher than that for the average developing economy, and it is high even in comparison to large industrial economies where typically about half of the population is employed.  The high employment-to-population ratio in CNMI reflects the fact that population growth has been predominantly driven by entry of working-age adults rather than by natural increase or immigration of families with children.

Of those employed, 40.7 percent (17,398 persons) were in manufacturing, mainly garment making, which has operated only on Saipan.  Other industries that were represented among the employed, although with much smaller magnitude, were arts, entertainment, and recreation (second); retail trade (third), and construction (fourth).  Public administration accounted for a relatively small share of employment (6.0 percent). 

In 2000, CNMI employment totaled 8,620 U.S. citizens and 34,130 non-citizens—predominantly temporary workers employed in the garment and service industries.  Non-citizens accounted for 88.8 percent of private sector wage and salary workers in 2000, an increase from 52.7 percent in 1980.  Among citizens, the 8,620 employed in 2000 included 4,190 private sector wage and salary workers, 4,175 government workers, 235 self-employed persons and 35 unpaid family members.[35]

Up-to-date and detailed data on employment and unemployment in CNMI are not available.  Data from the 2000 Census showed that overall unemployment in CNMI that year was 3.8 percent, down from an estimated 7.3 percent in 1995.  Among citizens, the unemployment rate was 11.1 percent and for non-citizens (predominantly temporary workers) the unemployment rate in 2000 was 1.8 percent.[36]

Expansion of the CNMI garment industry peaked in 1999 with 34 factories in operation and sales of $1.06 billion, according to the Saipan Garment Manufacturers Association (SGMA).  Sales declined beginning in 2000 in response to increased competition from lower cost countries in Asia and elsewhere and to the 2001 recession in the United States.  In 2003 there were 29 garment factories operating in CNMI.  Global competition has intensified since 2005, when implementation of World Trade Organization (WTO) agreements liberalized trade in garments and textiles.  Under the rules that took effect in January 2005, quotas disappeared for textiles, although import duties remained.  The removal of quotas made it possible for producers of labor-intensive goods such as garments to sell more of their products in markets such as the United States, Europe, and Japan, even with import duties.  Examples of countries that benefited from exports of labor-intensive goods are China and Mexico.  With its entry to the WTO as a partner in the new global trade regime, China obtained better access to the WTO’s high-income members and was expected to reciprocate with imports from these countries.

Since the cost of labor in China is lower than in the CNMI, Chinese manufacturers can take advantage of economies of scale to sell more abroad.[37]  In a global market of low unit cost and large volume advantage, small producers such as those in the CNMI, where production costs are higher than those in China, for example, are less able to compete.  The Commonwealth’s garment producers’ costs are lower than in the United States but still higher than in China and Mexico. 

Since implementation of garment and textile trade agreements in January 2005, increasing numbers of CNMI garment makers have exited or consolidated, especially the smaller producers who did not have the sales volumes to compensate for lower sales margins resulting from global competition and the subsequent lower prices.  Remaining garment producers focused on attempts to improve productivity and to develop niche markets to remain viable in the face of global competition.[38]  The decline in the number of garment factories has been mirrored in the decline of guest workers employed in the industry.  Table 6 shows that work permits issued by the CNMI Department of Labor for garment industry guest workers declined from 16,639 in 2000 to 10,089 in 2006.[39]

In the 1990s, Saipan’s garment industry grew rapidly to become the single largest source of taxes and jobs in the CNMI, especially on the island of Saipan.  According to the SGMA, the industry expanded from 21 factories with $300 million of sales (wholesale value) in 1992 and peaked at 34 factories with sales of $1.06 billion in 1999.  Sales began to decline in 2000 and continued to be weak through 2002 when they totaled $831 million. The 29 factories still in business in 2003 expected to sell garments valued at about $765 million.  Garment taxes and fees still accounted for more than one-quarter of the government’s direct revenues.  Garments also provided 40-45 percent of jobs in the Commonwealth, according to the SGMA.[40]  Exhibit 2 shows the trend of garment exports and of CNMI government user fee revenues through 2006.  By 2006, revenues had fallen by half compared to the 1999 peak.

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Exhibit 2

The number of operating garment factories had declined to 21 by the end of 2006, and to 15 by early August 2007.  Since early August 2007, an additional seven factories have either closed or announced plans to close.[41]  The initial fifty-cent increase in the minimum wage (to $3.55 per hour) became effective July 25, 2007.  In media reports since then announcements of garment factory closures have frequently included reference to the higher minimum wage as a contributing factor.  Following are some representative quotes from recent media reports:

• “Once the second fifty-cent minimum wage increase takes effect next summer, seven of the remaining garment factories which have not yet announced their closures will also cease operations, according to Richard A. Pierce, the governor’s special assistant for trade relations and economic affairs.” (Marianas Variety, December 14, 2007)
• “‘It was well within the federal government’s control to arrest this long announced downturn in the industry, and keep this industry alive until at least 2009 and possibly longer.  I refuse to listen to anyone that says it was going to happen anyway.  That may have been true in 2009 or 2010, but it did not have to happen now,’ Pierce said.” (Marianas Variety, December 14, 2007)
• “Garment manufacturers have been exiting the Commonwealth, citing adverse economic conditions caused by increases in the minimum wage, trade competition in China and other Asian countries, the increased costs of conducting business and a slump in orders.” (Radio New Zealand International, December 10, 2007)

The lack of detailed historical and contemporary labor market data for CNMI makes it impossible to distinguish among the contributions of the various adverse factors that have impacted the CNMI garment industry since 1999.

Tourism

Tourism is the second basic component of the CNMI economy, providing a source of income and jobs directly and indirectly because of the re-spending effect of wages paid to tourist industry workers.  The 2002 Economic Census found 4,304 workers employed in the Accommodation and Food Services sector – the industry sector primarily associated with the tourism industry.  Air transportation accounted for an additional 206 workers in 2002.  Together the 4,510 workers in these industry sectors accounted for 13.8 percent of total employment.[42]  CNMI has potential advantages as a tourist destination because of its proximity by air to Japan and Asia, its climate, and the natural beauty of the islands. 

The tourism industry grew rapidly in the early 1990s, declined in the second half of the decade, and has seen further declines recent years.[43]  Fueled by the East Asian economic boom of the late 1980s and early 1990s, tourist traffic to the Commonwealth tripled in less than a decade (1988-96) from 245,545 to 736,117.  With the onset of the Asian financial crisis in late 1997, tourist arrivals began to drop.  The decision by Korean Air Lines to suspend all flights to Guam and Saipan in late 1997 after the crash of one of its jumbo jets near the Guam airport had an immediate impact.  In part because of the near shutdown of the Korean market that followed, and more generally because of the continuation of the Asian financial crisis, total CNMI tourist traffic was down to 490,165 in 1998, roughly where it had been in 1992.

Tourist traffic recovered some lost ground in 1999-2000, when the total exceeded 500,000 again, but did not recover to the 1996 peak.  In 2001, in the aftermath of terrorist attacks on New York and Washington that caused many Japanese visitors to stay at home for some time, tourist arrivals fell significantly again, to 444,284, or roughly the count of a decade earlier.  In 2002, the count was up 7.0 percent to 475,169, mainly as a result of deep discounts, but still 35.4 percent below the 1996 peak.  Tourism was weakened further when Japan Airlines (JAL) withdrew from the market altogether in 2005. 

From 1988 to 1996, tourism was the Commonwealth’s second most important income source.  The impact of tourism extends beyond carriers and hotels and restaurants.  Tourist spending partly supports the CNMI’s retail trade, especially in the urban areas that cater more to tourists than residents.  By extension, tourist spending also contributes to the support of other services, including transport services.  When tourist numbers rise, the effects show up in many segments of the economy.  In the same way, contractions in tourist numbers leave a range of goods and service providers in financial stress.

In keeping with other growth trends over the period, the number of hotel rooms rose from fewer than 2,000 in 1988 to almost 3,000 in 1992, peaked at 4,651 in 1998 and declined slightly to 4,313 in 2002.  Over 85 percent of all hotel rooms in the Commonwealth are on Saipan.  The Tinian Dynasty Hotel and Casino, with 440 rooms, is thus far the only major hotel built on another island.  The average hotel occupancy rate for the Commonwealth, which the Hotel Association of the Northern Mariana Islands started reporting in 1992, peaked at 85.6 percent in 1996, dropped to 54.4 percent in 2001, and rose to 63.4 percent in 2002.

Total tourist spending in the Commonwealth was reported to have been $587 million in 1996 and dropped to $585 million in 1997.  In 1998, it fell further to an estimated $393.4 million, 33 percent below the 1996 level.  In 1999-2000, tourist spending was estimated to have reached $400-430 million.

Hotel, motel, and restaurant employment suffered a decline of an estimated 25-40 percent between 1997 and 2002.  Currently, no tourist spending estimates are available for the Commonwealth.  A crude estimate of tourist spending can be obtained by applying the average daily spending (based on tourist exit surveys) to the total tourist counts.  This method yielded an estimate of total spending of around $225 million for 2002, less than half of what was reported in 1996.[44]

The tourism industry in the CNMI has also suffered from the consequences of changes in regional and global air transport arrangements driven by market forces which dictate corporate resource realignments.  One such change that had a large and immediate negative effect on the CNMI economy and public finances was the pullout by JAL in October 2005.  This was significant, because JAL customarily carried about 40 percent of all Japanese tourists to the CNMI, who also constituted 29 percent of total arrivals.  With no other carrier filling the void, JAL’s pullout meant the loss of up to 40 percent of Japanese tourists.  The exit of JAL also affected garment producers as the reduction in available flights for air cargo increased the cost of exporting garments.

Currently the tourist industry in CNMI appears to be operating far below its potential, and immediate remedies are not evident.  In 2006, tourist traffic fell 16 percent. (See Exhibit 3.)  The decline of tourism is significant because of the large and diverse financial impacts of the

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Exhibit 3

industry on the overall economy.  Tourists not only spend money on hotels and food in the islands, but they shop at local retail outlets and buy gifts to take home.  They engage in diving, sightseeing and other recreational services that local vendors supply.  All the activities tourists engage in employ local labor and resources. 

For the longer term there is potential for improvement of the performance of the industry.  A tourist market that holds long-term potential for CNMI is China. Tourists from China were such a small number in 1996 that they were lumped together with “other” markets.  They increased some in the next few years, but averaged just over 2,200 per year from 1997 to 2001.  In 2002, the number of Chinese tourists increased nearly five-fold to 10,471.  Although they made up just over 2 percent of the market share in 2002, Chinese tourists are likely to increase in the years ahead, perhaps at rates greater than those of either Japanese or Korean tourists in the past decade.  In 2000, over 10 million Chinese traveled abroad, making them the second largest group in East Asia, after Japanese travelers, who then numbered 18 million. 

In anticipation of travel liberalization in China and addition of the CNMI to the “approved list of destinations” which Chinese citizens may visit without restrictions, the CNMI government rebuilt and expanded Tinian’s runway to accommodate wide-bodied jets such as the Boeing 767.  The existing airport terminal building is small, reflecting the island’s past remoteness, but that could change with improving financial conditions in the CNMI.

Summary of Current Economic Conditions in CNMI

The CNMI does not yet have in place macroeconomic data collection and accounting systems technology capable of generating information on total output and its components on a monthly or quarterly basis.  As a result, there is not a way to provide objective measures of productive capacity, capacity utilization, employment, wages or unemployment rates.  The Census Bureau’s International Programs Center, with the participation of staff from the CNMI Department of Commerce, works on estimates of GDP for the CNMI; however, these estimates have not yet been released.  In the absence of complete and accurate macroeconomic data, there is no objective method to gauge the level of aggregate economic activity, the level of employment it supports, or other important measures such as total personal income, consumption, savings and other metrics that explain the well-being of the population and the average citizen.  The information vacuum continues to be an obstacle to an objective and comprehensive assessment of the economy and its productive capacity.  The lack of such data are especially a barrier to assessing the current and future impact of the recent and scheduled increases in the minimum wage.

Under a technical assistance program of the Office of Insular Affairs, U.S. Department of the Interior, the CNMI is developing local expertise to generate national income and product account (NIPA) or macroeconomic data in a manner the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce produces for the United States and the 50 states.  Among the factors that make this and other data gathering and analysis work challenging is that the CNMI (as a U.S. territory along with American Samoa, Guam and the U.S. Virgin Islands) is not included in the U.S. Census Bureau’s American Community Survey (ACS) or other surveys that generate current detailed data on the 50 states and most areas of population of 65,000 or more.  Nor is the CNMI included in surveys that generate current data on industries, production and household income and expenditures.[45]

An alternative perspective on economic activity is provided by transactions subject to the CNMI’s business gross revenues (BGR) tax.  The Commonwealth has no sales tax.  Instead, several types of taxes are imposed on various types of business activities.  For example, an excise tax of 4 percent, embedded in the price before sale, is levied on goods and services, and is a condition of doing business in the Commonwealth.  Garment sales are subject to user fees and excise taxes, as are other activities.  BGR tax collections and the compilation of the underlying transaction data make it possible to keep track of the tax base.  Although the tax-base data are often incomplete and not current because of filing and accounting issues, they are the only source of information on aggregate business activity.  Also, since BGR taxes are levied on a wide range of business activities, they provide useful information on the various types of business activities.

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Exhibit 4

Exhibit 4 shows the trend of CNMI business gross revenues (BGR) in recent years.[46]  Total BGR increased quite rapidly from 1993 to 1997, reaching a record $2.6 billion in 1997, just before the onset of the Asian financial crisis.  The crisis caused a 14.3 percent loss in total business revenue in 1998, pushing it back to the level of 1996.  In 1998-2001, the annual total remained stable.  BGR data for 2002 showed large decrease in aggregate business activity.  Total business receipts in 2002 were down 10 percent from 2001.  Receipts for 2003 were stagnant.  A rebound in 2004 (reflecting some improvement in tourism) was reversed in 2005, with a decline of more than 10 percent reflecting both the shrinking garment industry and the fall-off in tourism following the withdrawal of JAL.

Impact of Minimum Wage Increases

With both of its major industries declining simultaneously, the CNMI economy is in overall decline, and its current economic situation makes it especially vulnerable to additional shocks.  While data are not available to precisely quantify the impact of the recent and scheduled future increases in the minimum wage, it seems likely that the current economic decline may be made worse.  General experience in the U.S. and elsewhere has shown that potential adverse employment effects of minimum wage increases can be masked or offset to some degree by an expanding economy that is generating net employment growth.[47]  No such offsets can be expected in a declining economy.

The proportion of wage and salary employees potentially affected by the minimum wage increases provides an indicator of the potential labor market impact.  Data from the CNMI 2004 household and expenditure survey shows that 68.2 percent of wage earners in CNMI earned no more than $4.99 per hour and that 79.5 percent earned no more than $7.99 per hour.  The scheduled increase in the minimum wage to $7.25 (by 2015) will likely affect at least 75 percent of wage and salary workers in CNMI.  By comparison, in order to directly affect 75 percent of U.S. hourly workers, the minimum wage would need to be raised to $16.50, the 75^th percentile mark for wage and salary workers who are paid hourly rates.[48]

Because CNMI has such a large proportion of temporary, non-citizen workers in its labor force, it is likely that future job losses will exacerbate the declining population trend in evidence since 2000.  Non-citizen temporary workers experiencing job loss will return to their countries of origin.  Because citizens of CNMI are U.S. citizens, they have access to the U.S. labor markets, including Guam, Hawaii and the mainland.  It is possible that movements of workers from CNMI into these U.S. labor market areas may increase as the minimum wage schedule for CNMI is implemented.  This would likely lead to additional population declines in CNMI.

[28] Much of the information describing the physical, political and economic situation of CNMI in this section is based on materials and data provided by the Office of Insular Affairs, U.S. Department of the Interior and by the Office of the Governor of the Commonwealth of the Northern Mariana Islands.

[29]48 U.S.C. Section 1801.

[30] CNMI Public Law 9-73 increased the minimum wage to $3.05 effective July 1, 1996.  The Minimum Wage Increase Act of 1996(Section 2104 of the Small Business Job Protection Act of 1996) raised the FLSA minimum wage from $4.25 per hour to $4.75 per hour effective October 1, 1996 and  $5.15 per hour effective September 1, 1997.

[31] The implementation dates for CNMI and American Samoa vary by one day because of each areas position with respect to the international date line.  Thus, the July 24, 2007 wage increase in American Samoa was effective July 25 in CNMI, and the future May 25 wage increases in American Samoa will be effective May 26 in CNMI.

[32] For 2000 data, see U.S. Census Bureau, 2000 Population and Housing Profile:  The Commonwealth of the Northern Mariana Islands, p. 4.  For 1980 and 2000 data, see CNMI Yearbook 2002, Table 5.4.

[33] See www.census.gov/compendia/statab/tables/08s0657.xls for U.S. data.

[34] The proportion is relative to the entire population not just the working-age population. 

[35] CNMI Census Reports, "Recent Trends in Population, Labor Force, Employment, Unemployment and Wages, CNMI: 1980 to 2000," reprinted in:  U.S. Department of the Interior, "Commonwealth of the Northern Mariana Islands," Unpublished briefing paper prepared by the Office of Insular Affairs, December 2007, p. 18.

[36] Ibid., p. 15.

[37] See Lett, Erin and Judith Banister. “Labor costs of manufacturing employees in China: an update to 2003–04.” Monthly Labor Review, November 2006.

[38] Information provided by CNMI business and government interviewees.

[39] Data from CNMI Department of Labor.

[40] Information and chart provided by Office of Insular Affairs, U.S. Department of Interior.

[41] Media reports and interview information provided by representatives of CNMI government. 

[42] U.S. Census Bureau, 2002 Economic Census of Island Areas:  Northern Mariana Islands, Table 1.

[43] Information in this section was provided by Office of Insular Affairs, U.S. Department of Interior.

[44] Estimates provided by Office of Insular Affairs, U.S. Department of Interior.

[45] Information provided by Office of Insular Affairs, U.S. Department of Interior.

[46] CNMI Department of Commerce.

[47] Some recent U.S. research regarding the effects of minimum wage increases suggests some positive employment effects when increases are associated with labor markets characterized by a degree of monopsony power.

[48] The data reflect analysis by the Office of the Assistant Secretary for Policy of unpublished tabulations from the Bureau of Labor Statistics of hourly earning of employed wage and salary workers who are paid hourly rates for 2006 (annual averages).  The figures are for wage and salary workers who report being paid on an hourly basis – a close approximation for workers covered by FLSA minimum wage provisions.

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