GAO: Wage hikes offset by price spikes

A 114-page U.S. Government Accountability Office report released yesterday showed that increases in CNMI employees’ earnings as a result of minimum wage hikes have been largely negated by consumer price increases, including fuel. The CNMI’s current minimum wage of $5.55 an hour will increase by another 50 cents to $6.05 an hour on Sept. 30 this year.
Employees’ average earnings increased by 3 percent from 2011 to 2012, but prices increased by 2 percent.

This means the inflation-adjusted average earnings of those employed increased only by 1 percent, says the GAO report.

GAO is the U.S. Congress’ investigative arm.

From 2006 to 2012, average inflation-adjusted earnings fell by about 2 percent. This was a result of about 29-percent increase in average earnings that was offset by an about 31-percent increase in prices in the same period.

But minimum wage was not as important a concern as the potential loss of foreign workers after Dec. 31, 2014, when the transitional CW program expires, and a halt to Russian and Chinese tourists’ parole into the CNMI, the GAO report says.

Meanwhile, the Inos administration said yesterday that Gov. Eloy S. Inos’ proposed fiscal year 2015 budget takes into consideration this year’s scheduled Sept. 30 minimum wage increase of 50 cents an hour.

“The impact on this budget proposal for the salary adjustments to a total of 189 employees is estimated at $220,000,” press secretary Angel Demapan told Saipan Tribune.

As of 7 last night, the Legislature had yet to receive the governor’s proposed 2015 budget. But the governor had until 11:59pm last night to do so.

GAO’s report, “American Samoa and the Commonwealth of the Northern Mariana Islands: Economic indicators since minimum wage increases began,” cites the impact of minimum wage increases since 2007.

The 2007 U.S. law requires the CNMI and American Samoa to increase their minimum wage by 50 cents every year until it reaches the federal wage floor of $7.25 an hour.

But subsequent laws allowed the CNMI to skip a 50-cent hike in 2011, 2013, and 2015 amid concerns about their impact on the economy. The CNMI will reach the current U.S. minimum wage on Sept. 30, 2018.

Since the sizeable garment industry left the CNMI, the territory has relied on its lone industry, tourism.

Greater concerns

The GAO report says the minimum wage “was not as important a concern for discussion group participants as the potential loss of the foreign labor force.”

“For hotel representatives we spoke with, providing easier access for Russian and Chinese tourists by having the Department of Homeland Security continue to parole these individuals into the CNMI was a greater concern than the minimum wage,” the GAO report says.

Workers on both Saipan and Tinian “feared that prices would increase along with the minimum wage, as they said had occurred at the time of previous increases.”

Commerce Secretary Sixto Igisomar, in a comment letter to GAO’s David Gootnick, said key challenges faced by CNMI businesses range from “uncertainties surrounding the availability of qualified workers or a labor force, pending a decision from U.S. Department of Labor on contract workers (CWs) program extension.”

He said the CNMI governor continues to urge U.S. Labor Secretary Thomas Perez to extend the CW program.

Igisomar also said businesses are predisposed to a high cost of transacting business in an isolated economy that is dependent on imported goods to operate the lone tourism service industry, among others.

He said the cost of fuel locally and globally affects local utility and transportation costs, as well as the opportunity for airlines to service the CNMI tourism industry.

“Although the CNMI does not have a specific disposable income ratio, the average income should negotiate the cost of basic necessities, which it does not. Our residents must cope with the additional burden of high utility and health care costs,” the Commerce secretary said.

This year, the CNMI government and its employees must cover a more than 30-percent increase in the government employee health insurance plan premiums, while government retirees saw a 25-percent pension cut.

“This hurdle for government employees is dwarfed by the complete lack of health insurance coverage in the private market for new insured lives in the year 2014—due to implications of the Affordable Care Act,” Igisomar told GAO’s Gootnick.

Economy, population

GAO says the CNMI’s gross domestic product decreased by approximately 36 percent from 2006 to 2012. It has remained relatively flat since 2009.

Population declined from 69,221 in 2000 to 53,883 in 2010.

The total number of people employed fell by some 6 percent or from 25,229 in 2011 to 23,720 in 2012, based on CNMI government tax data.

From 2006 to 2012, the number of people employed went down by 45 percent or from 43,036 to 23,720. Decreases prior to 2009 reflect the closures of garment factories, which employed thousands of foreign workers.

CNMI hotel occupancy and room rates have increased in recent years, but industry representatives that GAO spoke with characterized the recent growth as “an opportunity to recover and reinvest in their properties.”

Hotel industry

From June 2011 to June 2013, the median wage among workers employed by CNMI hotel industry questionnaire respondents increased by 10 percent—from $5.33 to $5.86 an hour, the GAO report says.

Future minimum wage increases would affect the wages of 94 percent of current workers in the CNMI hotel industry by the time the minimum wage reaches $7.25 in 2018.

GAO says that based on the wages workers currently earn, minimum wage increases would increase the average annual cost per worker in 2018 by $3,051 since June 2013.

In 2018, payroll will be representing 31 percent of hotels’ total operating costs compared to some 26 percent in 2012.

Hotels representing the majority of all workers employed by respondents to GAO’s questionnaire attributed past cost-saving strategies and price increases to minimum wage increases.

The GAO report says hotels also attributed their actions to other increased costs and changes to U.S. immigration law, which reduced the number of available permits for foreign workers in the CNMI.