Understanding minimum wage

How we can fix our wage system reflects how well we understand our economics. To begin with, wage is conditional to employment, and often is calculated to balance the term “living wage” from the profit to assure the capitalists of their investment.

In the Philippines, we opted for a socialist system of regulated wage by imposing a minimum limit. There are other options, and most prominent is the so-called “maximum wage”, also a form of regulated wage, and the system of “deregulated wage”, a situation where there is no law intervening to peg the amount of daily wage, but solely left to the workers and the employers to negotiate on what is fair and reasonable.

The trouble is while we assume that to sell one’s labor is a right, how much one would pay for those services now becomes a debate. Often, the buyers are not the consumers, but intend to resell the goods produced by their hired labor by putting a mark-up for them to earn profit. Hence, when the government fixes the minimum wage, it has in mind the objective of ensuring that the amount received by the workers is one of living wage.

Despite the many complaints that the amount is not enough, nobody acknowledges that the system has its inherent flaws. To give ourselves a clear view, wage can be doubly tricky under a system of minimum wage. It can either result in overpaying or underpaying the workers, and these rough edges in the system happen because of market volatility. Thus, under the system of minimum wage, when there is an overpayment in the cost of services, it is the employers who suffer because they are compelled by law to subsidize a portion of the minimum wage, and the situation results in the oversupply of labor, but constrict the number of jobs available. The net effect is increased unemployment.

If on the other hand, when there is an underpayment in the cost of services, it is the workers who suffer for instead of getting the right amount of wage, the minimum wage law pegs the cost for their services, and the situation results in the low supply of labor. The net effect is not necessarily a decrease in unemployment, but shortage of manpower. Less number of workers applies for that job, while those employed resign and seek employment abroad that offers higher wages. Should some employers unilaterally adjust their wage in accordance to the prevailing cost to keep their loyalty, it could jack up their cost of production, viz. reduce their competitiveness.

Both situations created a problem of national wage distortion of great magnitude. First, using the minimum wage law as ledger, the ratio in the number of overpaid from the underpaid workers is much greater. This is so because the overpaid workers are represented mostly by the unskilled and semi-skilled workers, while the underpaid workers are represented by the skilled and professional-technical workers.

Second, since the demand for wage adjustment is often initiated by the unskilled and semi-skilled workers, another round of adjustment on the minimum wage only results in further widening the gap between the overpaid and underpaid workers.

Third, an adjustment on the earnings of the skilled but underpaid workers to give rightful value to their labor would still not suffice. This explains why there is a high degree of turnover. Tight market competition for a limited job that is availability has made their wage slightly higher than the wage received by manual labor. Nonetheless, increasing their wage to a critical level could ultimately affect production cost resulting in many of them ending up jobless. Often employers, instead of hiring professionals substitute the work by hiring under-qualified manual workers by their experience to operate complex production lines to keep their overhead cost low.

With respect to the problem of overpaid manual labor, many employers just avail of the labor-only contractors as their stop gap to prevent their workers from forming a union or from becoming regular to avoid payment of incremental benefits. But in that instance, efficiency is still affected and their cost of production hardly reduced because they also pay the minimum wage to agency-supplied workers with an added cost paid to the labor-only contractors for their placement fee and monthly premium fee.

The net effect is a no-win situation. Instead of focusing on the problem of unemployment where 2.8 million of our people earn nothing, and 33 million living in poverty and scrounging an income from P150 to P200 a day, we focus on the cost of wage, which is counterproductive to wealth creation. We overlook the fact that high employment rate could raise the cost of labor, and not the cost of labor promoting employment, to residually increase the standard of living of our people. So, we have a rampant case of violation of the minimum wage for our manual workers and the immoral exploitation of our skilled and technical workers.

One could guess that possibly up to 45 percent in the cost of minimum wage is subsidized, which means we are paying them 100 percent for less of their productive output. The net effect is not so much on the cost of subsidy, but on its harmful effect on our economy. Even slight increases of 3 percent in the cost of minimum wage will always have a residual impact on the prices of goods, especially those locally produced. This explains why we have a prosaic situation of high labor cost amidst an increasing unemployment rate.

The problem is even serious among skilled workers receiving below the true value of their services. Their percentage runs to as high as 65 percent. Some attribute the problem not to the local market, but to the cost their specific technical services would command abroad. This is why many of them leave because they compete for few jobs available, yet get paid so low that at times makes them no different from janitors and messengers. –Rod Kapunan, Manila Standard Today

rodkap@yahoo.com.ph