Wage increase and inflation

Published by rudy Date posted on March 26, 2011

There is a saying that whenever the government needs money, all it does is increase the volume of money in circulation to trigger inflation, and people seldom know that an increase in the prices of almost everything they purchase would correspondingly increase the amount of taxes they pay. In fact, some say that government-induced inflation is the worse form of indirect tax because it quietly robs them of everything from their savings to earnings.
Of course, many of us would wonder how it is done because our understanding of the market mechanism is simply based on the general principle law of supply and demand: that whenever the demand is greater than the supply, the prices of goods will tend to increase. Unfortunately, in our modern times, spending is often induced by the increase in the amount of money pumped into the open market. Hence, when there is plenty of it, the people will in no time start spending their money. The result is inflation caused by an increase in the prices of goods, which is anticipated by the monetarists.

The dark side of it, however, is while there is an increase in demand for more consumer goods done by the easing of credits and by the lowering of interest rates to force people to spend, there is no corresponding increase in production to offset that gap. It is that gap that is often taken advantage of by the manufacturers and traders to offset their own losses.

Notably, the government, through the Bangko Sentral ng Pilipinas, possesses the mechanism to induce and curb inflation. That situation is best observed when the government is suffering from acute shortfalls in revenue collection. By increasing money supply, it automatically triggers an increase in the value of goods. Hence, the corresponding increases in purchase, though not necessarily in production, in turn, redound to the benefit of the government by way of collateral tax increases. Calibrated inflation as a policy has been seen as a much better way than imposing taxes, and beauty about it is that it encompasses all, including rent and property taxes.

In our case, if we increase the minimum wage, say by P25 a day, that would not mean anything if inflation runs at 4.3 percent. The increased wage would certainly be negligible or could even fall short from the increases in the prices of goods that may entail, but certainly the government in that situation will emerge the winner by way of additional revenue collection. This can be gleaned from the aggregate increase in the cost of the commodities individuals routinely buy, and often the amount exceeds the P25 additional increase in their take home pay.

The worse thing is while we are forced by law to increase the daily wage, we could not increase our production to induce the market to reduce their prices. On the contrary, the situation only results in the retrenchment or downsizing of the labor force, or worse, closure due to bankruptcy. In the end, the windfall that the government expected to reap by the calibrated method of inducing inflation always results in a net loss. Taxes still fall below the expected level because of the aggregate reduction in the country’s total productive output. At that given curve, taxes becomes a self-defeating proposition as proven by economist Arthur Laffer who came out in what is now known as “Laffer’s curve theory.”

The Keynesian approach of more government expenditures to resuscitate the economy through inflationary expenditures is useless. One could easily detect it by comparing our minimum wage of P404 or $9.07 daily from the average per capita income of our people of $2,100 per annum. The disparity in the amount of minimum wage from our per capita income is shocking because the latter represents an earning of only $7 or roughly equivalent to P311.50 per day computed at 300 working days. This explains why traders resort to importation; because producing goods here is hampered by the high cost of labor, and there is no way they could sell their locally produced goods because of low per capita income.

Hence, when the government opted to unlock that mechanism of inflation by adopting the system of currency deregulation, it doubly punished the people by deregulating the oil industry. In effect it opened wide the Pandora’ Box because oil and its by-products have an encompassing effect in our economy, including the cost of labor. So, while the increase in the prices of oil is the legitimate result of short supply, the corresponding increase in the prices of other goods is certainly the result of inflation, and we aggravate that by increasing the cost of wage.

The problem is once the minimum wage is increased, there is no way we could pull it back even in the event the cost of fuel is reduced. In other words, our liberal treatment of inflation as a way to minimize the shortfalls in revenue in the end ruined our economy. If we are to observe Arthur Okun’s law on unemployment, a gross domestic product growth of 3 percent, he said, will mean that our unemployment rate will remain the same. So, if we obtained a 4 percent GDP growth in a given year that could mean a one-half percent decrease in our current unemployment, viz. a GDP of 2 percent would correspondingly mean a one half percent increase in unemployment.

Perhaps, it was on this Okun’s law that the government opted to revise its methodology in coming out with statistics on unemployment insisting that our GDP registered 6.5 percent in the 3rd quarter of 2010. In that, the government managed to come out with that figure by excluding those who were not serious in looking for a job or have been out of job for more than one year, thus reducing unemployment from 9 percent to 7.3 percent or roughly about 2.8 million Filipinos out of job. Presto, we found ourselves having a declining unemployment rate despite the inflation and declining productivity.  –Rod P. Kapunan, Manila Standard Today


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