Minimum wage: (Part III) How our East Asian neighbors dealt with wage policy

Published by rudy Date posted on May 18, 2011

Minimum wage adjustment determined by the government after public hearings is a major part of Philippine labor welfare policy. The giant leaps in raising the welfare of labor in other countries should be studied to enable us to see the role of wage policy more clearly.

Successful East Asian neighbors did not adopt a minimum wage policy during their accelerated period of growth. Even those that introduced minimum wages later made sure that the rates that they set were in line with the productivity of labor. These countries have set the record of transformation from poor to rich countries within our lifetime.

How did they accomplish their success from the viewpoint of wage policy?

“Unique cases yet market-priced labor.” At the time of their breakout into sustained growth, these countries had enormous labor supply relative to their economic production. They had high unemployment and enormous poverty.

In the contemporary postwar period of our times, South Korea, Taiwan, Hong Kong, Singapore and, two decades later, – Thailand, Malaysia, Indonesia – have used labor as the key element in their growth strategies.

All countries allowed the price of labor to be essentially determined by the market in their respective economies. Pushed to conform with social, political, and international pressures, they instituted minimum wages but mindful not to overprice them as to cause enterprises to go to the edge of failure.

China in the late 1980s – and Vietnam today – represents an example of the overwhelming economic strategy of enticing companies to take advantage of low cost labor as the basis of their economic growth. The major emphasis of all such strategy was to open the economy to the entry of foreign capital in special zones of regional progress so that it could attract as much foreign factors of production to participate in the job generation.

Each country is an illuminating and unique story. But a pattern is easily recognized of countries that avoided pricing labor as if the government knew a good or proper wage rate. They let labor market conditions guide them.

These countries made their supply of labor as the foundation of their programs to provide new jobs. Their main strategy was to change the conditions of the country’s excess labor supply by stimulating the demand for labor. This was done in many coordinated ways often through the improvement of economic conditions. They worked on expanding investments, both domestic and foreign.

“Labor intensive industries provided more jobs.” During the 1950s and later on for the latecomers among these growing economies in the region, these countries were even relatively less endowed than the Philippines with resources. They were poorer in general, or only as poor as we were. They were even more greatly challenged than we were as a country.

They encouraged labor intensive industries so that more people could find jobs. By not interfering with labor market conditions, except to provide as many jobs as possible, they discovered that more workers from the same family could find jobs. With a job to work with, people found the ways to adjust to their true economic circumstances.

But this meant that the whole family was brought up to the modernizing impact of having a productive job. If the consequence was low income for labor initially, it at least helped sustain the employment of an otherwise unemployed individual, so that he could provide for his upkeep as a person and add to the family income. Thus, more laborers were brought to the realm of sustained employment.

“… and helped to raise family income quickly.” In such labor markets, the family units kept contributing many laborers that formed a unit so that family income – when added all together – combined to produce a high enough income to more than feed the family and then earn for it improving consumption.

This approach to industrialization made labor scarce quickly. Faced with the need to make their operations more efficient, companies adopted innovations in the work place by bringing in more capital to save on labor. The impact was to make wages rise and workers began to move to higher levels of job requirements.

In these economies, labor was made to earn its keep. The wage rate paid was what industry could afford to pay. Increased skills during employment and higher productivity were the result. Thus, enterprises became strong, competitive, and able to expand and keep on hiring more labor. More importantly, laborers prospered.

The exhaustion of surplus labor not only made wages rise. It also created enormous new demand for consumption goods. Thus, it moved the economy to the next stage in which more complex industries became more feasible to strengthen the domestic production base. This is essentially the East Asian story of development, viewed from the perspective of labor.

“Other critical policies in this development strategy.” Achieving this successful transformation was not however keyed only on the wage policy. Other critical policies worked to produce the main outcome.

One of these was food policy. This highlights attention to agriculture, especially to produce food at home for base supply as well as food security. Its objective is to make sure that food prices did not disturb the social equation of wages being in line with food prices. Thus when agriculture did not provide enough, food could still be imported at international prices because these countries essentially had an open stance with respect to food import policy.

Another policy was with respect toward strengthening overall investment in the economy. The rate of investment was sustained at a high level from year to year. A high rate of domestic saving helped to finance domestic investment. Foreign direct investment provided substantial new demand for labor, making possible the rapid exhaustion of the excess supply of labor.

The rapid exhaustion of excess labor force at whatever wage that the economy could support provided the best means for the conquest of poverty. It was not based on direct subsidies on the poor. Yet, it empowered the employed worker with income. In the end, it meant support of the family to help overcome poverty.

Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/ -Gerardo P. Sicat (The Philippine Star)

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