The minimum wage: Minimum wage adjustments and economic consequences

Published by rudy Date posted on May 4, 2011

The petition for a rise in the minimum wage will be rewarded with an increase in the minimum wage. Signals from the government have announced as much.

“A certain celebration.” When the expected adjustments are finally made on the minimum wage, there will be celebrations. The mandated increases will be considered a victory for labor. While labor leaders will celebrate outwardly and wish the raise were more, they know in their heart that the government could do more without further hurting the economy. The government will remind us how it cares for the welfare of labor. Business will make the usual comments about caring for its workers but it will accommodate the wage increases at some sacrifice, as in the past.

“The base minimum wage is high.” Whether or not the minimum wage is “high” or “low” is a relative concept. To workers, the minimum wage is too low. But the minimum wage is a legal definition that is related to certain economic and welfare standards.

Most income earners will nominate a number that is higher than what they actually earn if asked what would be their idea of a minimum income that they can live with. When the minimum wage was set nearly eight decades ago, the figure was much higher than what was then the going wage for most workers. That’s how the base minimum wage began.

A lot of laborers – many of them unskilled and less skilled – seek employment at lower wages than the minimum set by the government. Moreover, the Philippine minimum wage rate is high compared with other East Asian countries. The equivalent rate of US$ 8.80 per day minimum wage in Metro Manila is high compared to that in Bangkok, Thailand (at $6.24 per day), in Jakarta, Indonesia ($3.73), and in Vietnam ($1.74). Where the minimum wage is higher, as in Malaysia, South Korea, Taiwan, the unit cost of labor is cheaper however because of the productivity of the labor.

The minimum wage is the lowest entry wage rate in organized enterprises, private and government. Since it is “high” in relation to the going market rate in the country, it sets a standard for all those at the entry level of employment. As a result too, most people with only limited skills earn that wage level.

“Co-existence of high minimum wages and high unemployment.” Workers earning at least the minimum wage do not include all the employed workers in the country. Around 25 percent of the labor force does not earn even that wage level. Many of these work in the informal sectors and in industry exempted from the coverage of the minimum wage, like small establishments, cottage industries, and all forms of self-employment. These workers earn only a small fraction of that amount.

Likewise, labor unions complain and the Department of Labor and Employment (DOLE) asserts that there is a high rate of evasion of the minimum wage by on-going enterprises required to pay the minimum wage.

Further, many laborers are unemployed. In fact, using government survey of employment statistics, the equivalent level of unemployed and underemployed workers in the country come to around 25 percent of the labor force.

“The minimum wage is set across the country’s administrative regions.” The minimum wage is no longer a single number but several numbers chosen in all the 17 regional groupings of the country. In the past, it was a set of two numbers chosen for industry and for agricultural enterprises decided at the national level.

In the present practice, the minimum wage rate decided by the wage board of the national capital region (Metro Manila region) sets the stage for the decision on the increase of the minimum wage. All the regional wages are fractions of this rate. Some regions have many variations on their rates to adjust to enterprises.

This setup is superior to the old practice of a nationally determined minimum wage rate. Regional wage setting was set up in part to defuse the debate on the minimum wage rate and also to create regional competition to stimulate firms to locate their business enterprises in the regions with lower wages.

But development, it turns out, is dependent on many other critical factors. Regional conglomerations of industries create a strong interdependence among producing units. Firms often locate near each other to take advantage of economies of transport, infrastructure sharing, and other economies of scale derived from their trading and production activities.

“Effects on employment.” Raising the minimum wage can only reduce employment. The level of employment cannot rise from this action. And certainly firms are induced to hire less labor in the future.

If a firm has the flexibility to move its operations to other countries, it is mainly to reduce its costs. This is most true for foreign direct investments. It is also true of some Philippine world class companies that find it profitable to locate their production activities to countries where labor costs are lower.

Thus, the high minimum wage rate becomes a barrier to the entry of new investments that have no prior commitment to the country. Firms with stronger ties to the country are forced to move to foreign locations where their competitive urge to cut costs or they undertake cost cutting on the labor front through other means.

“Capable domestic companies accelerate labor-saving investments.” Companies that can afford to restructure their payroll invest in labor-displacing activities actually. A major consequence of the wage policy is for companies to accelerate their labor-displacing activities.

Some of these moves are due to the pressure of competition and of technological challenges. But the calculations that enter into the final decisions to accelerate labor displacements are affected by periodic adjustments of the minimum wage especially when they are significant changes.

“Impact on workers with families and young unemployed.” As for those who already belong to the ranks of the unemployed, the minimum wage adjustment is of no help to them. It makes their position worse. It is harder for them to find employment at the higher minimum wage.

Even those who benefit from the wage adjustments momentarily also suffer in the following manner. They may be workers with children and family members who are unemployed or underemployed or just coming of age as members of the labor force. Since the wage adjustment works adversely against those who are not employed, then obviously these members of the labor force who gain from the minimum wage on surface actually suffer more from it.

A worker may be forced to support an entire family if he benefits from a rise in the minimum wage. Under a lower minimum wage, it might be possible for more members of the family to get employment. In this way, total family income might rise faster than under a regime of high minimum wage.

A more important consequence of employment is that new skills are learned and the worker’s productivity as a consequence could also rise. In such cases, total family income might even become larger. In consequence, total family welfare, productivity, and perhaps overall well-being could increase immensely.

Visit this site for more information, feedback and commentary: –Gerardo P. Sicat (The Philippine Star)

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