Tripartism and wage hikes

WORKERS DEMAND higher wages. Companies offer rock-bottom rates. The government stands amid these conflicting interests, in the hope of mediating an acceptable outcome.

This is how tripartism works: The business sector, labor groups, and the government–each represented respectively by the Trade Union Congress of the Philippines (TUCP), the Employers’ Confederation of the Philippines (ECoP), and the Department of Labor and Employment (DOLE), via the Regional Tripartite Wages and Productivity Board (RTWPB)–all have roles to play in crafting and directing wage policy. Decisions are made and reached through negotiations, cooperation, and oftentimes, compromise.

Interests

Each party brings its own interests to the negotiating table.vLabor groups have been asking for as much as an additional Php125 to wages to allow workers to cope with rising commodity prices. Predictably, employers propose as little as Php13.35, because they, too, have costs to consider.

The government, as arbitrator, has to look after the welfare of the working class on the one hand; on the other, it needs to foster a friendly business environment to sustain economic growth and promote employment.

Inflation, however, makes the task more difficult. The Bangko Sentral ng Pilipinas (BSP) warns that wages can be raised by only Php25; any higher and businesses may have to pass on the added cost to consumers through higher retail prices, which defeats the purpose of the wage hike.

Invisible hand?

In any case, the Wage Board recently deliberated an increase of Php22 in the cost of living allowance, well within the limits that the central bank recommended. The increase falls far below the demands of labor groups and is thus deemed inadequate to help combat inflation; at the same time, it is way above the concessions that the business sector is willing, or perhaps even able, to make.

Quite understandably, the decision has left both parties displeased with an unsatisfying compromise. Such an outcome then raises the question of whether government intervention was needed in the first place.

Free markets are supposed to be guided by the proverbial invisible hand: In the labor market, the forces of self-interest and competition should help determine wages, even without aid from the government. In an ideal setup, firms set wages at levels that allow them to keep costs at a minimum and selling prices at par with their competitors’; if wages are too low, firms run the risk of not getting the employees they need.

Similarly, firms and workers adjust freely in response to developments. Inflation may prompt firms either to cut jobs or reduce the number of working hours; in the same vein, employees either cut back on their spending or search for better-paying opportunities.

Unfortunately, the market is far from perfect or ideal. An unattractive investment environment and a high population growth rate restrict such adjustments. The lack of investments in particular deprives the country of opportunities, leaving workers with fewer employment options than is desired or needed.

Together with a high population growth rate, this translates to an increasing number of graduates and workers competing for a limited number of worthwhile jobs. According to the CIA World Factbook, the country’s population is estimated to grow by 1.9 percent in 2011, well above the world average of 1.09 percent and the ASEAN average of 1.32 percent.

Essentially, then, if left to its own devices, the economy cannot absorb everyone who needs jobs, and workers, faced with limited alternatives, are constrained to accept low market wages.

Intervention

This market failure seems to necessitate government intervention. It is precisely for this reason–to safeguard the interests of workers–why the government mandates minimum wages.

Because of the opposing interests of workers and businesses, however, every government action carries tradeoffs.

As Professor Benjamin Diokno of the University of the Philippines School of Economics highlights in a recent article, the benefits to the estimated two million minimum-wage workers eventually will be offset by opportunity losses for the unemployed, which currently represent 7.4 percent of the labor force. That is, with little investments and few expansion plans, the business sector can ill-afford hiring more workers given the financial burden of higher wages.

Higher labor costs may also serve as a disincentive for firms to expand or invest more in the Philippines, setting off what may turn out to be a vicious cycle.

In the end, the government finds itself with a tough balancing act, and whether such a tripartite arrangement is beneficial or harmful remains an open question. As the recent round of wage-hike negotiations show, the middle ground often involves compromise. In the spirit of promoting national interests, perhaps that is the only palatable option. –Xervin Maulanin, IDEA Junior Researcher, BUsinessworld

The Institute for Development and Econometric Analysis (IDEA), Inc. is a non-stock, non-partisan institution dedicated to high-quality economic research, instruction, and communication. For questions and inquiries, please contact Eduard Robleza via edjrobleza@idea.org.ph or telefax no. 920-6872.