The minimum wage and economic progress

by Gerardo P. Sicat (The Philippine Star), Jun 6, 2018

Concern about rising prices has led to renewed demand to raise the minimum wage. In fact, it has led to proposals to radically raise the country’s already high national minimum wage.

The minimum wage in the East Asia development context. The Philippine minimum wage is the one of the highest among the country’s major competitors within ASEAN. (I refer mainly to Thailand, Indonesia, and Vietnam, which have fairly sizable economies.)

These other countries face similar inflationary pressures that we encounter, but they have done much better in raising investments to generate jobs and are conquering poverty faster.

These countries used the minimum wage to protect the entry level wage rate for the unskilled workers, not to raise the average incomes of most workers. To encourage the rise in wages, they relied on government policies to stimulate market forces.

What their governments did was to accelerate employment growth by attracting investments and to improve worker productivity through training and education.

This was the way to raise employment to wipe out the large amount of unemployed and underemployed workers and create employment in modern industry and agriculture.

In fact, the typical East Asia model of economic growth has relied mainly on using inexpensive labor as the principal resource to attract industrial investments. They all mainly used foreign trade to enlarge the markets served by their industries.

The spectacular growth of East Asian economies, beginning with Japan, South Korea, Taiwan, Hong Kong – and, of course, more recently China – have been exemplars of this successful strategy.

Labor groups propose high minimum wage. Though the Philippine minimum wage is still the highest among ASEAN countries today. (I have in mind Thailand, Indonesia, and Vietnam as active comparators), the Trade Union Congress of the Philippines (TUCP) is proposing an even higher, minimum wage to raise worker incomes by state mandate.

In addition, it is proposing to abandon the current policy of regional minimum wage-setting in favor of a single national minimum wage set by Congress.

For specifics, as suggested in a bill introduced in Congress by their political promoters, they want to legislate a national minimum wage – of P750 a day. (At this proposal, and if the national base pay is at P400 a day, this would be an 87 percent increase in base pay).

One reasoning prevalent among labor groups is the following: “Regional wage boards heavily base their determination for the increase in minimum wage rates on the employers’ capacity to pay, instead of on the prevailing cost of living and living wage.”

The above is a quote from the leader of the Partido Manggagawa. Thus, they want to emphasize the cost of living and the calculation (bureaucratically calculated) of the living wage, or what the amount it takes to allow a worker with dependents to live comfortably.

The logic of the proposal is that the employers’ capacity to pay is not relevant, but the calculations of cost of living and the “living wage” are.

Of course, the cost of living is important in determining wage rates. But so is the capacity of employers to pay the wages. The important matter is that the wage that is paid provides an outcome that both workers and their employers need to mutually accept.

Unrealistic or excessive demands concerning minimum wage could escalate into unproductive outcomes for all involved. Unfortunately, in our present case, where the good jobs are less plentiful in relation to all the workers seeking to fill them, the imposition of high minimum wages will only cause loss of jobs for many workers.

In such cases, the biggest loser is the laborer. Relative to the success of other countries in generating more jobs and economic productivity in their economy, our country has lost much ground because of the failure to create sound labor and employment policy.

Cart before of the horse: a recipe for economic disaster. The logic of labor markets in a capitalist economy is that somehow, job opportunities must expand if the country’s labor force is large and wanting in job opportunities. This has surely been the case still in the Philippines.

Labor leaders need to be more grounded on the reality of the labor situation in the country. They should look at the employment situation and examine why there is so much unemployment and underemployment.

The cart cannot pull the horse. It is the horse that pulls the cart. If they understand the problem better, they will come to the conclusion that jobs are wanting because investments are wanting.

So, their tack of improving the welfare of workers would be to support policies that create in employment: improving the investment climate, reforming industrial incentives, and supporting moves to open the economy toward greater competition. In addition, they should support the removal of economic restrictions to the entry of foreign investments into the country.

Labor leaders need to think more about the overall conditions of employment and unemployment. In the current situation of the country, the bigger problem is to generate more jobs and to raise worker productivity. As long as such problems persist in a country, it is difficult to imagine how high minimum wage mandated by government could effectively be successfully carried.

That is because when the generation of good jobs and highly productive jobs dominate the scene, the nation’s productivity rises and incomes rise for the average worker and for all.

The meaning of this point on our political leaders is important. It is to recognize that the minimum wage should be mainly for the protection of the entry wage earner.

All other labor policies should be geared toward raising investments in the economy, promoting greater flexibility in the rules pertaining to employment and promoting reasonable standards of protection of the worker in the workplace through the enhancement of social security, worker’s compensation, and the expansion of training programs so as to create greater labor productivity at the workplace.

In the end, some of these policies are not directly in the realm of direct labor policy. They are policies to promote industrial investments. They cover policies to raise the quality of labor training, both in the formal school systems and in the workplace.