24 May 2023 – The history of our ‘high’ minimum wage policy

CROSSROADS TOWARD PHILIPPINE ECONOMIC AND SOCIAL PROGRESS – Gerardo P. Sicat –
The Philippine Star
May 24, 2023 | 12:00am

Last week, at my lecture at the UP School of Economics to begin the series on 50 years of national economic policy-making, I gave a brief history of our postwar minimum wage legislation in discussing part of our problems of unemployment.

I expound further on this point.

Background history on the Phl minimum wage. In 1951, on the basis of the US Bell Economic Mission recommendation, our Congress enacted a national minimum wage. The minimum wage for urban and industry was set at P4 a day; and the rural and agricultural minimum at P2.50.

It so happened that the peso-dollar exchange rate of exchange at that time was still officially at the rate of two-to-one. That was the prewar rate of exchange. That was, in fact, the exchange rate adopted by the US colonial authorities when they assumed monetary control over its new colony shortly after 1898.

Under the Philippine independence law of 1934 passed by the US Congress, the value of the peso could not be changed by the successor Philippine government without the approval of the American president. As we gained our independence in 1946, that currency rule would still be binding on us.

Immediately after independence, we signed on to the Philippine-United States trade agreement that defined our economic relations up to 1974 with that currency provision still in our laws.

This onerous currency provision was one of the thorny issues that was settled by the Laurel-Langley Agreement in 1955 when presidents Ramon Magsaysay and Dwight Eisenhower decided to reset the bilateral economic relationships.

Prices after the war in East Asia. The Second World War impoverished most countries of the world – whether they were with the winners or losers in the war. This was the case, except for the United States whose dollar currency became the strongest in the world.

In East Asia, almost all countries devalued their currencies. As a result, they reset their economies to the level of their devastated economic productivities. They also received foreign aid, but they restarted their economies to the realities of their impoverished situations. They could rise again by their own productive growth.

Not so with us. As we became politically independent, with our economy badly destroyed like other countries after the war, our peso currency returned to the prewar two-to-one peso-dollar rate. Our peso in effect got anchored back to the strongest currency, the US dollar.

To many Filipinos, that seemed like a return to a paradise of relative economic comfort. Our peso could again buy goods that had disappeared in wartime. Despite our impoverished state, this illusion was enabled by a bounty of dollar resources that flowed back into the Philippine economy as independence came.

That was the immediate past economic scenario when the postwar minimum wage was legislated in 1952. The minimum wage was stated in pesos, but the external value of the peso could not be legally adjusted by provision of law and by treaty obligation.

Even after the Laurel-Langley Agreement made us gain complete control over our currency, the policy of protectionist industrial development emphasizing import substitution would continue to cling to that exchange rate. By then, the peso was grossly over-valued.

It would take the President Diosdado Macapagal in 1961 to decontrol the economy and unlatch the peso from the dollar.

East Asian Countries achieve progress without minimum wages. Going back to our neighbors in East Asia, I have stated that after the war, they reset their economies by accepting the weakness of their currencies and begin from there. In effect, they all had devalued their currencies to enable their economies to make the gains they needed through international trade.

When they began to industrialize, many East Asian countries looked more to promoting industry and commerce and refused to have minimum wages in their policies. At the same time, they encouraged heavy inflows of foreign direct investments in industry to make up for their lack of domestic capital, technology and entrepreneurial expertise.

I remember in 1968, as a member of an economic mission from the Asian Development Bank to Thailand, I asked officials what their minimum wage was. Their answer was unanimous. They did not have a minimum wage. And when I asked what would be a useful wage rate if there was one, their answer was a very low figure, if they gave one at all. (Note: This was the mission that preceded the first loan ever given by ADB, the loan to Thailand’s IFCT.)In many countries in East Asia, as they were grappling with their low level of development at the time and their large supply of poor people, of unemployed and underemployed working age people, their solution was to encourage commerce and businesses to grow. And if, later in time, they had to adopt a minimum wage to follow the trend in global legal norms, they set those rates to protect mainly the unskilled and first time entrants to labor employment to keep the rates low.

One by one, they improved the wages of workers as investments and productivity improved. Eventually, their domestic labor supply became scarce as all their workers prospered and rose from the depths of poverty. The families of these workers improved in health, in education, in aspirations, and in leisure enjoyment.

This is the story of the rapid rise to prosperity of the postwar industrializers East Asia: Japan, South Korea, Taiwan, Hong Kong and Singapore.

Our ASEAN partners Thailand and Indonesia have followed essentially the model of expansion by creating opportunities for companies to come without fear of high minimum wage legislation. Today, they have succeeded better than us in making their workers more prosperous.

China, which rose to economic prosperity under a different system, made sure wages were kept low to keep their industries globally competitive. Vietnam is following the same model.

Our labor unions and our politicians who think of promoting the welfare of our workers should look to these realities. When the economy suffers from unemployment and underemployment, imposing unrealistic minimum wages hurt these workers because their path towards obtaining good jobs become more difficult.