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The minimum wage conundrum

from June 20, 2014 04:00 pm to June 20, 2014 04:00 pm

Date posted: Wednesday, June 18, 2014 | Manila, Philippines

http://research.bworldonline.com/popular-economics/story.php?id=412&title=The-minimum-wage-conundrum

BY Leo Jaymar G. Uy

 

The minimum wage conundrum

DETERMINING the cost paid to labor has always been a contentious battle between employer and labor groups -- with the government acting to reconcile the demands of the two parties.

 

While it is agreed that wage adjustments are necessary to shield workers from rising prices, the issue on how much remains in dispute. On one hand, labor groups demand a big increase as inflation erodes the “real” value of their wages. On the other, employers argue that big increases cause distortions by increasing prices further or forcing them to lay off people.

 

THE MINIMUM PRICE

 

The minimum wage is the minimum price for paid work. Under the supply-demand model, the minimum wage is set above the point where supply and demand for workers intersect -- known as the equilibrium point -- in the belief that the equilibrium wage may be less than the cost of basic necessities.

 

In the case of the Philippines, wage rates are set at the regional level and through two tiers: first, through the wage orders issued by the Regional Tripartite Wages And Productivity Boards that represent workers, employers and government; and second, through voluntary incentive programs by companies to award worker performance.

 

Supervising the regional wage boards is the National Wages and Productivity Commission (NWPC), the government’s policy-making body on wages, incomes and productivity.

 

Patricia P. Hornilla, NWPC officer-in-charge, explained the two-tiered wage system’s “policy space,” or the space that defines how high or low the minimum wage should be set.

 

“The minimum wage should be higher than the poverty threshold (the minimum income needed to meet basic needs) to ensure basic needs of workers and their families, reduce poverty and improve income distribution among low paid workers,” Ms. Hornilla said.

 

She added that so as not to “crowd out” the space for “collective bargaining and other bipartite approaches,” the minimum wage should be lower than the average wage, or the mean wage earned by workers in a region.

 

In 1989, Congress delegated the duty to set wages to the regional wage boards by virtue of Republic Act 6727 or the Wage Rationalization Act of 1989.

 

A regional wage board is made up of seven members. The regional director of the Department of Labor and Employment (DOLE) serves as chairperson while the regional directors of the National Economic and Development Authority (NEDA) and Department of Trade and Industry (DTI) act as vice-chairpersons. Workers and employers are each represented by two of their members, who must be appointed for a five-year term by the President of the Philippines.

 

TWO-TIER WAGE SYSTEM

 

The two-tier wage system was adopted in 2012 through NWPC Guidelines No. 2-2012. The minimum wage is calculated based on three major indicators: the region’s poverty threshold, the average wage (an indicator of firms’ capacity to pay) and socioeconomic indicators (consumer price index, gross regional domestic product, among others). Weights are then assigned to poverty threshold and average wage depending on the region’s economic conditions.

 

“For instance, the [regional wage board] may assign the biggest weight to poverty threshold if minimum wages are already close to or have exceeded the average wage,” the guidelines read.

 

Meanwhile, the regional wage board shall issue an industry-specific advisory upon which enterprises can base their voluntary incentive programs. Businesses that wish to implement the second tier shall create a committee represented by the workers and management called the productivity and incentive committee to come up with incentive scheme.

 

“The voluntary productivity-based pay scheme aims to tighten the link between productivity and pay by encouraging and assisting enterprises in adopting productivity improvement and gain-sharing schemes,” Ms. Hornilla said.

 

“At the end of the day, both the workers and employers will benefit from improved productivity.”

 

Ms. Hornilla also stated that firms that have productivity schemes in place will enjoy the incentives provided by Republic Act No. 6971 or the Productivity Incentives Act of 1990. For one, a firm can deduct half of total productivity bonuses given to employees from its gross income.

 

Firms that conducted “manpower training and special studies” for their employees are also entitled for a special deduction equivalent to 50\\% of expenses incurred from its gross income.

 

Notwithstanding the wage reform, there still appears to be some concerns.

 

ISSUES

 

For Rafael E. Mapalo, education director at labor group Trade Union Congress of the Philippines (TUCP) under the faction of former senator Ernesto F. Herrera, the current wage setup puts too much emphasis on the poverty threshold as a major factor in determining the minimum wage.

 

“It is not the intention of the two-tiered wage system to use the poverty line (poverty threshold) as the sole determinant of regional minimum wages, [b]ut this is what is happening,” Mr. Mapalo said. 

 

“The two-tiered wage system was meant to partially remedy the problems of equitable distribution of income and wealth… [t]hat industries and enterprises that perform very well are encouraged and enabled to share their gains with their workers, [n]ot to go around the minimum wage law and bring minimum wages lower, or increase minimum wages lower than [the increase in] inflation,” he added.

 

The TUCP education director noted that the approved P10 adjustment in the daily basic wage in National Capital Region (NCR) last September, was “far too low” compared to TUCP’s petition of an “across-the-board” (all workers) and “region wide” increase of P83.

 

“Unions have pushed for across-the-board wage increases year after year. The rationale is that all workers, regardless of industry, enterprise size, mode of payment, etcetera, are subject to the same rates of increase in consumer prices,” Mr. Mapalo said.

 

Ms. Hornilla of the NWPC, however, clarified that the other “relevant factors” of wage adjustments stated in RA 6727 such as the demand for living wages and price increases, among others, would still be considered in determining the minimum wage.

 

“Even in cases where the minimum wage is near the average wage, wages would still be increased to offset the erosion rate caused by inflation,” she said.

 

Bills for a daily across-the-board P125 wage hike have been filed in Congress since 2001. The P125 increase is advocated by labor group Kilusang Mayo Uno (KMU). Also, the TUCP’s Democrito C. Mendoza faction is asking for a P135 across-the-board wage increase.

 

But employers regard the wage hikes proposed by TUCP and KMU as unreasonable.

 

Vicente R. Leogardo, Jr., director-general of the Employers Confederation of the Philippines (ECOP), said the costs for implementing their petitions would be “astronomical.” He illustrated that by having a P125 wage increase, the formal sector would incur costs of as much as P1.24 billion daily using the Bureau of Labor and Employment Statistics (BLES) methodology for computing labor costs.

 

“This massive increase [would hit] the micro and small establishments, which constitute over 99\\% of total enterprises in the formal sector,” he said.

 

“Firms, which could not pass on the increased cost to the market due to competition, would be constrained either to retrench or close or adopt labor-saving techniques to increase efficiency.”

 

The ECOP director-general stated that based on calculations, NCR wage’s “erosion rate” due to inflation in 2013 amounted to only P7.22, which was below the P10 increase granted that year.

 

Mr. Leogardo further cited results of an impact analysis of a P125 wage hike conducted in 2012 by NEDA:

 

• real GDP growth rate would fall to the 6.3-7.3\\% range following a wage hike, compared to the baseline of 7-8\\%.

• inflation rate would increase to 9.8\\% on the first year of the wage hike’s implementation followed by 10.3\\% in the succeeding year.

• 344,000-353,000 jobs would be lost.

 

HIGH LABOR COST

 

University of the Philippines economist Ernesto M. Pernia shared the same view on the adverse effects of the high wage hikes.

 

“The problem is firms would see it is more expensive to hire more workers. Thus, they tend to hire less if they think the cost of their services is more than the output that they make. Their wages should be commensurate with their productivity,” Mr. Pernia said in a phone interview.

 

The unemployed and those in the informal sector will not benefit from the wage increase, while making it harder for the unemployed to look for jobs, the economist added.

 

The World Bank’s Philippine Development Report 2013 titled “Creating More and Better Jobs” stated that minimum wage rates are already nearing the average wage in some regions. For instance, the minimum wage in NCR had reached 90\\% of the average wage, “resulting in significant wage distortion.”

 

However, in real terms, minimum wages in the NCR have been flat or decreasing as wage adjustments “fall short of inflation.”

 

Mr. Pernia said the country’s relatively high cost of labor is one of the factors that discouraged the entry of foreign investments, in turn, affecting job creation.

 

Mr. Mapalo, however, said wages comprise only 15-25\\% of companies’ cost based on TUCP estimates, adding that the lack of investments and jobs had more to do with high utility power, water and input  costs.

 

NWPC data showed that workers in the NCR, the region with the highest minimum wage in the Philippines, have a daily minimum wage of $9.56-$10.38 based on a $1:P44.8750 exchange rate. Meanwhile, the daily wage rates of some of its Asian neighbors are as follows:

• Indonesia - $3.53-$7.19;
• Malaysia - $8.17-$9.19;
• Bangkok, Thailand - $9.21;
• Vietnam  - $2.96-$4.21; and
• Taiwan - $30.21.