Minimum wage woes

When Bangko Sentral ng Pilipinas Governor Eli Remolona—a seasoned central banker and economist whose competence, integrity, and professionalism are beyond question—publicly worries about the substantial minimum wage hike in Metro Manila, then we must all worry too. He is particularly concerned about how it will speed up price increases and raise everyone’s cost of living, especially the poor. In the end, the intended benefits for workers could be offset by reduced purchasing power due to higher prices.

Even as the controversial P80 daily minimum wage hike was for the National Capital Region, it causes concern nationally because (1) NCR alone accounts for nearly a third of the country’s total production; hence, wage hike-induced price increases could affect a disproportionately wider share of goods and services, (2) NCR wage orders typically set the tone for all other regional tripartite wage boards, which will likely take the cue from NCR’s unprecedentedly large wage adjustment and push similarly in their regions, and (3) the large minimum wage adjustment distorts firms’ wage structures and is likely to trigger wage hike demands across the board.

Wage setting is an inherently delicate matter with far-reaching repercussions. It amounts to defying the law of supply and demand, a natural law of economics that no one can “repeal” or escape, whatever economic system prevails. When a price is fixed above the level that clears the market (i.e., where quantity demanded exactly matches quantity supplied), an excess supply results. In the market for labor, this translates to unemployment: some workers will not find demand for their services (i.e., jobs) because the price (wage) has been set so high that employers are led to reduce their workforce, while the higher wage attracts even more workers to seek jobs. The imbalance makes some already employed workers lose their jobs, and those without jobs become even less likely to find one. It’s yet another “no free lunch”: granting higher wages to the poorest workers is a well-motivated move, but it comes at a cost, and it’s not the employers who would bear it, as they would simply pass it on to their buyers through higher prices. It is in fact workers themselves, including the majority of them who are not benefited by a minimum wage hike, who end up bearing the cost and are hurt most, through loss of purchasing power as prices rise, and through loss of jobs, or greater difficulty in finding one.

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Any minimum wage setting exercise should keep in mind that only a small minority of the labor force are minimum wage earners, yet everyone ends up paying for it, including and especially the poor themselves. Going deeper into the numbers of the latest monthly Labor Force Statistics from the Philippine Statistics Authority helps illuminate this. First, note that not all workers are paid wages and thus subject to this regulation; less than two-thirds (64.4 percent) of all Filipino workers are wage and salary workers. The rest are either self-employed (27.8 percent, or 13.6 million) or unpaid family workers (5.8 percent, or 2.8 million) who do not gain, and could even suffer, from a minimum wage hike. Of the self-employed, close to one million are employers in a family-owned farm or business. For them, a substantial mandated wage hike could mean the end of their enterprise, thus leading to substantial job losses.

Only 50.7 percent of the 64.4 percent who are wage earners earn their wages from a private enterprise. The other 13.7 percent (some 6.7 million wage workers) work in private households, their own family farms or businesses, or the government, where mandated daily minimum wages would not apply or are largely not enforced. In the case of government, about one-third of workers are “job order” or “contract of service” hires who technically are paid for defined tasks, not reckoned on a per-day or per-month basis.

There’s more. Out of the 50.7 percent of wage workers in private firms (numbering less than 25 million), an undetermined but substantial percentage work in small firms exempt from minimum wages, particularly micro-enterprises that make up 90 percent of all firms. This leaves only a fraction of those working in private firms to be covered by minimum wage rules. Furthermore, only about a third would actually be minimum wage workers, based on Department of Labor and Employment (Dole) data, further shrinking the number of those who would directly benefit from hiked minimum wages. All told, the Dole counts roughly 4.7 million minimum wage workers, less than one in every 10 members of our labor force. Being such a small minority, why not come up with a more targeted way to help them cope without inflicting wide collateral damage on the entire economy? I’ve long lamented how our government has a propensity to use shotguns to attack problems where focused rifles make far more sense.

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