Minimum wage?

A press release from the Trade Union Congress of the Philippines (TUCP) on the minimum wage last Monday brought me back to a vigorous debate among my economist friends in the Foundation for Economic Freedom (FEF). The debate was so heated that fraternity brothers were accusing each other of being less than academically adequate even if they all have their PhDs.

There are also on-going debates on minimum wage in the United States, often contentious and highly partisan. And it isn’t just in the US. An article last Monday in the website Quartz (qz.com) pointed out the following developments:

“In Germany, a coalition government led by the conservative Angela Merkel just put the country’s first-ever minimum-wage law into effect…

“British Prime Minister David Cameron, standard-bearer of the business-friendly Tories, is openly urging companies to ‘give Britain a pay rise,’ as an independent advisory group recommends a three-percent hike to the minimum wage.

“In Japan, Prime Minister Shinzo Abe is leaning on exporters to pass part of their record profits along to workers in the form of higher pay.

“And central bankers, who traditionally play the role of monetary referees in the tug-of-war between labor and capital, are now openly calling for fatter pay packets — even in inflation-phobic Germany.”

The worsening gap between the one percent and the 99 percent worldwide is firing up the discussions. What I get from the arguments here and there is the need to have a minimum wage that covers the needs of a worker and his family to survive.

I figure that if a worker needs to work more than one job to earn what it takes to have shelter, buy food and other groceries and cover other needs like education and health, then something must be wrong with the system. But for many businessmen and some economists, it is all about worker productivity.

For the TUCP, there is urgency for action based on a survey that shows “poverty continues to surpass poor workers’ take home pay and has now overtaken minimum wage earners’ in Metro Manila and in all other regions in the Philippines since last year.”

Citing results of a recent survey released by the Philippine Statistics Authority (PSA), TUCP pointed out “there are now four million more of more than 20 million poorest of the working poor nationwide who cannot even afford the daily P293 cost of food and basic commodities needed by a Filipino family of five to survive…

“The result also showed incomes of poor families were short by 27 percent of the average poverty threshold of P8,778/month or P293/day for a family of five in the first semester of 2014. This means, on the average, an additional P2,370 was needed by a poor worker and his family with five members in order to move out of poverty.

“In the National Capital Region (NCR) alone, the highest minimum wage in all 17 regions, government said the real value of the current P466 minimum daily wage is P356.64 or P7,846.08 a month or P932 short of the poverty threshold. The same survey showed 10.5 percent of the working population whose income cannot afford even the food threshold alone.”

TUCP also pointed out “The National Economic Development Authority (NEDA) cited the rapid rise in food prices and the lingering effects of typhoon Yolanda as key reasons poverty worsened. Rice prices alone increased to 11.9 percent in the first semester of 2014 from 1.7 percent in the same period of 2013.”

The debate in my e-group of economists happened two weeks before last Monday’s TUCP press release. But the give and take among my PhD friends reveal why formulating a minimum wage policy is not easy.

Said one senior economist: “At low levels, increasing minimum wages don’t do much harm and could possibly do some good, especially if aggregate demand is weak.

“The Philippines has a minimum wage which is adjusted every year, with many firms seeking exemptions because they can’t afford to pay the newly adjusted minimum wage. If there are firms that are having a hard time paying the minimum wage (plus the great likelihood that more firms would have existed  if the minimum wage were lower), it is hard to argue that minimum wage in our country has no effect on formal sector employment.

“Union leaders themselves admit that a large increase in the number of firms that have collective bargaining is better than raising minimum wage because some firms can afford to pay much more while some firms can’t…

“That the regional wage and productivity boards see that there is a trade-off between employment and raising average pay is another  indicator that minimum wage setting in our country has negative effects on employment. Of course, regional wage setting distorts less than national minimum wage setting.”

Another economist cited another economist, my friend Noel de Dios: “The bias of social policy-making is revealed in the refusal to grant labor any publicly provided social insurance, while there is no shortage of official concern in bailing out distressed firms and banks, often with public funds...”

Another economist insisted there is no proof that a high minimum wage kills employment. He went on to claim that “The minimum wage has a positive effect on employment if a forced increase in the wage rate may rouse management of firms operating in competitive markets from becoming lazy and inefficient leading to improvement in personnel and production management.

“Paying a higher wage rate as a result of minimum wage legislation may reduce the quit rate of workers. For firms with significant costs of recruiting or training workers, this reduction in quit rates might reduce costs enough to balance out the increase in cost caused by higher wage rates.”

Another economist asserted that “very high legal minimum wages will kill (or prevent the setting up of) firms that use a lot of unskilled labor in the formal sector.”

Economist Toti Chikiamco had what I thought was a view that embodies an easily doable solution for the moment:

“Politically, abolishing the minimum wage legislation and the labor security provision in the Labor Code will be tough. One suggestion by Dr. Sicat is the creation of “labor-free” zones, where the restrictive labor regulations and minimum wages are relaxed. This will still take tough going unless a strong political champion emerges. 

“In the meantime, the Secretary of Labor has the power to suspend legal minimum wages (as was done in La Frutera in Mindanao). But without a political champion with a political cover (for example, creating these ecozones in depressed areas like Leyte or Tondo), it is very difficult to get the DOLE Secretary to suspend the minimum wage.

“My proposal is to push for the apprenticeship law, which will not be opposed by labor nor DOLE (in fact, DOLE is pushing for an amendment). The PBED group of Ramon del Rosario is also pushing for an apprenticeship law as an educational reform. The Germans have also been active in pushing for labor apprenticeship, which they practice in their homeland.

“Under the current apprenticeship law, apprenticeship is only limited to six months and only confined to technical industries. Apprentices are allowed to be paid 75 percent of the minimum wage. We need a new apprenticeship law that:  a) expands apprenticeship from six months to at least two years, but ideally about four years, and b) allows it for all industries…”

Toti also lamented the effect of our high food prices on the demand to constantly increase minimum wage: 

“The Aquino administration must be faulted for keeping the NFA monopoly and Quantitative Restrictions. It was supposed to have ended under our WTO commitment last year, but the Aquino administration got an extension with US support in exchange for the EDCA (Enhanced Defense Cooperation Agreement).

“I understand that price of rice in Vietnam is half of what it is here.  No policy is more anti-poor than the NFA monopoly and the rice self-sufficiency program. Even poor rice farmers, who are net-consumers of rice (they eat what they produce during the harvest season and buy rice the rest of the year) are victims of this policy.”

The demand of that TUCP press release is not a simple one. I guess the problem is also tied up with the current level of our economic development and the politics from having a large segment of our population mired in crippling poverty. Government officials can get guidelines from number crunching economists but in the end cannot ignore social needs.

 It is a balancing act: attract job creating investors by not scaring them away with high minimum wage and tough employment rules while making sure our workers are able to live on the salary they are paid. In the end, it is a political decision.

Chain of command

 Kaya daw hindi maintindihan ni P-Noy ang ibig sabihin ng chain of command, kasi wala pa siyang asawa.

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco