Labor productivity and wages

Calls for a suspension in the implementation of the minimum wage increase order have centered on the claim that there is a lack of productivity gains to support it.

The recently promulgated Wage Order NCR-27, the P85 daily minimum wage hike was primarily driven by indexing to the steep cost of living and high inflation, rather than a direct, quantitative measure of worker productivity.

For economists, real wages should generally rise in lockstep with labor productivity – meaning as workers produce more value per hour, employers can sustainably pay higher wages without raising prices.

Economic theory dictates that a worker’s compensation cannot permanently exceed the value of the output produced. It is only when output per worker increases that businesses become more profitable. Only then will an increase in basic wages be justified.

As it is, economists and employers point out that the Philippines has some of the highest nominal minimum wages in Southeast Asia, but its average worker output lags behind its neighbors.

While labor groups are correct that Filipino workers are working longer hours, international indicators show that without automated industrial supply chains, the actual financial value generated per worker per day lags behind Thailand, Malaysia and Vietnam.

Comparative regional data from the World Bank shows the annual average economic value added per worker in the Philippines hovers around $8,400. That’s way behind regional competitors like Vietnam ($11,500), Thailand ($18,000) and Malaysia ($30,000+).

This structural productivity gap forces international manufacturing and labor-intensive export firms to redirect their capital to more cost-efficient neighboring countries.

The Foundation for Economic Freedom (FEF) points out that a sustainable rise in living standards cannot be legislated through paper wage orders alone. We need aggressive supply-side interventions.

This means lowering food and energy costs to naturally boost the purchasing power of the peso, alongside heavy capital investments in infrastructure and technology to lift the Filipino worker’s hourly output.

FEF warned that the P85 increase outpacing both productivity growth and inflation, raises the risk of higher prices for basic commodities as businesses pass on increased labor costs to consumers.

If nominal wages rise without corresponding productivity gains, inflation is triggered, eroding purchasing power. Decoupling wage hikes from labor productivity, as the labor department just did, is not macroeconomically sustainable.

While indexing wages to inflation provides  short-term relief, doing so repeatedly while productivity continues to lag creates structural economic imbalances.

On the other hand, IBON Foundation, the left-leaning economic think tank, claims that Philippine labor productivity has actually grown faster than real wages.

“Measured at constant prices, Filipino labor productivity increased by 28.9 percent over a recent decade (moving from P330,035) per worker to P425,511).”

IBON also points out that real wages are falling. Adjusted for inflation, the value of the minimum wage has actually dropped, meaning worker purchasing power has eroded even as worker output is going up.

IBON laments that the gains from growing productivity are not going to workers as higher wages but to the profits of corporations and the wealth of the super-rich

IBON points out that profits of the Top 1,000 corporations in the country increased by nearly 35 percent between 2012 (P1.1 trillion) and 2019 (P1.5 trillion), and then by another 25 percent between 2019 and 2021 (P1.8 trillion).

“The nominal average daily basic pay or ADBP across all industries still falls far short of the family living wage (FLW). The nominal ADBP of P544 in 2022 is not even half (49 percent) of the FLW of P1,103, with a yawning wage gap of P559.”

Recent IBON computations show that the gap is even wider today than the P559 in 2022.

“The estimated national average FLW is now over P1,310 per day, compared to a nominal average minimum wage of just around P510. In Metro Manila, the daily minimum wage of up to P645 still falls roughly P570-P600 short of the regional living standard.”

But mandated wage increases can cause unintended consequences.

According to structural analysis by the Philippine Institute for Development Studies (PIDS), artificial wage floors cause a “scale effect.” Small firms are forced to reduce their headcount of production workers to keep total operating costs static.

This creates a barrier to entry for younger, less-educated and lower-skilled applicants, as firms raise their hiring standards to ensure that any worker they do take on can justify the high mandatory minimum rate.

Large, capital-intensive firms can absorb legislative wage hikes by investing in automation or streamlining operations. However, the Philippine economy is overwhelmingly driven by micro, small and medium Enterprises (MSMEs).

“Unlike large conglomerates, MSMEs operate on paper-thin margins and lack the capital cushions to absorb a sudden spike in overhead costs. Forcing these businesses to shoulder higher labor costs under current volatile conditions will push many to the brink of insolvency, resulting in widespread layoffs, reduced working hours or even complete business closures,” the FEF said.

To survive mandated minimum rates that outpace actual output, small enterprises often slip into the informal economy. They begin hiring workers under informal or undocumented arrangements to bypass mandatory rates.

FEF also warned that the wage increase could discourage investments in manufacturing, agribusiness and other labor-intensive industries.

In summary, data supporting FEF show a slowing economy (about three percent growth), high fuel costs and compressed corporate margins. A 12 percent wage increase mathematically outpaces these near-term metrics.

On the other hand, data also shows worker productivity did increase over the last 10 years, while real inflation-adjusted wages stagnated or dropped. Labor groups argue this P85 hike is simply a delayed correction for years of lost purchasing power.

Both sides have made good points. The real solution still involves addressing continually rising food prices that fuels the demand for higher wages. That’s an area our government has proven to be quite inept and not expected to improve soon enough to matter.

Boo Chanco’s email address is b[email protected]. Follow him on X @boochanco