Last week, the House of Representatives passed on second reading a bill that would raise minimum wages by P125 over the next three years. The Palace has opposed the measure.
Over the same period, the regional wage boards could, in all probability, raise wages by that same amount. But that is not the point.
The point is: we have, after much political difficulty, succeeded in relieving the legislature the expectation that it sets wages among the other things it must do. That is a milestone in the maturation of our public understanding of how economies work.
The present effort of the House to return to the practice of legislating wages overturns that achievement. Having made substantial gains in depoliticizing wage-setting, the House now threatens to return us to that sorry period of a heavily politicized economy.
A politicized economy will return us to that forgettable period of chronic market failure that haunts us today with the burden of massive poverty.
For decades, before we finally removed wage-setting from the sphere of legislative activity, Congress legislated wages almost annually – and almost as a matter of course. That was in response to demands from the highly organized and influential labor aristocracy: the small segment of the regularly employed whose unions were located mainly in the highly protected sections of our economy.
That practice did not bring prosperity to our economy. Nor did it bring lasting relief to our workers.
What it did, definitely, was to condemn the unemployed to permanent exclusion from the economic mainstream.
Legislated wage increases, understandably, adjusted wages according to political stimulus. The wage level was de-linked from productivity and from the requirements of trade competitiveness.
When our economy was heavily protected, wages in our manufacturing sector overtook increases in productivity. That produced the long episode of high inflation that we experienced from the fifties to the eighties.
With our wages constantly rising and our productivity largely stagnant, our economy produced goods that could not be traded abroad. Behind a wall of high tariffs, our manufacturers could only sell to our captive consumers.
The biggest loser of this arrangement was the Filipino consumer. He had no choice but to buy the same low-quality, high-priced goods that a closed, non-trading economy allowed.
Since even the unionized worker was also a consumer, he too was penalized by this economic regime. His wages might have nominally increased, but his purchasing power was always below the inflation rate.
As a consequence of legislated wage-setting, the cost of labor in our economy rose at a faster rate than improvements in productivity. In fact, legislated wages was, effectively, a disincentive to improving productivity.
The further consequence of this is that the cost of our labor, at a specific level of productivity, rose higher than those of our neighboring economy. In effect, it was cheaper for labor intensive industries to migrate to neighboring economies rather than deal with our costly labor force.
Not only was our labor cost more expensive, our unions were heavily influenced by radical, unreasonable political movements. That added uncertainty to the costs.
The result is what we experienced the past few years. Not only did investments into our manufacturing sector drop, our own firms relocated their operations to China. Our manufacturing sector hollowed out as uncompetitive firms closed down. We lost our entire garments sector that used to employ over a million workers.
Add to the unreasonable cost and behavior of our labor the other inefficiencies that plague our economy: European-style labor policies that were inhospitable to hiring, high power costs, poor infrastructure and a heavily politicized business environment such as we precisely see today in the House’s effort to return to the outdated practice of legislating wages.
No wonder foreign investments in manufacturing flowed to China, Vietnam, Indonesia and Thailand rather than to the Philippines. No wonder manufacturing shrunk as a percentage of our GDP as be become a service-sector economy currently driven by consumption that is fueled by remittances. No wonder we are not a trading power in a region whose economic miracles were produced by manufacturing and trade.
No wonder, too, that we have high unemployment aggravated by one of the highest population growth rates in the world. No wonder we have to send our workers abroad and, in the process, evolve an economy dependent on their remitted incomes.
Legislated wage adjustments is a response to political, rather than market, stimulus. It tends towards instant gratification instead of the strategic needs of economic growth.
Worse, legislated wage increases is often an extension of political grandstanding with devastating long-term consequences. It wins the votes of the already employed. Those who are unemployed fail to realize that they are the casualties of this act of petty politicking passing off as a "pro-labor" stance.
In a word, legislated wage increases is a fossil from the age of populist politics – the sort of politics that produced the damaged economy we are only now beginning to repair.
That move in the House to return to the practice of politicizing wage-setting is a step backwards to the sort of near-sighted economic interventions that is the source of our economic malaise.
It must be stopped by explaining to the public the vanity and the futility of setting wages by law.