Is minimum wage counterproductive?

Last week the Philippines Senate passed on second reading the proposed ?100 per day addition to the current minimum daily wage in the country. Using the Metro Manila minimum wage of ?6.10 per day plus ?100, this will mean an increase of ?2,600 per month bringing it to ?18,460 per month for Metro-Manila minimum salary earners. The business sectors/employers through their chambers/associations are opposing this proposed legislation, citing increase in prices and higher inflation as manufacturers/producers/service employers will pass the additional costs to the consumers. They say that many of the small and medium enterprises (SMEs), companies/employers cannot afford this increase and may just reduce employees, lay off workers, or close down resulting in higher unemployment.

There is a realistic basis of these probable effects as any mandated wage increase has a cascading effect on all salaries and wages. To avoid wage/salary distortions, all wages and salaries in any organization have to be adjusted upwards for all employees in the company. This makes the mandated salary increase costlier to the companies, than just the ?100 per day increase to minimum wage earners. Moreover, since compliance of the legislated wage are problematic to the SME’s, most of the beneficiaries of the wage increase will be the unionized workers and workers of the larger companies, which accounts for less than 20% of the workers, and not really the minimum wage earners.

Historically, the concept of mandated wages did not really start as a minimum wage. In 13th century Europe, after a plague that decimated many agricultural workers, a king mandated that there should be a maximum limit on the wages that can be paid to the workers due to a severe shortage of workers. In the 18th century when the stirrings of democracy were growing, both maximum and minimum wage rates were set by benevolent rulers. In the 19th century with the onset of industrialization and the proliferation of “sweatshops” employing unskilled workers including women and children, democratic governments set minimum wages.

In a developing democratic country like the Philippines, a legislated minimum wage is still relevant but will have a declining relevance. At the rate of economic/GDP growth rate of 6% to 8%, and assuming the government unemployment and under employment rate at 3.6% and 14.9% respectively, employees will have more bargaining power over wages. There are already shortages for farm laborers in some areas of the country and sugar farmers are mechanizing planting and harvesting. Skilled construction workers are already getting 40% over minimum wage, and service workers in the hotels/restaurants are way above the minimum wage with the service fees accruing to them. Employees in BPO’s and in all the “Gig” economy are all beyond the minimum wage. The fast pace in the developments in artificial intelligence is an added factor that will diminish the importance of minimum wages.

At this time, a legislated wage increase is not needed as the Regional Tripartite Wages and Productivity Boards are doing a good job of coming up with a moderated wage increase annually or sooner if there are intervening circumstances. It is a consultative democratic process that minimize abrupt sudden changes, and more acceptable to the employers, including the SMEs. The Senate proposal is even delaying incoming company initiated salary increases as employers await the outcome of this legislation so it will be part/incorporated in the merit increases.

Minimum wage is not counterproductive, but legislated minimum wage is counterproductive and an implied failure of the government to grow the economy. It should be less relevant in the years to come, and not even as “pogi points” for some politicians.