Insane

The best definition of insanity is doing the same thing over and over again, expecting a different result.

By this definition, the move to legislate a new minimum wage has to be called insane. It will torpedo all efforts to grow the economy by attracting new investments because it introduces uncertainty by way of politicizing wage-setting. It will increase unemployment both because enterprises will likely trim their workforce or simply close shop. It will push up the cost factors driving up our inflation rate.

In a word, it will create more poverty and misery for our people.

We knew this for years. Over three decades ago, our legislators, dazzled by the popularity points legislating wages could bring on the eve of elections, set a higher minimum wage. As a nod to sound economic arguments against doing so, Congress at the same instance renounced the power to further set wages. Such power was transferred to tripartite regional wage boards that would set wage scales based on the actual cost of living in a locality.

For three decades, we realized the wisdom of regional wage boards. It helped disperse investments to the provinces and encouraged investment flows to regions with lower cost of living indexes. We saw exceptional economic growth in our provincial cities – particularly Cebu, Davao and Iloilo.

Growth in investments in regional nodes eventually reflected in improvement in infra, better distribution of consumer demand indicated by the dispersal of retail outlets and higher disposable income reflected in the rise in housing development. The poorer provinces benefited from the wage differential created by regionalizing wage-setting.

Last week, our legislators are moving to reverse all the strategic economic gains derived from depoliticizing the minimum wage. By attempting to politicize wage-setting, our legislators are courting the resurrection of highly politicized trade unions poised to use their ability to disrupt to force legislated wage increases.

Remember the bad old days of politicized trade unions that intermittently used the “welgang bayan” to force their demands on everyone? Those days saw the migration of some of our most labor-intensive industries, such as the garments sector, to neighboring economies such as China, Vietnam and Indonesia. This, in turn, caused a spike in unemployment and hence of poverty.

Legislated wage increases raised labor costs without improving productivity. By most measures, the Philippines has among the highest minimum wages in the region relative to productivity. That is a factor explaining why the Philippines gets only four percent of total investment flows to the ASEAN.

While wages rose, due to political intervention, productivity remained stagnant. Our workers remained poor because inflation ate away whatever nominal increases legislated wages brought. Minimal investment flows into our economy caused us to lag behind our neighbors in capitalizing our production process. In turn, this caused further stagnation in productivity.

A legislated wage increase harms most the poorest workers in the small enterprises and the informal sector. It compresses the wage schedule within enterprises – another disincentive to improving productivity.

Should the current effort to legislate minimum wages move ahead, some of our most job-intensive sectors will be harmed. The BPO and electronics sector, the two most competitive sectors in our economy, will likely shrink as labor costs erode competitiveness. The comparatively young labor force in these two sectors will have no option but to migrate with their companies to better climes.

The Senate is proposing a P100 legislated wage increase. I have seen no sound economic study supporting such a proposal, even as the bill has reached third reading in that chamber. This can be nothing more than unenlightened legislation in aid of reelection.

The proponents of a legislated wage increase themselves admit that this will benefit 10 percent of the labor force. Not one of them dares to elaborate on the harm the measure will bring to 90 percent of our workers.

Not to be outdone in the brownie points game, the House of Representatives is now proposing a P350 legislated wage increase. As in the case of the Senate proposal, no proper economic study is quoted to support the wisdom of such a move.

Worse, it is clear the House is merely playing a game of one-upmanship with their Senate counterparts. In actuality, what they are doing is to force our economy into a race to the bottom. This is pure madness.

The injury all this talk of legislated minimum wage increases is not prospective. Even as our politicians are playing on the minds of voters in aid of reelection, mere talk of a return to a regime of politicized wage setting is now causing businesses to put expansion plans on hold.

For as long as politicized wage-setting – and its ugly twin, politicized trade unions – remains a possibility, our businesses will shrink. Worse, they will begin to consider the option of migrating their capital elsewhere, to economies with greater policy predictability.

The folly of our politicians is already taking its toll. Our dream of a dynamic and competitive national economy is being torpedoed even as we speak.

There is something worse about our present constitutional order than merely the inward-looking economic provisions. We have a political system that produces populist clowns rather than statesmen. Consequently, our voters are trained to select those who grandstand the most.

All this grandstanding about a legislated minimum wage increase, notwithstanding all the terrible economic setbacks this has inflicted, is a symptom of a damaged political culture: one that cannot breed economic statesmanship.