Setting wages can backfire (1)

Having a minimum wage (MW) is considered an important policy tool to ensure that workers are protected from low pay, but does it work?

Recently, legislators have been trumpeting measures that will raise the minimum wage at differing rates to a maximum of P300 a day, considering the recent spikes in inflation.

According to a Congressional Policy and Budget Research Department (CPBRD) study, it is effective to a certain degree, provided that it is complemented by other policies to enhance workers’ productivity.

While increases in the minimum wage can be perceived as an instant pill to counter persistent rises in prices, the CPBRD study showed the outcomes can be tricky without an extensive study of its effects.

Globally, over 90 percent of the International Labor Organization’s 186 member states make the lowest wage given to workers a policy set through legislation or a binding collective agreement.

“From a social policy standpoint, wage floors may be instrumental in attaining redistribution and welfare-enhancing objectives,” CPBRD reported.

It cited studies that showed meaningful MW mechanisms can aid in achieving the United Nations’ goals on decent work, gender equality, reduction of poverty and hunger, and better health outcomes.

It was found that in developing countries such as Brazil and China, well-thought-out and enforceable MW policies have contributed to improving the welfare of its workers.

Nonetheless, the report referred to the neoclassical economic theory, which holds that setting a basic wage is counterproductive as it can create further unemployment, especially affecting intended beneficiaries, such as low-skilled and low-income workers.

Setting wage floors can also “negatively affect investments in human capital as firms may substitute higher wages for on-thejob training.”

The CPBRD noted it could also be ineffective in altering the distribution of family income or reducing poverty since paid workers or those employed in the formal economy typically belong to the middle to upper-income classes.

The report also said that raising MWs to a certain level can drive prices in two ways: by increasing firms’ production costs and boosting aggregate demand.

Much of the policy debate has focused on the effects of minimum wages, but little has been discussed about the mechanisms through which the policy operates.

The study showed that the landscape of wage policies across nations presents a variety of diverse approaches, achievements, and challenges.

The CPBRD said that while the overarching goal of improving workers’ lives and living standards resonates across the region, the methods and outcomes vary significantly.

The study cited key observations, such as disparities in the design and implementation mechanisms among ASEAN member states, the importance of economic and labor market structures in understanding the effectiveness of the policy, and the need to find the right balance for attaining multiple objectives, such as increasing MW levels, job creation, and economic competitiveness.

The study gave favorable views to Singapore’s Progressive Wage Model, which the research said offers an innovative approach to wage growth and skills development.

The Philippines and Malaysia are now looking at Singapore’s Progressive Minimum Wage model.

The CPBRD added that policymakers focus on inclusivity as there is a growing recognition of the need for measures addressing income inequality and empowering vulnerable groups.

Nonetheless, some issues still need to be addressed, including simplifying the MW system to help enhance compliance, examining significant regional disparities in the rates, strengthening collective bargaining systems, and conducting meaningful and regular assessments of the MW levels and the policy itself.

Other key factors being looked at are assessing the impacts on different outcomes, especially on the most vulnerable groups such as the medium and small enterprises and the youth; ensuring availability of quality and timely data on MW adjustments; enhancing transparency in the adjustments process; and guaranteeing that MW rates remain reasonable given the level of labor productivity over time.

“Globally, over 90 percent of the International Labor Organization’s 186 member states make the lowest wage given to workers a policy set through legislation or a binding collective agreement.

“The Philippines and Malaysia are now looking at Singapore’s Progressive Minimum Wage model.

(To be continued)