10 reasons to reject legislated wage adjustments (And 10 other options)

THE Senate of the Philippines has recently approved on third and final reading Senate Bill 2534 or “An Act Providing for 100 Pesos Daily Minimum Wage Increase for Employees and Workers in The Private Sector.” The House of Representatives (HoR) is in the process of making a counterpart bill with an even higher wage increase.

The minimum wage is a safety net provided by government, aimed at ensuring that unskilled workers are protected from unduly low wages. It is the minimum price of unskilled work, not the money to feed, clothe, educate, etc., a household of five.

On wage setting – RA 6727

The following are the requirements of the law for wage setting:

1. In 1989, RA 6727, or “Wage Rationalization Act,” became a law that created the National Wages and Productivity Council (NWPC) and the Regional Tripartite Wages and Productivity Boards (RTWPBs). That same law delegated the responsibility of Congress to these two bodies to “study, fix, and raise wages on a regional level based on poverty threshold, employment rate, and cost of living, etc. … “

2. The regional board is authorized to determine adjustments to the minimum wages in 16 regions of the country. Each wage board (RTWPB) is composed of representatives from DoLE, DTI, NEDA, and workers’ and employers’ sectors. The composition of the board is balanced, and it has worked well for 35 years without prejudicing the overall national programs for growth and development. The RTWPB should continue with its mandate to determine minimum wage adjustments.

3. As of this writing, all 16 Regional Tripartite Wages and Productivity Boards have already granted increases in minimum wages for 2023, the year just ended. Under the law, the RTWPBs must review minimum wages once a year. There’s no urgent need for legislated wage adjustments now.

On wage setting – ILO and OECD

The following are wage-setting guidelines from the International Labor Organization (ILO) and the Organization for Economic Cooperation and Development (OECD):

4. “A balanced and evidence-based approach is necessary which takes into account, on the one hand, the needs of workers and their families and, on the other, economic factors. An appropriate balance between these two sets of considerations is essential to ensure that minimum wages are adapted to the national context and that both the effective protection of workers and the development of sustainable enterprises are taken into account.” (ILO on Minimum Wages) Note that ILO wants to balance workers’ protection with the sustainability of enterprises. A P100/day minimum wage adjustment will not allow enterprises, especially the MSMEs, to be sustainable.

5. “When setting the level of the minimum wage, policymakers should take into account economic factors. If the minimum wage is set too high or increased too much, this may have unexpectedly large impacts on the labor costs that employers must pay. This, in turn, could trigger price inflation, hurt exports, and reduce the level of employment. (ILO on Minimum Wages) The economic managers warn that the added labor cost will make commodity prices higher and further erode the workers’ and everybody else’s purchasing power.

6. “One useful and widely used statistical indicator is the ratio of the minimum wage to the mean or the median wage. The minimum wage ranges usually from 35 to 60 percent of the median wage. … in developing countries, the ratio of minimum to median wages is frequently higher. (ILO on Minimum Wages). Legislators and policymakers should be guided by this indicator.

7. “In setting and adjusting minimum wages, policymakers frequently make reference to labor productivity. Labor productivity provides contextual information on the market value of what is produced by an average worker in a country, given existing levels of capital and technology.” (OECD) It appears that labor productivity is hardly a factor discussed in wage adjustments here, as more weight is placed on the workers’ needs.

8. “Another statistical indicator to consider is the proportion of employees who will likely be affected by the introduction of a minimum wage or an uprating of an existing minimum wage. This indicator captures the impact that the minimum wage will likely have on the overall wage structure and the total wage bill. Only 4 million minimum wagers will benefit from this, but roughly 50 million workers with wages beyond the minimum, not counting the jobless, the minors and all of society, will suffer the unintended consequences.

“The ILO Convention 131, furthermore, provides that the economic factors to consider in wage setting include “the requirement of economic development, levels of productivity, and the desirability of attaining and maintaining a high level of employment.”

Realities on the ground

It pays to consider ground-level realities today:

9. In the National Capital Region (NCR), the RTWPB issued a Wage Order increasing the minimum wage by P50/day in the non-agriculture sector, and P40/day in the agriculture sector, effective September 2023. In September 2023, the inflation rate in NCR was 7.3 percent, driven mostly by the 19.8 percent national inflation rate in rice. In January 2024, the inflation rate in NCR was 3.4 percent, while the national inflation rate for food was 5.2 percent, much less than last year. (Reference: PSA) After the government has effectively reduced BY MORE THAN HALF THE INflATION AND cost of living, why is there a need to legislate a wage adjustment at twice to seven times the previous highest wage adjustment less than a year ago?

10. In the NCR, the minimum wage of P610/day is 76 percent of the estimated median wage for rankand-file jobs. A P100/day adjustment will raise the minimum wage to 89 percent of the estimated median wage. Where there is no discernible difference between the minimum and median wages, employers will simply hire one skilled worker instead of two unskilled workers. The very sector that the government wants to protect will be disadvantaged.

Here are my suggested options for legislated wage adjustments: 1) reduce the cost of putting food on the table; 2) modernize agriculture to reduce food inflation; 3) subsidize power and electricity for workers’ consumption; 4) reduce the cost of commute for workers; 5) provide massive training, reskilling, and upskilling so workers can move to higher value jobs; 6) set up more affordable but livable housing projects for workers in urban areas outside NCR; 7) provide more scholarships to children of indigent workers; 8) institutionalize a pay-for-performance or productivity schemes to raise workers’ income and productivity; 9) provide more support to MSMEs and the informal sector so that they can hire more people; and 10) equip and encourage students to become entrepreneurs so that they can hire more people.

Let’s listen to the government’s economic managers and the more than 20 business, industry, and employer groups that reject legislated wage adjustments. Let’s consider sustainable, win-win solutions that benefit all of society.

Ernie Cecilia is the chairman of the Human Capital Committee and the Publication Committee of the American Chamber of Commerce of the Philippines (AmCham); chairman of the Employers Confederation of the Philippines’ (ECOP’s) TWG on Labor and Social Policy Issues; and past president of the People Management Association of the Philippines (PMAP). He can be reached at erniececilia@gmail.com.