Does minimum wage work?

We’ve never had a government-mandated wage increase that matched organized workers’ demands. The increase granted this week does not even come up to 10 percent of what labor groups had asked for.

To be fair, the minimum wage in Metro Cebu still puts workers in a slightly better position than where we were a decade ago. In 2006, the minimum wage stood at P241, which amounts to P341 when adjusted for inflation. The current floor wage, set in 2015, is P353 a day—which means the daily minimum wage increased by only P12 in nine years.

A mandatory minimum wage--with a regular review process--remains an important form of protection for workers, especially in Southeast Asia where collective bargaining is minimal. But finding the correct wage level is tricky. Our current system of regional wage-setting actually follows a best-case practice. Wages that are set locally are better than those set nationwide, because economic conditions vary.

Minimum wages alone, however, aren’t going to lift more people out of poverty. An Organization for Economic Development and Cooperation study in 2015 recommended that in addition to a minimum wage, government must work on tax reforms and transfers in order to improve workers’ lives.

The Duterte administration is correct in pushing for tax reforms that will grant workers a larger take-home pay. It has proposed an income tax exemption for those who earn P250,000 or less a year. If approved, that will bring significant relief to some 80 percent of all taxpayers, who belong to that group and who are currently taxed 10 to 25 percent.

Transfers, however, are for now limited to the poorest of the poor. A case worth examining is that of Singapore, which has no required minimum wage but instead gives workers supplementary income to save for retirement, as well as subsidies of up to 95 percent of fees for skills training courses. The focus isn’t only on floor wages, but on increasing individual productivity.

One of the insights in Thomas Piketty’s “Capital” was that the world did not become less unequal in the last century because of a reformist push for better working and living conditions. “To a large extent,” Piketty wrote, “it was the chaos of war…that reduced inequality in the 20th century.” It was the erosion of the incomes of the wealthy few—as a result of two world wars and the Great Depression—that made incomes less unequal. At least for a while.