Legislated minimum wage bad for economy

THE minimum wage is better determined by the Regional Tripartite Wages and Productivity Boards, rather than by politicians. In those boards, the minimum wage is deliberated by representatives of the government, labor sector and employers’ groups for their respective regions across the country.

Some legislators want to bypass that system by introducing bills to increase the minimum wage. In the House of Representatives, the militant Makabayan bloc filed House Bill 7568 calling for an across the board increase of P750. If enacted, that would raise the minimum wage in Metro Manila to P1,161 per day from P570 per day — an increase of nearly 51 percent.

Over at the Senate, its president Juan Miguel “Migz” Zubiri filed Senate Bill 2002, which calls for a P150 minimum wage adjustment. That may be more modest, a 26 percent increase in the National Capital Region (Metro Manila), compared to the House bill. But the Senate version is no less harmful to businesses, many which are yet to recover from the economic impact of the lingering Covid-19 pandemic.

First of all, legislated wage increases are unwelcome because that introduces politics into the equation. Politicians gravitate to measures that can make them more popular among voters, instead toward options that can be better for the economy.

Another terrible idea is to raise the minimum wage to blunt the impact of high inflation. Inflation, the rate of price increases, goes up and down. Wage levels tend to stick when raised, and in countries like the Philippines, they cannot be brought back down when inflation recedes. Put another way, wages lag behind inflation, because it does not fluctuate like commodity prices.

On a related point, proponents of a wage increase argue that doing so will not drive inflation even higher than what it already is these days. That does not sound right, although to be fair, economists should validate that claim. It seems more logical to think that a wage increase will be inflationary, especially in a consumer-driven economy like the Philippines. In other words, Filipinos are more likely to spend, not save, any additional pay that they receive.

As expected, employers warn of possible layoffs, especially among micro, small and medium enterprises (MSMEs), if minimum wage goes up. In fairness, that, too, should be validated, given newer economic studies that counter that argument. Still, it seems hard to dismiss the possibility that higher wages discourage firms from hiring more workers, at least according to the fundamental law of supply and demand for labor.

Legislators and others in government should be careful about harming MSMEs. They account for 99.6 percent of all registered firms in the country, and they employ between 60 percent and 70 percent of the labor force. Clearly, policies that harm them will also hurt the entire economy.