Bernardo M. Villegas
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Should Minimum Wages Be Increased?

             The higher rates of inflation that have prevailed over the last two years have decreased the purchasing power of the ordinary workers.  It is only to be expected that there will be requests from the labor groups that the current minimum wages be increased. In fact, there are indeed proposals to have a P150 daily across-the-board increase in the salary rates of employees and workers in the private sector What are the pros and cons of increasing minimum wages at this time when unemployment and underemployment rates are still high?

            The Secretary of Finance, Benjamin Diokno, has already cautioned against the increase of minimum wages, especially at this time when the economy is just recovering from the ravages wrought by the pandemic and the increase in commodities prices (especially food and oil) because of the Russia-Ukraine conflict.  Citing data from the National Economic and Development Authority (NEDA), said that raising the minimum wage by P150 (as suggested by some Senators) would increase inflation by 1.4 percentage points.  If inflation is estimated at about 5.5% for 2023, the proposed wage hike could drive it up to 6.9%.  A related information comes from a 2019 study of PIDS that found that the 10% increase in minimum wage in 2018 led to a 1.5% increase in consumer prices in Metro Manila.  Thus, a P150 increase in minimum wage (i.e.42.3% increase from the current level) could result in a 6.35% increase in consumer prices.  The ones who would suffer most from such an acceleration in the inflation rate will be the very workers whom the increase in minimum wage was intended to benefit.  Even worse, an increase in minimum wages will discourage employers to hire more workers, harming the millions of workers who are either unemployed or underemployed.

            There are ample evidences from previous studies of NEDA, the Central Bank, the World Bank and private think tanks that increased labor costs tend to have more negative impacts on the ordinary workers than benefits.  These have been summarized by a leading agribusiness enterprise in the middle a highly rural area in Palawan. I am referring to Lionheart Farms located in Rizal, Palawan that has recently caught much public attention (including that of President Marcos Jr.) for very innovative practices of employing small farmers, including indigenous natives, in more productive means of cultivating coconuts through the nucleus estate system popularized by the Malaysians in palm oil.  I am referring to Lionheart Farms that is employing more than 3,000 full time workers while at the same time paying rentals to small farmers who lease their lands to the corporation.  This highly innovative approach to improving the productivity of our more than 3 million hectares of coconut farms would be among those highly prejudiced by the proposed increase in minimum wages. Instead of hiring workers from the small farming communities, these corporations would increasingly mechanize and especially robotize their operations. This brings to my mind the largest vineyard in the world located in Southern Spain owned by the Megaworld group operated only by seven people!

            No wonder the management of Lionheart Farms were quick to send a position paper to Senator Miguel Zubiri and the Secretary of the Department of Labor and Employment outlining the negative impact of the proposed hike in minimum wages on its operations.  Let me quote the opening paragraph of the fact sheet presented by Lionheart Farms:  “As an agricultural company based on Palawan, we fervently seek your consideration to defer the imposition of the across-the-board wage increase in the Philippines for agricultural workers.  We believe that such a proposal is detrimental to the ongoing formalization of the majority of workers in the agricultural sector in the country, which already has a high incidence of informal employment.  With this initiative, poverty incidence might not necessarily be addressed, but rather bring the agricultural businesses that comply with legal minimum wages face highly challenging conditions, which negatively impact industry competitiveness and labor productivity.”

            I know that there are serious plans to replicate the Lionheart Farms model in five other coconut regions in the country and upscale the operations from the 3,000 or so hectares of Lionheart Farms to as much as 20,000 hectares in each region.  It would be a pity if because of this proposed hike in minimum wages this very worthwhile plan to address mass poverty in the coconut areas will be nipped in the bud because the proposed agribusiness ventures would be made highly unprofitable with such high minimum wages.  It would be enlightening to list here all the arguments used in the Fact Sheet of Lionheart Farms against the proposed wage hike.

            Based on the available research, the following are the general negative effects of across-the-board hikes in minimum wages in the Philippines:

            -Disproportionate impact on small businesses.  Increasing the minimum wage can be particularly challenging for small businesses, which ordinarily do not have the financial capability to absorb higher labor costs.  This can lead to reduced competitiveness, lower profits, and even closure of some small businesses.

            -Higher production costs.  Increasing the minimum wage may result in higher production costs for businesses in general, but particularly for those that are in labor-intensive industries.  This could lead to higher prices for consumers, especially among the lower-income households. 

            -Reduction in employment.  Several studies suggest that increasing the minimum wage can lead to a reduction in employment, particularly for low-skilled workers, as businesses may opt to reduce their workforce to manage their labor costs.

            -Decline in investment. Higher labor costs resulting from minimum wages hikes can reduce investments in the affected industries, particularly in labor-intensive sectors like agribusiness.  This reduction in investment would obviously result in a decline in job opportunities and overall decline of productivity in the sector with the reduced capital.

            -Decline in smallholder farmers.  Minimum wage increases can lead to a decline in the number of small holder farmers who may not have the resources to absorb the increased labor costs.  This would be unfortunate because there is an increasing trend for urban dwellers to go into small-scale farming of high-value crops such as vegetables, fruits and livestock.  High labor costs may discourage them to pursue such entrepreneurial endeavors.

            -Higher government spending.  With higher unemployment that may result in increased minimum wages, the Government will be forced to spend more on social protection programs, such as conditional cash transfer.

            -Informalization of work.  Several studies have already suggested that minimum wage increases can lead to the “informalization” of work, motivating employers to hire workers under informal arrangements to avoid the higher labor costs.

            A study by the International Food Policy Research Institute (IFPRI) found that high inflation rates resulting from increases in minimum wages have a negative impact on food consumption in the Philippines, particularly among low-income households.  This, in turn, would hurt farmers and rural communities because of the decline in the demand for their products, further reducing their already meager incomes from the sale of farm products.  According to the Philippine Statistical Authority (PSA), the food and non-alcoholic beverages category account for the largest share of the consumer price index in the Philippines, estimated at 39.7 % as of February 2021.  This means that any increase in the prices of  farm products will have a significant impact on overall inflation rates and the purchasing power of consumers.  To be continued.