Bernardo M. Villegas
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Should Minimum Wages Be Increased? (Part 2)

       Much has been said about how Vietnam surpassed the Philippines in per capita income in 2020, among other reasons because this new Asian tiger has been attracting significantly more FDIs, especially from China, in export-oriented manufacturing.  Although there are other factors explaining the attractiveness of Vietnam to foreign manufacturers (their Government has been much more open to foreigners investing in their country much longer than we have), one attraction is the relatively low level of wages they have maintained.  In contrast, the Philippines already has one of the highest minimum wages in Southeast Asia, next only to Singapore and Malaysia.  In U.S. dollar terms, average daily minimum wage in the Philippines is as high as $9.81 (at 1$ = P56) in the National Capital Region.  In Vietnam, it is $ 6.29 and as low as $4.67 in the agricultural sector.  Thus, increasing the minimum wage by P150 daily would make the Philippines even less competitive in the global market.  This could go counter to our current efforts to increase FDIs that are badly needed to supplement our very limited sources for long-term investments, which the recent passing of the Maharlika Investment Fund is meant to address.

            In addition to possible reduction in employment, decrease in investment, decline in smallholder farmers, higher government spending, the informalization of work could result from the proposed P150 across the board minimum wage increase.  Over the years studies of government agencies have identified other harmful effects of excessively high wages.  In a review of the BSP in 2017, it was pointed out that if firms increase their prices as a result of higher labor costs, their prices would be higher compared to the goods produced by competing firms in the global setting.  The loss in competitiveness will depend on the proportion of wage costs to the total production costs. If the country’s major industries are labor intensive, such as agriculture or manufacturing, the increase in wages would have a relatively larger impact on competitiveness.  A study by Filipino economist Lanzona (2014) showed that increasing minimum wage had a “significant” negative impact on labor force participation by individuals, and notably among the young, inexperienced, less educated and female labor force.

            Leading international agencies have come out with results of studies on the relationships between labor costs and other measures of economic progress.  According to a World Bank study, higher labor costs can lead to a decline in productivity, particularly in labor-intensive sectors.  According to a report by the Organization for Economic Cooperation and Development (OECD), higher labor costs can reduce incentives for firms to innovate and adopt new technologies.   The Asian Development Bank (ADB) has come out with studies that show higher labor costs reducing the competitiveness of Philippine manufactured exports. Another study by Canales (2014) showed that the probability of gaining or retaining employment fell by about 8% to 22% as a result of an increase in minimum wage.  A 10% increase in minimum wages would lead to a decline in labor participation rate of -6.36 for all workers, -5.97 % among teenagers, -3.64  among young adults and -2.36 among those with some years of college education.

            Minimum wage increases, if excessive, can actually end up harming the workers themselves.  They can lead to reduced workers’ hours to offset the cost of increased wages, leading to lower total earnings for employees.  Research by the Asian Development Bank found that higher minimum wages in the Philippines actually led to reduced working hours and lower weekly total earnings for low-wage workers. There could also be reduction of benefits to offset the wage increases, such as health insurance or retirement plans.  According to a study of the International Labour Office (ILO), increasing the minimum wage may reduce the provision of non-wage benefits to workers, such as investment in training and upskilling programs that are necessary today more than ever.  Another study of the World Bank found that minimum wage increases in the Philippines led to increased turnover among low-skilled workers.            

            At this time, however, the greatest harm may occur in the agricultural sector which is the top priority of President BBM as regards increase in productivity in order to achieve greater food security.  To tell the truth, in my opinion, even if Philippine wages become competitive with those of countries like Vietnam and Thailand, we will not necessarily see significant increases of  FDIs in manufacturing as we are witnessing among our neighboring ASEAN countries.  There are more serious hindrances to the competitiveness of our manufacturing sector here than high wages.  These are high electricity rates, inefficient transport and logistics, limited digital infrastructures,  excessive red tape and bureaucracy and lack of technical skills.  I have no illusions that there will be suddenly a huge inflow of manufacturing enterprises like those of Samsung, Apple, Telstra, etc as we are seeing in Vietnam if our wages become competitive with those of our neighbors.   We have lost the battle in export-oriented manufacturing, except in electronics and semiconductor devices.

            High minimum wages, however, can deal a fatal blow to current efforts to formalize work in the agricultural sector, i.e., to transform farmers and farm workers to formal employees both of SMEs and large-scale agribusiness ventures like those that are being patterned after Lionheart Farms that has succeeded in Palawan to consolidate small farming units in larger corporate farms through either cooperatives or the nucleus estates perfected by the Malaysians in their palm oil and rubber industries.  Already, according to a study of Oxford Economics, the agricultural sector employs around 10.6 million workers and a significant portion of these workers earn minimum wage or below.  According to a study by the PIDS, the agricultural sector, especially in the smallholder farms, operates on thin profit margins, which may make it difficult for businesses to absorb the increased labor costs of a minimum wage increase.  According to a study by the ADB, higher labor costs can reduce investment in the agricultural sector, which in turn would reduce job opportunities for agricultural workers and result in a decline in the overall productivity of the sector.

  A 10 % increase in minimum wages results in a 1.5 % decrease in the labor productivity of the agricultural sectors (PIDS, 2016)); in a 2.2% increase in the cost of production in the agricultural sector (ADB, 2018); a 3.7 reduction in the profitability of farms (ADB, 2018); 3.2 decline in the investment rate in agriculture (PIDS, 2016); and a 2.7% reduction in the adoption of new agricultural technology (ADB, 2018). Now is not the time to put another obstacle  to the number one objective of the BBM Administration of improving agricultural productivity.  For comments, my email address is