The Impact of Increasing Minimum Wage on the Philippine Economy

Minimum wage policy has always been a contentious topic in economic discussions, particularly in developing countries like the Philippines. Proponents of raising the minimum wage contend it helps lower poverty and inequality; opponents sometimes contend it causes more unemployment and inflation. Let's do a deep dive into the possible advantages and disadvantages of raising the minimum wage.

Now, before you start thinking that I am against the increase in the minimum wage, let me stop you there. I truly believe that the recent increase in the minimum wage was very timely. However, are we implementing it properly?

Setting the Minimum Wage

Since the Commonwealth Act No. 444 of 1939, which created the first minimum wage rules, the Philippines has had a lengthy history of minimum wage regulations. Many changes and legislation have been passed throughout time; among them is the Wage Rationalization Act (Republic Act No. 6727) of 1989. Establishing minimum pay levels depending on local economic situations, this Act created the Regional Tripartite Wages and Productivity Boards (RTWPBs).

The minimum pay varies depending on the area to reflect variations in the cost of living and level of economic activity. Metro Manila's greater cost of living, for example, results in a higher minimum wage than in other areas. This regional variation seeks to strike a compromise between the economic reality of every location and the need for just salaries.

In the past, the differentiation in the minimum wage was only between Metro Manila and nearby provinces, and other regions. Now, minimum wage differs from one region to the next. NCR, though, still holds the highest minimum wage figure.

Perceived Benefits of Increasing Minimum Wage

• Poverty Alleviation

One of the primary arguments in favor of increasing the minimum wage is its potential to reduce poverty. Higher wages can lead to an improved standard of living for low-income workers, enabling them to afford basic necessities such as food, shelter, and education. This, in turn, can contribute to better health outcomes and increased productivity.

In a country like the Philippines, where poverty remains a significant issue, increasing the minimum wage can provide immediate relief to millions of workers and their families. By putting more money in the hands of consumers, an increased minimum wage can stimulate demand for goods and services, thereby boosting economic activity.

• Reduction in Income Inequality

It cannot be denied that there is a significant gap between low-income earners and high-income earners here in the Philippines. While we are not the only country to have this, this is still something that should be quickly addressed, and one way to do this would be to increase the minimum wage. A more equitable distribution of income can foster social cohesion and stability - both essential for sustainable economic growth.

• Increased Consumer Spending

Theoretically, increasing the minimum wage increases the spending power of employees, which is a significant driver of economic growth. Simply put, the more workers earn, the more they will spend on goods and services. This, in turn, leads to higher demand, which can lead to business expansion and more jobs being created. At the same time, this increased economic activity is not limited to just one industry. It impacts all interconnected industries.

• Enhanced Worker Productivity and Motivation

A higher salary, theoretically, leads to greater work satisfaction, motivation, and productivity. Employees who feel they are compensated fairly tend to be more engaged and committed to their jobs. This typically leads to a reduced turnover rate and lower training costs.

Challenges and Potential Downsides of Increase in Minimum Wages

• Increased Business Costs

98% of the businesses in the Philippines are categorized as Small to Medium-Sized. For many of these enterprises, labor costs make up a significant portion of their expenses and budget. Any change, therefore, in the minimum wage, can have a significant impact on their operational costs.

• Potential Job Losses

In connection with the first bullet point, one of the most common argument against increase in the minimum wage is the possible job loss. In industries that are considered labor-intensive, margins tend to be tight. Given this, employers might now resort to cutting down headcount and, instead, outsourcing to third-party providers or automating certain functions. It cannot also be denied that another scenario could also happen - companies will now shy away from providing increase in basic pay and would rather stay close to the minimum wage in an effort to maintain headcount while ensuring very minimal impact to the

• Inflationary Pressure

We know that businesses need to turn a profit. That said, if the minimum wage is increased, a business will most likely find it difficult to absorb the additional costs (i.e., increase in the basic, an increase in the employer share in SSS, PHIC and HDMF, and increase in 13th month). As businesses face higher labor costs, they may pass on these costs to consumers via higher prices for goods and services. This will most likely trigger a cycle of rising wages and prices, which, in turn, may erode the purchasing power of consumers.

• Increased Disparities

Originally, the differences in regional minimum wages were aimed at addressing economic disparities. This, however, leads to a different problem - areas with lower minimum wages find it difficult to attract and retain employees, while areas with higher minimum wages suffer from overpopulation.

So, what to do now?

To maximize the benefits and lessen the downside of increasing the minimum wage, policymakers should consider the following:

• Gradual and Predictable Increases

The above table shows how the minimum wage has been adjusted over the years in NCR. NCR-21 and NCR-20 integrated the existing COLA during that time, with NCR-20 also allowing for an increased COLA on top of the COLA that was integrated into the basic.

In recent years, there has been a lot of clamor for a Php 750.00 increase in the minimum wage, bringing the minimum wage closer to Php 1,400.00. This is closely aligned with the findings of IBON Foundation which indicated that the average family living wage is around Php 900.00 to Php 1,200.00. Of course, this significant jump is not something that SMEs can readily absorb. However, this amount can be implemented in tranches, similar to how NWPC increases the minimum wage in some regions. This would allow the companies to better project their sales target and headcount in order to soften the impact of the increase.

If this is the plan of the government, what with the consecutive increases for the last two/ three years, the only thing that needs to change is making it predictable so that companies are not caught off guard.

• Targeted Support for SMEs

In the discussion of the minimum wage, the government should not just be consolidating data and creating the wage order. It should actively play a role in supporting SMEs as well. Support in the form of tax incentives or subsidies can help mitigate the impact of the increased labor expenses. This will enable SMEs to remain competitive and continue to contribute to the economic growth of the company.

Providing exemptions is well and good, but it is not enough, as the impact of the increase in labor costs oftentimes goes beyond the one-year effectivity of the certificate of exemption.

At the end of the day, a balanced approach is needed when implementing any increase in the minimum wage. SMEs, particularly, bear the brunt of these increases. It is not logical to not support them, as they make up most of the businesses that help support the economy of the country.

Empower your salary structure and ensure that increases in minimum wage do not catch you by surprise. Email us at [email protected] or message us at UpRush Social Geekers for help in creating your own salary structure.