No. 84 - December 2006
MBC Research Analysis on House Bill 345
Compliments of the House
Is a legislated P125 across-the-board wage increase justifiable?

By Michael B. Mundo, Senior Research Associate; Roxanne V. Lu , Managing Editor

With its hardworking, highly skilled, and educated workforce, the Philippines is a haven for labor-intensive companies looking for workforce quality and at the same time aiming to control labor costs. Currently, the country has 33.2 million employed persons, with 12.5 million absorbed by private establishments, 2.6 million employed by government and government-controlled corporations, 6.1 million working for private households and family businesses, and 12 million self-employed. Of these, close to 3 million are minimum wage earners, whose salaries are annually adjusted by the Regional Tripartite Wages and Productivity Boards (RTWPB).

Established in 1989, the RTWPBs are tasked to implement wage, income, and productivity policies and programs, and set standards for the minimum wage in their respective regions. Collective bargaining, on the other hand, shall determine the fixing of wages above the minimum wage level.

Labor advocates, however, seem unsatisfied by the results of these systems and have been lobbying for a legislated across-the-board wage increase for all private sector workers in all levels. The proposed law is House Bill No. 345, also known as “The P125.00 Daily Across-the-Board Wage Increase Bill.”

HOUSE BILL NO. 345

House Bill No. 345 was approved by the House of Representatives on 20 December 2006 after two and a half years of contentious debate. It was filed on 1 July 2004 by 43 lawmakers seeking a P125 across-the-board salary increase for all private sector workers, both in agricultural and nonagricultural sectors. It is designed to increase wages for three consecutive years: P45 in Year 1, P40 in Year 2, and P40 in Year 3.

The House-approved bill is currently in the Senate labor committee for deliberation. The Senate is expected to release its own version of the bill before it is referred for bicameral debate.

The last legislated wage hike was granted 17 years ago, just before the Philippine Congress enacted Republic Act 6727 in July 1989. The law created the RTWPBs in the wage-setting process and established collective bargaining agreements (CBAs).

MIXED REACTIONS

The wage hike bill instantly earned the approval of labor groups while meriting the ire of various business organizations. For the former, a wage increase is a much-needed boost to household income, particularly for those earning within, or just slightly above, the minimum wage level. A P45 increase in daily wages, or a P1,170 increase for monthly earners, will go a long way for a poor family that values and strictly budgets every centavo earned.

Despite government efforts at eliminating poverty, the degree of self-rated hunger in Philippine households reached an initial peak of 16.9% in the March and August rounds of the 2006 Social Weather Station Hunger and Poverty surveys. It further climbed to a new record-high in the November poll at 19%. Clearly, the SWS surveys reveal that more and more Filipino families are experiencing food deprivation, thus the growing clamor for a wage increase from the labor sector.

On the business side, economic indicators picked up only in the second half of the year, yielding mixed results for businesses. The appreciation of the Philippine peso, for example, made imported goods cheaper and has lowered the debt of both private and public sector loans. Exporters, on the other hand, are feeling the crunch of the weakening dollar, which has reduced the value of their products sold abroad.

The year also proved tricky to businesses, as government prudence in public spending affected domestic demands. Fortunately, it was equalized by the overwhelming influx of OFW remittances that fueled local spending. However, despite the general robustness of the economy, the private sector remains wary about its ability to provide the additional P45-P40-P40 daily pays to its employees. The wariness is based on the argument that 99.6% of Philippine businesses fall under the small- and medium-sized category, and are still vulnerable to internal and external shocks.

Many economic analysts believe that an across-the-board P125 daily wage increase would spell the collapse of many of these businesses. Opposing groups project that such a move will trigger the rise of inflation, the displacement of workers, the downsizing and closure of businesses, the growth of informal businesses and workers, and a reduction in the country’s competitiveness as an investment site.

MBC FORECAST

MBC Research probed deeper into these opposing arguments by creating a simulation estimating the inflationary effects of the wage hike bill, as well as its impact on businesses in terms of retrenching workers and business closures.

On Inflationary Effects

MBC Research’s estimates show that a P125 across-the-board wage hike spread out over three years would have a minimal impact on consumer price inflation. The annual average inflation rate would rise by only 0.3% in the first year and by 0.2% each in the second and third years.

Furthermore, a P45 rise in wages across all regions fails to address the gap between the nominal wage and 45.4% of the family living wage (assuming 2.2 workers per household) per region. Thus, minimum wages have to be set at the regional level, not on a national scale.

On Job Losses

Every year, regional wage boards examine minimum wage standards, taking into consideration the factors that affect each region’s local conditions. Living requirements of a Filipino family, productivity levels of workers, and the ability of businesses to pay for labor are just a few of the elements considered by the tripartite boards in adjusting minimum wage.

Adopting the yearly nominal minimum wage increase in Metro Manila for nonagricultural sectors, Table 3 below shows that an increase in minimum wage occurs every year, with varying amounts of adjustments.

The table below also indicates the number of displayed workers reported by employers to the labor department every year. Of the total cases of displaced workers between 1998 and 2005, an average of 0.48% has been displaced due to increases in minimum wage. Majority of businesses reported cases of retrenchments due to internal reorganization, lack of market demand, financial losses, and changes in management (see Table 4).

In the simulation analysis shown in Table 5, the estimated total number of retrenchment cases has been adjusted to increase along with the implementation of the legislated across-the-board wage hike of P45-P40-P40. Despite the seemingly meager percentage of businesses closing due to an increase in the minimum wage in the past (see Table 6), the present case will have harsher consequences as it forces businesses to increase the salaries of all workers, not just the minimum wage earners. Thus, it is expected that the legislated wage increase will also increase the total cases of retrenchments, not just the retrenched due to an increase in the minimum wage.

In this analysis, job losses and business closures for the next three years, following the trend of a P5 increase in minimum wages granted by the RTWPBs every two years, were considered. These were then used to derive the expected job losses and business closures for the next three years if lawmakers implement the across-the-board P45-P40-P40 wage hike instead of the usual adjustment in minimum wage by the wage boards.

Considering these assumptions, the MBC simulation reveals that the legislated wage hike could force operating businesses to displace around 109,737 workers in the first year with the P45 mandatory wage hike, 162,411 workers in the second year with the succeeding P40 hike, and 209,510 workers with another P40 wage increase on the third year.

Aside from this estimate, about 38,446 workers are expected to lose work because of business closures in the first year of the wage hike implementation, followed by 51,133 in the second year, and 68,201 in the last year. In total, an estimated 639,438 people are expected to lose jobs following the three-year implementation of the wage hike bill.

On Business Closures

At present, there are 12.5 million laborers and employees working for the private sector. Adopting this figure for the next three years, a P125 across-the-board wage increase would force private employers to shell out an additional P14.3 billion per month in year 1, and P12.8 billion every month for years 2 and 3.

In the three years of implementing the P125 wage hike, a total of P478.2 billion will be added to the labor cost of businesses, excluding add-ons that employers pay with every peso increase in wages. The labor department estimates that for every peso increase in salaries, employers’ actual cash outlay is P1.21. This means that the actual cost of a P478.2 billion increase is P578.6 billion.

Can local businesses afford to keep their balance with these cost increases?
Obviously, not all businesses are resilient enough to come out of this alive. But while a legislated across-the-board wage hike would prompt several thriving businesses to close shop, a massive business closure is unlikely. Based on MBC estimates, the first-year implementation of the across-the-board wage hike would result in the closure of 686 business establishments, while the second and third year would force 912 and 1,216 establishments to close, respectively.

TRUTH AND CONSEQUENCE

The simulation on the effects of a legislated P125 across-the-board wage hike projects a 0.3% increase in inflation rate in the first year and a 0.2% increase in the second and third years, job losses for 639,438 workers, and the closure of 2,814 business establishments. Although the negative impact is not as bad as initially expected, these figures should still serve as a warning for a developing country whose economy is easily swayed by internal and external shocks, and is heavily dependent on foreign investments.

While warnings about the ill-effects of a P125 wage hike on the economy are valid, the primary concern lies heavily on the process of increasing wages itself. Legislating a wage increase, an important business-labor issue, undermines existing systems governing wage adjustments.

Undermining the CBA process

Collective bargaining agreements are the most universal and effective form of negotiating wage increases. Labor and management both participate in the CBA process, in contrast to legislation where politicians determine the price of labor. Enforcing a wage increase through legislation discourages both parties from together working out their differences and will only inspire a trend of seeking government intervention on labor-management issues in the future.

Paralyzing regional wage boards

Regional Tripartite Wages and Productivity Boards determine the minimum wage for each region every year. The boards account for differences in the cost of living across the different parts of the country. Highly urbanized regions have a higher cost of living and can also afford to pay higher wages. If implemented, a “one-size-fits-all” wage increase by legislation will result in some regions losing their competitiveness. This will result in disinvestments in those areas that are most starved for investments.

Furthermore, since regional adjustments are allowed only once a year, this means that the legislated increases of P45-P40-P40 for three consecutive years would render the RTWPBs powerless until the end of year 3.

Loss of our country’s competitiveness

Compared to neighboring countries, the Philippines has a higher minimum wage than Vietnam (US$1.26), India (US$1.97), Indonesia (US$3.31), China (US$3.33), and Thailand (US$5.33). The daily minimum wage in Metro Manila is P350 or US$7.11. Increasing the salaries of private workers through this legislation will gravely affect the competitiveness of the country as an investment area, given its combined trends of increasing wages, decreasing English proficiency, and stagnant productivity levels.

In a globalized economy, the Philippines has a niche in a long supply chain. It imports inputs from a low-wage country, adds value through labor, and then exports to a higher-wage country that can perform higher value addition through their highly skilled labor force. Adding to wages beyond our competitive level in the chain may result in the loss of jobs to a more wage-to-skill-competitive country.

If, indeed, the intention of lawmakers is to improve the standard of living of Filipino workers, it would be a better alternative if they use their authority and access to public exposure to lobby for better pay for workers in their respective regions of governance, instead of imposing a “one-size-fits-all” solution that is House Bill No. 345.