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Key to the right minimum wage formula

May 08, 2019

ONE topic that never fails to provoke a great deal of acrimonious debate in this country is the subject of minimum wage. The issue comes to the fore several times a year as the various tripartite wage boards around the country consider adjustments to the minimum wage in their area, and of course, as political candidates use the topic to call the attention of the working class to their election campaign and win their votes.

A report this week by Fitch Group research unit Fitch Solutions casts the problem of setting effective minimum wages in a new light, although in doing so it may have made finding the best solution even more challenging.

Fitch said that increasing minimum wages in Southeast Asia are raising the cost of production and making these countries less competitive. In just four years, minimum wages in East and Southeast Asia have risen to 82 percent of the global average from 63 percent, and within the next 10 years will catch up with the average or even exceed it, Fitch said.

The credit ratings agency even quantified the cost of employment in its Labor Market Risk Index, which is an assessment of the competitiveness of labor markets from the point of view of foreign business investors. On a scale of 0-100, where 100 equals the lowest risk, the region’s cost of employment score dropped to 56.8 in 2019 from 59.3 in 2018.

While the Fitch report considered the region as a whole, it singled out the Philippines as one of the countries that are contributing significantly to the erosion of competitiveness by continually increasing minimum wages.

“Governments in countries such as Cambodia, Vietnam and the Philippines are succumbing to union pressure as they seek to prevent outbreaks of social unrest that could cause political instability,” it said.

Increasing wages are not entirely bad news, however. Fitch did point out that higher wages lead to higher private consumption. Over a longer term, this can result in the region’s economy growing stronger in the way China’s economy has, by shifting from being totally reliant on foreign investments and exports to more stable consumption-led growth.

This presents an apparent paradox: higher wages are beneficial to the economy in the long run, but in the short term may hinder investment and job growth that makes higher wages possible. Little wonder, then, that constant tinkering with minimum wage levels seems to leave neither workers nor employers satisfied.

In our view, minimum wages are a positive good, because they are a necessary protection against outright exploitation of labor. But minimum wages, and in fact all wages, must be guided by two equally important ideals: every Filipino willing to put in an honest day’s work ought to be able to support a healthy and dignified standard of living for his or her household by doing so. Likewise, wages must reflect economic reality and the true value of labor to employers — not necessarily the lowest cost, but a fair one in alignment with market demand and the value of skills employees bring to the job.

That means that simply either bending to the whims of labor advocates who wish to have minimum wages set as high as possible, or to business advocates who wish to keep them as low as possible, will result in arbitrary solutions that will ultimately do more harm than good.

Finding the right balance that offers appropriate social protections without discouraging investment, job growth and greater domestic production is a tremendously difficult challenge, but one we believe that the Philippines has the foresight and political will to overcome, if policymakers and stakeholders are willing to make the effort.

Credit belongs to : www.manilatimes.net

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