Philippine economy

[OPINION] Minimum wages have been historically stagnant – it’s time to act

Vincent Ramos, Edgar Suguitan

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[OPINION] Minimum wages have been historically stagnant – it’s time to act

Janina Malinis/Rappler

'Has the Philippine government historically done a good job protecting the purchasing power of minimum wage earners? The answer seems to be no.'

The Philippine Statistics Authority (PSA) announced January’s inflation rate at 8.7%, exceeding targets and forecasts. One does not need to be an economist to understand its major implication – one can buy a smaller basket of goods with the same amount of income. With high inflation being a concern over the past months, it is unsurprising that “protecting purchasing power” has been a top government priority and was dedicated its own chapter in the recently released Philippine Development Plan (PDP) 2023-2028. While protecting purchasing power is an agreeable priority, important strategies to attain it are being sidelined in the discussions.

Among these is ensuring that minimum wages (MW), the lowest possible wage one can receive in formal employment, tracks the increasing cost of living. This is a globally agreed principle. Balanced MW adjustments, according to the International Labor Organization, must consider household needs (e.g. cost of living) and economic factors (e.g. productivity growth). In the Philippines, the Wage Rationalization Act of 1989 likewise accounts for these considerations. This begets the question: in practice, has the Philippine government historically done a good job protecting the purchasing power of minimum wage earners? The answer seems to be no.
Sources: CPI data obtained from the Philippine Statistics Authority and wage orders from the National Wages and Productivity Commission (NWPC). Replication files available here.

In 2022, the MW in the National Capital Region (NCR) was adjusted for the first time in four years from P533 to P570 (non-agriculture), a 6.9% increase. How much did prices change in NCR over the same four years? 12.3%. But 2022 is not isolated. From 2014 to 2017, periods when the Philippines was supposedly among the “fastest growing economies,” MW adjustments were at a historical low, ranging from P10 to P15 per day. We take an even broader view – plotting the historical annual MW increase in real terms (which means net of inflation) and comparing it with the annual increase of prices in NCR. There are two striking findings: (1) changes in the MW have been historically hovering around zero, implying stagnation; and (2) the growth in prices outweighs and outpaces the growth in the MW. Further, if one considers the real per capita GDP growth in NCR, it likewise outweighs and outpaces MW growth.

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Clearly, the purchasing power of MW earners has not been protected historically and current government pronouncements (e.g. PDP) do not include MW-setting reforms. This hesitation is perhaps due to the belief that when labor demand is insufficient, increasing the nominal value of the MW has both inflationary and disemployment effects. However, we argue that the false dichotomy of “increasing vs. not increasing” has been misguiding the MW discussion. A growing strand of the empirical literature employing more localized analyses of MW adjustments in developing countries reveals insightful findings.

Brazil has been historically adjusting its MW in sizable magnitudes and recent studies in reputable economics journals such as the American Economic Review and Economic Development and Cultural Change have found that these adjustments account for a reduction in income inequality with either insignificant or negligible effects on unemployment. Similar findings exist for India, where increasing the MW raised rural workers’ incomes and incentivized more people into formal employment, with little to no effects on wages and employment in urban areas. Even a working paper at the Bangko Sentral ng Pilipinas finds that the effects of MW increases on prices are “relatively small and may not lead to inflationary pressures.”

While individual papers should never be read in isolation, the growth of papers dispelling a blanket “doomsday” effect of MW adjustments should be a sufficient basis for us to reframe our discussions from a false dichotomy of “increasing or not” towards “by how much should the minimum wage grow to sufficiently track the growth in prices and productivity.” Concrete reforms are likewise needed and we proffer two starting points. First, the determination of MW adjustments should be made more transparent and data-driven. How exactly are these specific amounts determined and what goes into this decision-making process? Why have they been so low relative to growth in prices and productivity and much lower relative to what the workers demand? Second, the government must commit to at least an annual review. Back in the late 1990s to the early 2000s, MW adjustments in NCR have been done as often as twice a year and were relatively larger in nominal terms. 

Make no mistake. Recognizing the current economic landscape, MW adjustments are not (and should not be) the tool to solve high inflation. Supply-side constraints must be solved through supply-side interventions. MW adjustments for low-income formally employed workers and subsidies for the informally employed are likewise not mutually exclusive solutions. Finally, MW adjustments are not meant to address other labor market issues such as informality and the increasing use of non-competes. However, these adjustments are necessary to cushion the disproportionate effects of high inflation on the purchasing power of minimum wage earners who are among our lower-income kababayans. Their wages have been historically stagnating – it’s time to break this pattern. –

Vincent Jerald Ramos is a PhD candidate at the Hertie School Berlin and the Humboldt University Berlin, focusing on the causes and consequences of labor market precarity. He is currently a visiting researcher at the University of California-Berkeley and has previously taught labor economics and economic demography. Views are his alone. 

Edgar Suguitan is a research assistant at the Philippine Competition Commission’s Economics Office, supporting the project on the Determinants of Labor Market Power Exercise. He obtained his BA Social Sciences (Economics) from the University of the Philippines-Baguio. His research interests are on industrial relations and labor market policies. Views are his alone. 

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