Tuesday, May 17, 2005

Should we raise the minimum wage ?

The Manila Times quotes Dennis Arroyo, assistant director of NEDA’s National Planning and Policy Staff, as saying any increase in wages will worsen the county’s labor competitiveness. "... [A wage increase] would further worsen our competitiveness, inflation, unemployment and gross domestic product," Arroyo said.

Some quick thoughts on the matter:

A fact sheet from the National Statistical Coordinating Board points out that the present minimum wage for the National Capital Region (NCR) of $5.54 is actually higher than Vietnam ($0.93), China ($0.31 to $1.28), Indonesia ($1.36) and Thailand ($3.36 to $4.25). Any further increase will make Philippine labor more expensive compared to our neighbors of comparable economic development. I buy this argument, alright, but I wonder how can people in Vietnam and China cope on so little? If ever there is a pressing need for legislative inquiry, it is for this one: to know the best practices of the Vietnemese and Chinese on scrimping. In the face of the massive discrepancy between the country's present minimum wage and the living wage (as calculated by the government itself here), I find it cruel to dismiss demands for minimum wage increase by saying there are people more hard up than we are. By the way, did you ever wonder why the onus of productivity is always on labor? What about that other means of production--capital ?

Will increasing the minimum wage cause people to lose jobs? Economic orthodoxes would answer yes. It is natural for businesses to retrench following increased wage costs, right? Wrong (or at the very least not as decisively correct as Arroyo would have us believe). There is a justifiable place for economic agnosticism in the issue of minimum wage and unemployment. In the case of Indonesia, for example, in the early 1990s, the minimum wage was doubled in real terms (tripled in nominal terms) and yet that dramatic wage hike had no effect on over-all employment (See The consequences of doubling the minimum wage: The case of Indonesia. Martin Rama, Industrial & Labor Relations Review, Ithaca: Jul 2001, Vol.54, Iss. 4; pg. 864, 18 pgs). What explains this ? Joseph Stiglitz thinks a mandated wage increase would be expected to raise productivity by almost enough to offset the higher cost of labor, so the status quo ante, prior to the wage increase, is preserved.

So what are we to do? What is my point? Only this: Contrary to what people like Arroyo of NEDA says, economics presents no decisive answer on the issue of the effects of raising the minimum wage. It is not necessarily an economist's nightmare. A moderate minimum wage increase is workable and there is room for maneuver. Too bad though that President Arroyo, a Ph. D. economist, prefers to leave the hard decisions on the regional wage boards instead, the members of which, I presume, know less economics than herself.

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