Position Paper in Support of House Bill 375 which provides for a P125 Daily Across-the-board Increase in the Salary

Rates of Private Sector Workers Ecumenical Institute for Labor Education and Research (EILER) February 16, 2011
The Ecumenical Institute for Labor Education and Research (EILER) strongly supports House Bill 375 (HB 375) which provides for a P125 across-the-board increase in daily salaries of private workers for three main reasons: 1) Soaring prices and high cost of living have steadily eroded the value of workers' wages, making it difficult for Filipino families to meet decent standards of living Consumer prices have steadily risen at an average of 5.3 percent since 2001, yet the increase in average basic pay nationwide averaged at only 3.43 percent in the same period. This clearly highlights how the increase in prices of basic commodities outpaces measly minimum wage increases granted by the regional wage boards.1 The gap between the daily minimum wage and the family living wage (the minimum amount needed to meet food and non-food requirements as estimated by the government) has also widened over the years. In the National Capital Region for instance, this gap more than doubled from P257 in 2001 to P553 as of June 2010. Currently, only 40 percent of the P957 estimated family living wage in NCR is being met by the P404 minimum wage in the region. Comparison of daily minimum wage and family living wage (National Capital Region)

Daily minimum wage in NCR 2001 2011 P252 P404

Daily cost of living in NCR

Difference

P509 P957

P257 P553

While recognizing that the P125 increase as provided for by HB 375 will not bridge this gap, granting the substantial wage hike will nevertheless cut the gap significantly and thus help families cope better with rising consumer prices. The year 2010 was ended with rounds of price hikes, local oil companies hiked gasoline and diesel prices by P1.15 a liter last December 13, on top of the hefty P1.50 per liter pump price hikes implemented by these firms last December 7. LPG retailers had also increased the price of cooking gas at P3 per kilo. Moreover, bread prices were hiked by P1 to P1.50 per loaf bread and 50 centavos per pack of ten pandesal. Aside from this, sugar prices have also gone up by 30 percent to P58 to P62 per kilo from only P48 in the past few months. And the coming of the year 2011 welcomed the Filipino workers with more promises of price hikes and fare hikes, such as the MRT/ LRT fare hikes, electricity and water rate hikes, and new bouts of oil price hikes. All these price hikes put pressure on the measly incomes of Filipino families and consequently push them closer to hunger and poverty. This clearly calls for a substantial wage increase to at least mitigate the impact of these price hikes. As consequence of unabated price hikes vis--vis measly hikes in workers wages, the real value of workers salaries was eroded in the past decade. In the National Capital Region, real wages slid to P242.4 this year from P249.10 in 2001. 2

1 2

Computation based on the statistical tables from the 2009 BLES-DOLE Yearbook of Labor Statistics 2000 Consumer Price Index (CPI) used as base year

Assuming the P125 wage increase is passed, the situation will be greatly reversed as the current P404 minimum wage will be hiked to P529 (nominally) and the corresponding real wage will be increased to P317.40.3 2) Labor productivity and company profits have steadily risen while workers' wages lag by a yawning margin Labor productivity, a measure of new wealth created by each worker annually as reflected in the Gross Domestic Product, steadily grew by 76 percent from P124,553 in 2001 to P219,016 in 2009. On the contrary, the average daily basic pay of workers nationwide increased by only 31 percent during the same period. In the manufacturing sector, rising labor productivity vis-a-vis depressed wages has resulted into bigger company profits. From P297,899 in 2004, profits reaped by manufacturing firms per worker grew to P482,746 in 2008. Annual labor (2004-2008)* productivity, salaries 2004 and wages and 2006 surplus value 2007 in manufacturing 2008 sector

MANUFACTURING Annual labor productivity per worker (value added) Salaries and wages per worker Surplus value (profits) per worker

2005

366,834

411,001

451,213

476,994

566,139

68,935

71,018

76,317

79,831

83,393

297,899

339,983

374,896

397,163

482,746

*Computed from the statistical data in the BLES 2009 Yearbook of Labor Statistics In the table above, it is clear that the huge profit margins by companies can really accommodate a P125 increase in the daily wage of workers. Meanwhile, as labor productivity increases, the wage share in GDP continues to shrink. Wage share is computed based on the share of value of wages to total GDP or total value and wealth created by the economy. An increase in wage share would indicate that workers (through their wages) benefit from whatever growth in the economy, while a declining wage share implies that a larger share of the economic gains is directed into profits. It is an indication that any benefits from growth in the economy do not trickle down to workers and thus, contributing to social inequity. The Philippines recorded a declining wage share with negative 2% change in wage share from 2000 to 2007.4 3) The inability of wages to cope with rising prices and to keep attuned to increasing labor productivity and profits starkly highlights the ineffectiveness of the wage setting by the regional wage boards. The continuing rise in commodity prices, profits and productivity amid the scanty increase in minimum wages essentially exposes the failure of the regional wage boards in fulfilling its avowed mission of ensuring a decent standard of living for workers and their families. This also points to government neglect of its constitutional duty to recognize the right of labor to its just share in the fruits of production as stipulated in Sec. 3 Art. XIII of the 1987 Constitution.
3

Real wage is computed by multiplying nominal wage by purchasing power of the peso (pegged at 0.60 based on the November 2010 CPI) 4 ILO Global Wage Report 2008-2009.

To illustrate the dismal record of the regional tripartite productivity and wages board (RTPWB), regional wage boards across the nation has granted minimum wage increases not higher than P26 since their creation in 1989 under the Wage Rationalization Act. In several instances, these regional wage boards even implemented wage hike moratoriums. In the NCR, the RTPWB implemented a wage freeze thrice since 1989 (1992, 2003 and 2009). Since the deregulation of national wage setting in 1989, under the Wage Rationalization Act, the value of real wages in non-agricultural sectors was glued to 1980s level for three decades (1980s-2000s), while real wages for workers in the manufacturing sector had a constant declining trajectory. Thus, the inability of a deregulated wage setting to adjust to the needs of workers for a living wage needs to be urgently compensated by a national legislated wage increase.

4) The right to living wage and the right to security of tenure are both inherent worker's rights that are stated
in our Philippine Constitution, both are rights that should be protected by the State. Article 8 of the Philippine Constitution states that: LABOR Section 3. The State shall afford full protection to labor, local and overseas, organized and unorganized, and promote full employment and equality of employment opportunities for all. It shall guarantee the rights of all workers to self-organization, collective bargaining and negotiations, and peaceful concerted activities, including the right to strike in accordance with law. They shall be entitled to security of tenure, humane conditions of work, and a living wage. They shall also participate in policy and decision-making processes affecting their rights and benefits as may be provided by law. It has been a usual counterargument that granting an increase in minimum wage would hurt employment. But there has been no empirical evidence on this theory. A study cited by ILO in its Global Wage Report 2009-2010, showed that this theory is only applicable under perfectly competitive market and firms always have some control over their production. In practice, higher minimum wages do not necessarily lead to reduced employment since the higher costs of minimum wages can be covered by the reduction of profits for the firms. 5 Other empirical studies show that there is insignificant

Manning, Alan. Imperfect competition in the Labour Market. CEP Discussion Paper No. 981. Center for Economic Performance. May 2010.

employment effect from minimum wage increases.6 Even in the released OECD Employment Outlook 2010 concluded that the relationship between minimum wage and median wage brings no significant changes to worker flows. 7 These studies are confirmed by the recently released government data on Establishments Resorting to Permanent Closure/ Retrenchment Due to Economic Reasons8 as shown below. From 2008 to 2010 (January-October), the accumulated number of workers that were permanently displaced by establishments due to minimum wage increase were only 722 workers and only covers 0.5% of the total number of permanently displaced workers or 141,474 permanently displaced workers for the 3-year coverage. The top reasons for the permanent displacement of workers by establishments were mainly due to reorganization, downsizing, or redundancy (41,135 workers displaced or 29%), lack of market or slump in demand (29,027 workers displaced or 21%), and financial losses (27,457 workers displaced or 19%). Thus, in the Philippines, the minimum wage increases did not result in massive retrenchments and closures of establishments. An increase in minimum wage should be accommodated by firms through reduction of their profits, since labor costs (wages and benefits) only constitute around 6.8% of production costs (in manufacturing as of 2005). The direct impact of a minimum wage increase is trimming the employers profit margins. 5) There are various determinant factors for foreign direct investments (FDI) to choose a location for their capital, it is not just limited to wages. For decades, the Philippine government's model for economic growth has been FDI-dependent. That is why alongside with this economic growth model is the policy of cheap wages to increase global competitiveness of the country over other developing countries. One of the main arguments against the clamor for minimum wage increase is that higher wages will not be favorable in creating an investor-friendly environment. And so we were all geared for the race-to-thebottom wage rates with other Asian neighbors to lure the investors in.

Doucouliagos, H.; Stanley, T.D. 2009. Publication selection bias in minimum-wage research?: A meta-regression analysis, in British Journal of Industrial Relations,Vol. 47, No. 2.
7

OECD 2010 Employment Outlook: Moving beyond the jobs crisis (Paris).

Current Labor Statistics, January 2011. Bureau of Labor and Employment Statistics, Department of Labor and Employment. http://www.bles.dole.gov.ph/Current%20Labor%20Statistics/HTML/FOREWORD.html

However, a deeper understanding of trends of global FDI flow would show that, determinants of FDI location is a complex combination of following factors: market size, market growth, barriers to trade, production and transportation cost, GDP per capita, political stability, host government's trade and tax regulations, and investment incentives. The primary basis for FDI inflow would be the overall performance of an economy.9 And so, labor cost is just one of the many of the factors that is being considered by FDI for its location. Low labor cost presents both as a positive and negative points for investments. For resource-seeking and cost-reduction-seeking firms low wages would come as a plus factor as it will bring production cost to a low level. But for efficiencyseeking firms and market-seeking firms, having a general low labor cost level in a particular country serves as a negative point since it is a general manifestation that the economy in general is in low productivity level, and domestic market is limited due to weak aggregate demand. A look at statistics of global FDI inflows (Figure below) would show that overall good investment climate is most preferred by FDIs rather than low wage rates as majority of global FDIs is hosted by developed economies which has relatively higher wage rates that developing countries. This is confirmed by the list of Top 20 host economies of global FDI inflows which has relatively higher wages that includes United States, France, United Kingdom, and Germany. 10 6) A legislated wage increase now would be a sound wage policy in times of crisis. The global economic crisis has brought to fore the structural problems of the dominant global economic system. In fact, the current crisis resulted from the inherent structural weakness of this system, with the perennial decreasing wage share and wage inequality amidst the so called economic growth and depressing wage rates amidst ballooning corporate profits, has led to spiral falling of aggregate demand. This was compensated for by increased borrowing, and growth was maintained at the cost of increased indebtedness.

Trends in foreign direct investment flows. Journal of International Business Studies. http://faculty.unlv.edu/phelan/Research/JIBS2003.pdf
10

World Investment Report 2010. UNCTAD.

The policies of deregulation, liberalization and privatization under globalization has brought the vulnerable sectors of society to lower wages, informalization, joblessness and deeper poverty. According to ILO, in these times of crisis, it is time for nations to look inward and develop the domestic economy. In its Global Wage Report 2009-2010, ILO has urged policy-makers to prioritize wage policies during crisis since it concerns social justice and the hardships that inequality and low wages bring to the most vulnerable sectors of society. It is a matter of achieving social justice since the costs of the financial crisis and rescue packages were borne by all, while the benefits of earlier expansionary period were unevenly shared. ILO presented numerous wage and labor policies with stress on overarching regulation by the state. It explains importance of collective bargaining and minimum wages. It states that the minimum wage is a policy tool to provide an effective backstop at the lower end of the wage distribution.11 Reverberating ILO's recommendations, EILER supports the legislated across-the-board wage increase. We believe that the granting of a legislated P125 across-the-board minimum wage increase stated under HB 375 will result to the following positive impact: It will strengthen aggregate demand for goods and services from domestic sources, creating a more viable domestic market.

It will help address market imperfections, such as gender pay gaps. According to the report, women are more vulnerable to lower wages, thus, increasing minimum wage would benefit mostly women workers receiving lower pay. It will benefit the most vulnerable sectors workers, the contractuals, women workers and other low-wage workers, who are earning around 40% less than the current minimum wage. The figure below shows that majority of workers who are salary and wage earners receive wages below the minimum wage rates. An increase in minimum wage would help reduce low wage employment.
It will create a ripple wage effect, wherein other workers above the minimum wage rates will benefit also from the increase as the ripple effect can reach even to wage levels that are 25% more than the minimum wage rates. In the United States, a 10% increase in the minimum wage resulted in a 1.4% increase for the highest percentile wage level.

In view of the justifications cited above, it is highly justified and necessary for Congress to pass HB 375 at the soonest time possible. Passing the bill should also be complemented by a strong implementation machinery to ensure compliance and maximize the impact of the minimum wage increase. For the longest time, millions of Filipino workers have been deprived of decent living because of the current slave wages. Approving the P125 across-the-board nationwide wage increase is one step towards ending this social injustice.#

11

ILO Global Wage Report 2010-2011.