| ECOP opposes P125 accross the board daily wage increase |
 POSITION PAPER ON THE P125.00 ACROSS-THE-BOARD DAILY WAGE INCREASE
House Bill No. 345 introduced by Representative Roseller L. Barinaga entitled:
“AN ACT PROVIDING FOR A P125 DAILY ACROSS-THE-BOARD INCREASE IN THE SALARY RATES OF EMPLOYEES AND WORKERS IN THE PRIVATE SECTOR AND FOR OTHER PURPOSES”
House Bill No. 1063 introduced by Anakpawis Representatives Crispin B. Beltran, Rafael V. Mariano; Bayan Muna Representatives Satur Ocampo, Teodoro A. Casino, Joel G. Virador; Gabriela Women’s Party Rep. Liza Maza entitled:
“AN ACT PROVIDING FOR A P125 DAILY ACROSS-THE-BOARD INCREASE IN THE SALARY RATES OF EMPLOYEES AND WORKERS IN THE PRIVATE SECTOR AND FOR OTHER PURPOSES”
The Bills Completely Disregard the Realities of the Philippine Labor Market
1. These bills reflect the prevailing highly populist orientation to continue increasing the benefits of the employed wage and salary workers in the formal sector in complete disregard of the stark realities of the Philippine labor market characterized by increasing chronic unemployment and underemployment, shrinking formal sector and an expanding informal sector.
2. At the same time, these populist bills not only fail to take into account the
impact of globalization on the Philippine labor market, but their effect on the
productivity, viability and competitiveness of enterprises.
3. The formal sector is dominated by a structure of economic units or establishments featuring a predominance of micro enterprise and SMEs.
a) These establishments, numbering 719,420 in 2003, had a total employment of 5,067,194 wage and salary workers. These are the workers who would be the beneficiaries of these bills, and for that matter, of all labor laws, including the Labor Code.
b) However, 1,973,785 or 39% of the total are employed in micro enterprises, which constitute 92% of establishments in the formal sector while another 1,126,668 or 22.23% of the total, are employed in small establishments. In sum, a total of 3,100,453 or 61.18% of the total are employed in micro and small establishments.
c) These micro and small establishments are labor intensive and they are the ones most vulnerable to any wage increase.
d) These bills will accelerate the marginalization of the formal sector and the expansion of the informal sector and the so-called underground economy. Table 1 shows that in 1999, after the Asian Financial Crises, there were 826,769 establishments in the formal sector. In 2003, the number was 719,420, or a reduction of 107,439. At the same time, total employment decreased from 6,013,688 in 1999 to 5, 67,194 in 2003, or a loss of 946,494 jobs. These decreases should be cause for concern for policy makers, as this pattern is inconsistent with the progressive increase of the labor force, employment and of economic growth.
e) What is even a more worrisome trend is that the percentage of loss in number of establishments and jobs is greater for the micro and SMEs as indicated in Table 1. In 1999, there was a total of 823,763 micro and SMEs; in 2003, it was reduced to 661,825, or a loss of 89,918 establishments. In 1999, total employment for micro and SMEs totaled 4,155,356; in 2003, it was reduced to 3,100,453, or a job loss of 616,011 jobs.
a. Populists need to inculcate in their mind-set that in a market economy like the Philippines, wealth creation and job generation takes place primarily at the enterprise level (whether private or state owned) which in turn operate in a national environment which enhances or hinders their ability to compete domestically or internationally.
4. The Informal Sector or Economy
a) Based upon the ILO definition, the term “informal economy” refers to all economic activities by workers and economic units that are—in law or in practice—not covered or insufficiently covered by formal arrangements. On the other hand, enterprise-based surveys of the National Statistics Office revolve on its definition of establishment: an economic unit which engages under a single ownership or control, i.e., under a single legal entity, in one, or predominantly one kind of economic activity at a single fixed physical location. Thus the definition leaves out activities which are run on a very small scale, have unsettled locations and are not readily recognizable.
b) In the context of the Philippine labor market, workers in the informal economy include wage and salary workers in family based or unregistered economic units, industrial home-workers, the self-employed and the unpaid family workers. Most of these workers are insecure and vulnerable and move from one situation to the other. Because they lack protection, rights and representation, these workers often remained trapped in poverty.
c) There are over 20 M workers in the informal sector, or over 65% of employed labor. These are the workers who are not affected by minimum wage laws and for that matter all labor laws. In fact any new wage increases and other benefits granted by labor laws that benefit only the wage and salary workers in the formal sector serve only to exacerbate the inequity and disparity of income between these two types of workers.
d) It is significant to note that between 1999 after the Asian Financial Crisis and 2003, employment in the formal sector shrunk by over 900,000 while the informal sector increased by over 2,600,000. This is in the light of the fact that while the labor force increased by over 3,800,000 the total employed increased only by about 2,900,000.
The justifications for the Bills as contained in the Explanatory Notes have no factual and economic basis
1. It is not true as alleged that minimum wages have not improved compared to
the cost of living. Since July 1, 1989, when Republic Act No. 6727 or the Wage Rationalization Act took effect, minimum wages outpaced the consumer price index (CPI) and labor productivity while unemployment continued to rise.
2. It is erroneous to equate minimum wage under Art. 124 of the Labor Code
with the “living wage” as defined by the National Wages and Productivity
Commission.
a) “Living wage” as defined by the NWPC is based on family or household income. Family or household income is derived from several sources.
b) It should be noted that the 47.30% share of wages and salaries to total household income include the wages and salaries of 2,300,000 government workers and 1,500,000 domestic helpers.
c)Moreover, the NWPC itself admits its study on the living wage is not final and needs further revisions in order to address a number of controversial issues, such as the following:
- Equating the living wage found in the labor provisions of the Constitution to family income. The living wage in said labor provisions is derived from wage employment arising from employer-employee relationship and not from household income.
- The assumption that family income is sourced from two wage and salary earners, when statistically, there is less than one wage earner in the family.
- The NWPC living wage is admittedly “utopian” because it is far beyond the poverty threshold and economically out of context. For example, based on the 2000 Family Income and Expenditure Survey (FIES), a Filipino should have at least P13,916.00 in annual income for his/her food and non-food requirements, otherwise he he/she would be considered poor. This level of income is called the poverty threshold.
According to the survey, 36% of the population is below the poverty threshold. In contrast, the NWPC annual living wage was based in the upper 5th and 6th deciles of the FIES which are far above the poverty threshold.
- The study based family size on 6 members, when the average size is 5 based on the 2000 census
Adverse Effects of a P125.00 Daily Across-the-Board Wage Increase
1. The P125.00 daily across-the-board increase if applied to the 5,067,460 wage and salary workers in the formal sector (as of 2003) would spike up labor costs on basic wages alone to an astronomical P633,399,250.00 a day and to P16,468,380,500.00 a month, based on 26 working days a month. In one year, the additional cost in terms of basic wages alone would amount to P197, 620,566,000.00. Based upon the latest Labor Cost Survey conducted by the Bureau of Labor and Employment Statistics of non-agricultural establishments employing 20 and over, payment of direct wages and salaries constitutes 74.4% of total labor cost. If the balance of 25.6% of labor cost which includes other remuneration, bonuses, gratuities, facilities and indirect costs such as social security, cost of training and welfare services, etc. which amount to P50,590,864,896.00 were to be added the increase in total labor cost to employers in the formal sector would amount to P248,211,430,896.00 billion!
2. According to the same Labor Cost Survey, the annual labor cost in non-agricultural establishments employing 20 and over amounted to P459, 934,000,000.00 in 2002. Using this as indicator, the P125.00 across-the-board increase would bloat total annual labor cost by approximately fifty four (54%)!
3. Inasmuch as the increase is not productivity-based, it would cause the following chain reaction of adverse and destructive consequences:
a) It would trigger unprecedented spiraling cost-push inflation. The cost of labor is one of the factors of production. Simply put, if the cost of labor as a factor input within a given set of inputs is unduly raised by mandated wage increases, then it would cost more to produce the same quantity of output and the increased cost is then passed on to the market.
b) It would trigger massive job losses and unemployment. As it is, as a result of the vicious cycle of explosive population growth, relatively slow economic growth and populist policies which include the politics of high minimum wages, the Philippines is experiencing the phenomenon of jobless-growth.
c) The basic rationale of minimum wage fixing is to provide an entry safety net level for the unskilled and inexperienced worker. So long as the minimum wage is maintained at this level, more workers, especially the new entrants to the labor force, have a greater chance to land a job in a labor-surplus economy, as it would promote the use of more labor. But once wages are raised far beyond the safety net and the market rate, workers with low skills or education would have little chance against the more skilled and competent workers in finding employment in the wage sector.
d) At the same time, high wages discourage the use of labor-intensive operations or technology in industry which will find it more cost efficient and productive in the long run to resort to automation, capital-intensive technology and the deployment of a small but highly skilled workforce. Even worse, the P125.00 increase will accelerate the decimation of hundreds of thousands of micro establishments and the SMEs in the formal sector, which would run counter to the flagship program of the Administration to promote and strengthen the micro enterprises and SMEs as key generators of employment and economic dynamism in the value chain.
e) It would worsen the wage-competitiveness of the Philippines in the region. As it is, the Philippines has already the highest minimum wage rates or entry level for unskilled workers as adjusted to productivity in the region. This is clearly shown in the table below. It may be noted that among the ASEAN countries, three, namely the Philippines, Thailand and Indonesia have regional minimum wage fixing. It may be noted while Thailand has a GDP per capita twice bigger than the Philippines. The minimum wage equivalent to $3.39 in Metro Bangkok is much lower than the equivalent minimum wage of $5.31 in Metro Manila. Malaysia, which has a GDP per capita nearly four times greater than the Philippines and where thousands of OFWs have found lucrative employment, starts with an entry-level wage of $4.22.
f) Inasmuch as the massive wage increase is not productivity based, it would cause the further deterioration of the productivity and competitiveness of the Philippine economy in the world market. It is sad to say that in the past decade Philippine labor productivity has progressively declined or remained stagnant as compared to neighboring countries.
g) In terms of world competitiveness, from among 60 countries surveyed, the Philippines has progressively slid down from No. 29 in 1997 to No. 52 this year, while Malaysia and Thailand have continued to improve their standing to Nos. 16 and 29 respectively. One of the major factors for the continued decline of Philippine competitiveness is overall low productivity which is the lowest in the region.
The bills are anti-labor and anti-poor
a) They violate the Constitution and implementing legislation that
“The State shall promote collective bargaining as the primary mode of setting wages and other terms and conditions of employment (Sec. 2, R. A. No. 6727)
b) They undermine unionism and collective bargaining.
The P125.00 across-the-board daily wage increase is equivalent to 41.7% of the minimum rate of P300.00 in Metro Manila. If wage benefits in excess of 40% can be secured through legislative largess, while unions can negotiate on the average benefits equivalent to around 10-15% only, then what is the sense of forming and joining unions?
c) They exacerbate the inequity between the 5M employed in the formal sector and the more than 24,600,000 other workers in the labor force (informal sector: 20,600,000 + 4,000,000 unemployed) who will not enjoy the increase but whose marginal income, if any, will be further eroded by the double digit inflation caused by the increase
The bills are confiscatory, oppressive and repressive
a) These bills are uniquely egregious because there is no market economy in the world that would arbitrarily compel all enterprises, big and small, to grant an across-the-board pay increase to all their employees from the lowest rank to the top executives in complete disregard whatsoever to its effect on the viability of the individual enterprise.
b) In fact these bills are clearly confiscatory, oppressive and repressive as they coerce and compel compliance on pain of imposition of penalties for non-compliance with a fine of P20, 000.00 to P100, 000.00 and imprisonment of two to four years, plus the payment of double the unpaid benefits. Considering that the increase constitutes an additional 54% of labor cost which is not productivity-based, enterprises would suffer grievous losses and drive distressed establishments to bankruptcy and closure.
c) These bills therefore are violative of the Constitution on least two counts:
d) Deprivation of property without due process of law; and
e) Denial of the right of enterprises to reasonable returns on investments, and to expansion and growth.
Conclusions and Recommendations
In the light of the foregoing considerations and premises, there can be no other conclusion that these two bills if enacted will cripple the economy and make it the most uncompetitive in the region.
More than ever, populists should open up their mind-set that competitiveness is immutably correlated with economic freedom. According to a prestigious international think-tank, the Heritage Foundation, there is a positive correlation between economic freedom and prosperity.
For 11 years, the Heritage Foundation has tracked the performance of the economies of the world and has prepared an annual report on the Index of Economic Freedom. Based on 10 measures of economic freedom, countries which have done most to improve their scores have experienced the highest rates of economic growth. The countries are categorized according to whether their economies are free, mostly free, mostly unfree or repressed. The scoring was 1 to 5, where an average score of less than 2 is free, 2 but less than 3 mostly free, 3 but less than 4, mostly unfree, and 4 or more, repressed.
According to the 2005 Index of Economic Freedom, the Philippine economy was found to be most unfree with a score of 3.25, as it continued to decline in terms of economic freedom. On the other hand, both Malaysia and Thailand with a score of 2.96 and 2.98 respective, were classified as mostly free economies.
It is interesting to note that in terms of one measure, regulation, the Philippines has a score of 4 or repressed. In other words, the Philippine economy is over-regulated.
This issue of over-regulation is most telling in labor market policies which directly affect the competitiveness of enterprises.
The trend and pattern of labor market policies, particularly legislation, do not encourage investors’ confidence and constrain enterprise development. Not only the Constitution, but existing labor legislation, particularly the Labor Code, protect only the wage and salary workers in the formal sector to the exclusion of the rest of the labor force. On the other hand, all labor bills that have been filed in Congress continue to increase protection and benefits to the same employed labor in the formal sector without due regard to their effect on the competitiveness of enterprises.
It is therefore suggested that these two populist bills be shelved. In lieu thereof, it is suggested that the legislature focus on reforming the highly regulated labor market by redressing, in the words of one noted economist, the balance between labor protection and job creation, while putting productivity on center stage.
Date Posted :
2005-11-15 |
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