Wage hikes: A matter for market forces

The issue of minimum wage is upon us once more. Even as labor groups have just started filing their petitions for wage hikes, the Lower House has already approved on second reading last week a bill providing for staggered increase in the minimum wage. Malacañang, for its part, has raised its objection to the approved bill which is a complete departure from the wage-setting mechanism that has been in place over the past 17 years.

While congressmen may have had the best intentions in mind when they approved the bill, we believe that they may have overlooked certain realities. We are not against wage increases per se. Given the current conditions, there may be even some justifications for one amid the unabated rise in oil prices and the corresponding impact on the prices of goods. We should also take into account the erosion in the purchasing power of the peso which, as one business daily reported last week, has declined by almost seven percent in 2005-2006 and by almost eight percent in 2004-2005.

The big picture: An economy of SMEs

But it is not just us, the workers, who feel the burden of rising costs. Employers are just are burdened by current the circumstances. It is in this light that we urge the proponents of the bill to consider the bigger picture: ours is still an economy of micro- and SMEs. In its May 2005 Philippines Private Sector Assessment Report, the Asian Development Bank reported that there are 825,000 registered private enterprises in the Philippines. However, 91 percent of these are considered microenterprises while another 8.5 percent are SMEs. Only 0.5 percent of the total can be considered large companies. In terms of employment, the NSO reports that only 29 percent of our workforce is employed by large companies.

Given this profile of our economy, what will be hardly hit by an unreasonable wage hike are the 99.5 percent of employers and 71 percent of the workforce. Excessive wage hikes would weigh down on the employers’ (which in our case mostly small enterprises) viability and could translate to either closure or the implementing cost-cutting measures which, in most cases, are almost always done through job cuts. Worse, small firms may be forced to just go underground and join those who unscrupulously pay their workers less than the minimum wage. On the other hand, keeping wages too low will not enable workers to afford basic necessities and will keep them in poverty. This could also dampen demand and would weigh down on the sales and profitability of companies. In either scenario, both the workers and the employers are on the losing end. It is therefore just appropriate to let the employers and workers decide the right wage level through negotiations, which is exactly what the regional wage boards were created for. Simply put, this is a matter of supply and demand and therefore subject to market forces.

Rendering us less competitive

Aside from the market distortion that a forcible wage fixing will create, we are also concerned that an unreasonable wage hike will render the country less competitive versus its neighbors. As it is, the successive increases over the years have rendered the country’s wage levels less attractive to investors especially as the wage hikes have not been matched with increases in overall productivity. The minimum wage in the Philippines is reportedly among the highest in the region at $6.26/day. However, its labor productivity of about $676 is among the lowest.

More than just political expediency

There is indeed more to wage setting than just political expediency. We hope that after highlighting the abovementioned facts our legislators will take a closer look at the proposed legislated wage hike. We already have a tried-and-tested mechanism for setting wage levels through the regional wage boards. If policymakers need to focus on anything, this should be the strict enforcement of the prescribed wage levels in able to ensure that workers get their just pay and eventually encourage them to be more productive.

Manic May turns to panic

Market action is often driven by greed and fear. Dreams of wealth can drive most investors to take unnecessary risks, but the fear of losing is likewise as strong. The interplay between these two powerful instinctive feelings was very evident in the financial markets last May. It was during this month that we saw gold dazzling past $700/oz (refer to Philequity article, May 15, 2006), copper surging above $4 per pound, and emerging equities markets such as India and Indonesia making new all-time highs. This was also the same month that we saw gold, copper and silver drop 15 to 20 percent from their highs and India and Indonesia lose as much as 20 percent of their market value.

Measuring investors’ fear

The shift from greed to fear, and at some point, towards panic, has never been more abrupt in recent memory. During the last couple of years, investors have been so comfortable with risky assets that the spread between high-yield and high-grade debt (e.g. between emerging market debt and US treasuries) has fallen to its lowest levels. In the same manner, stock market volatility as measured by the Volatility Index (VIX) has fallen to all-time lows… that is, before the turbulence experienced last month.

The VIX, for our readers’ information, was introduced in 1993 by the Chicago Board Options Exchange (CBOE). It is now widely used as the benchmark for stock market volatility. VIX measures market expectations of near term stock volatility conveyed by stock index option prices (in this case, the CBOE uses the S&P 500). Since volatility often signifies financial turmoil, the VIX is often referred to as the "investor fear gauge."

Keeping a close watch on US equities markets

Since the 2nd quarter of 2003, when global equities including the Philippine stocks bottomed out, the VIX has stayed well below 25 (as seen from the chart below). In other words, investors have become increasingly accustomed to risk – searching for higher yield. In fact, every time the VIX reached 15 or when investors slightly turn risk averse, equities markets bottomed out and investors gladly welcomed risk back again.

Volatility Index & the S&P 500

Last week’s pullback of the VIX, therefore, could be a positive for equities if historical patterns hold. Clearly, the long-term trend of S&P 500 continues to be upward. However, we continue to keep a close watch on the US markets. Heightened inflation concerns, volatile commodity prices, and uncertainty over interest rate increases have already caused some initial damage on investors’ risk appetite.

With this in mind, we will be wary if we see an upsurge in the VIX above 25 (similar to the instances during the WTC bombing and the US-Afgan and US-Iraq wars). Although it is too early to make a conclusion, it would not hurt to be cautious and watch how events in the US markets play out.

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