Missing it

After the Senate’s first public hearing on the matter of a legislated wage increase, the chairman of the chamber’s committee on labor, Sen. Jinggoy Estrada, put on a sage look and observed that the representatives of the business community did not clearly quote an amount they would prefer legislated as the minimum wage. He then concluded that, perhaps, the business community would not want any wage increase.

I’m sorry I have to put it so bluntly: the good senator completely misses the point.

The business community – and, for that matter, the entire community of economists – are not arguing against wage adjustments. They are arguing against a legislated wage increase.

The point was clearly established over a decade ago when the Congress wisely relieved itself of the legislative power to set wages. Setting wages was devolved to the regional tripartite wage boards.

This was done because of the inherent anomalies and glaring adverse consequences of setting wages by legislation.

Legislating wage increases politicizes the process, creating uncertainties in our investment environment. In the past, politicians routinely raised the minimum wages on election years. We see that happening again, in the bill passed by the House before the congressmen went on holiday binge.

We see that clearly in the actions and utterances of the militant trade unions the past few days. They have tried to intimidate employers by mounting noisy demonstrations before the offices of the Employers Confederation of the Philippines. A spokesman from the radical (but miniscule) Bukluran ng Manggawang Pilipino (BMP) threatens the senators with electoral retribution next May if they do not pass the wage legislation.

That spokesman is all bluster. We all know that less than a tenth of workers are unionized and less than a percent are affiliated with the leftist unions. Of those affiliated with the leftist unions, an even smaller proportion are with the BMP.

Unfortunately, some senators appear to be impressed with decibel levels. It could also be that they are obsessed with partisan goals: in this case, passing the hot potato to the presidency on an election year by forcing a veto of a measure that will devastate our economy if allowed to pass into law.

I discussed the politics of this in a previous column.

Our experience during the period we allowed wages to be legislated should be educational enough. Legislated wage increases unhinge pay from productivity. And so it was that during the time wages were routinely raised during election years, the gap between productivity and pay widened intolerably. Because of that, labor-intensive industries migrated to neighboring economies such as China, Vietnam, Thailand and Indonesia.

The migration of labor intensive industries (the garments sector being the most spectacular) pushed up our unemployment rate and widened poverty in our society. High unemployment creates a second-generation of social problems: high rates of crime, drug-dependence and a population so gripped by misery their invest pompous hopes in movie stars presenting themselves as messiahs for the poor.

Legislated wage increases produce what economists call "wage rigidity." The prohibitive costs of hiring at the lower end of the skills spectrum discourage employment creation. That, in turn, produces the phenomenon of jobless growth.

By passing the chore of wage-setting to the regional tripartite wage boards, we have been able to shift from a regime of wage rigidity to a regime of wage flexibility. Poorer regions, which usually have the advantage of lower costs of living, are able to compete for jobs and draw investments to their communities. That lessens investment concentration in the metropolitan area and decreases the propensity for congestion in the cities and poverty in the countryside.

An unrealistic minimum wage regime enforced nationwide and across the board will have the reverse effect. It will encourage the traditional concentration of investments in the metropolitan areas and deepen rural poverty. It will force large-scale internal migration that creates congestion, infrastructure strain and all the social and humanitarian problems associated with that.

There is something to learn from the wage policy in the US, which has one of the lowest unemployment rates in the world. The US minimum wage is so low, relative to comparative costs of living, that no employer bothers to evade it. Hiring and firing is so flexible there is no inhibition on employers to hire whenever they need manpower.

By contrast, a developed country like France has one of the highest unemployment rate in the European Community. The principal reason for that is a rigid wage and labor regime put in place during period when the socialists ruled.

There is a clear and direct correlation between wage flexibility and the capacity of national economies to maintain high employment rates – and therefore low rates of poverty. Understanding this does not require too much sophistication in economics. It is all common sense.

Unfortunately, common sense is always scarce in the theater of politics.

Politicians deal principally with the commodity of instant gratification. They buy popularity during election years by raising minimum wages. The economy pays for that with high rates in poverty over the longer run.

Everybody recognizes that inflation has reduced the purchasing power of present wages. I should know that. As a teacher, I get paid a ridiculous sum for all the professorial work I do with a large dose of personal passion.

But there are better ways of dealing with that other than legislating wages. An interim measure, of course, is to reduce wage erosion by bringing down the inflation rate. Here government has performed magnificently through a combination of fiscal discipline and exemplary monetary management.

Then there are the regional wage boards and, of course, the independent contracting of workers with the enterprises that employ them. These mechanisms are not broke and should not be overridden by the political grandstanding of those who preach salvation through wage legislation.

That, Mr. Senator, is the point.