Can a minimum wage hike raise Filipinos’ standard of living? 

Many of us lament the fact that we can now buy fewer things with the money we have. For the rich, that’s just a phase they have to go through. For the poor, the impact is much more dire.

Inflation increased by 5.8% in 2022 and by 6.0% in 2023. Despite a slowdown in inflation at the beginning of 2024, rice, which is a basic staple for Filipino families, continues to become more costly. In fact, the most recent rice inflation of 23.7% in February 2024 is the highest in 20 years!

To address the decreasing purchasing power of wages, Congress is proposing legislation for an across-the-board wage increase. The last legislated wage hike was in 1989, when the Wage Rationalization Act was enacted.

In this Congress, the Senate approved, on third reading, a bill providing a PHP 100 across-the-board minimum wage increase for workers in the private sector. Meanwhile, the House of Representatives is still deliberating on the proposal. They are looking at a PHP 150 to PHP 750 across-the-board wage increase for workers in the private sector.

Because minimum wage rates vary across different regions, a PHP 100 wage hike will bring a 16% to 30% increase in daily earnings, while a PHP 150 wage hike will bring a 25% to 45% increase.

Which sectors will be most affected by a minimum wage hike?

In 2023, only 62% of workers in the Philippines were wage and salary workers. The rest were either self-employed or employed in family-owned businesses or farms. This implies that only a small number of workers will benefit from the wage hike, especially since only a portion of the wage and salary workers are minimum wage earners.

The services sector will be hit the most by the proposal as it comprises 59.3% of total employment in the country, 38% of which is in wholesale and retail trade (21% of the total employment).

What are the potential adverse effects of the proposed minimum wage hike?

A large wage hike is potentially detrimental to businesses, especially medium, small, and micro enterprises, as higher wage requirements will add to operational expenses.

However, Senate President Pro Tempore Loren Legarda assures micro enterprises that they are exempt from the proposed minimum wage hike, saying that existing laws will protect them. Exemptions include establishments with less than 10 employees. Under the wage hike proposal pending in the House of Representatives, small and micro enterprises may also apply for wage subsidies from the Department of Labor and Employment (DOLE).

But still, bigger firms may find it necessary to increase prices or reduce their labor force to maintain their profit margin. This may then push inflation higher, reduce the employment rate, and hinder economic growth.

An impulsive policy decision could reverse the progress the government has made for the country, especially now that the Philippines is among the fastest-growing economies in Asia.

Wages and inflation

Currently, the government’s inflation target is set at 2-4%, with the latest inflation print in February 2024 at 3.4%, which is above the consensus forecast of 3.1% but within the upper bound of the Bangko Sentral ng Pilipinas (BSP) forecast at 2.8% to 3.6%.

Empirical results from a BSP study (Cacnio 2017) showed that a one-percentage-point increase in the regional minimum wage, on average, will increase the regional consumer price index by 0.1 percentage point.

According to National Economic and Development Authority (NEDA) Secretary Arsenio Balisacan, the proposed wage hike of PHP 100 for minimum wage earners across the country will negatively impact the downward trend in inflation and induce 0.2- to 0.8-percentage-point inflation, depending on the mechanism of the wage hike.

Lower demand for labor

According to NEDA, even with the savings brought on by the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law, which reduced corporate taxes for enterprises earning PHP 5 million and below to 20% from 30%, it will not be enough.

Small, micro, and medium enterprises will still not be able to afford the wage hike. Even DOLE Secretary Bienvenido Laguesma opposed the proposal.

Currently, the unemployment rate as of December 2023, was at the lowest in almost two decades, at 3.1%. This was also complemented by a decrease in the underemployment rate to 11.9%, from 12.6% in the same period in 2022.

The proposed wage hike with a minimum proposal of PHP 100 could reverse the efforts of the government to generate employment for Filipinos. According to NEDA Secretary Balisacan, it could increase the unemployment rate by 0.2 to 0.7 percentage points, leading to around 100,000 to 340,000 jobs lost.

Reduced economic growth

Lastly, according to NEDA Secretary Balisacan, the agency’s estimate shows that the country’s gross domestic product (GDP) would be reduced by 0.1 to 0.5 percentage points depending on how the wage hike will be implemented.

The Philippines, whose GDP growth rate for 2023 was 5.6%, may not enjoy faster growth because of the possible ramifications of the wage hike.

A win for minimum wage earners?

The Senate approved a PHP 100 hike for all minimum wage earners (reduced from an original proposal of a PHP 150 minimum wage hike), with 20 affirmative votes and no negative votes or abstentions.

Senators believe the wage hike, although not sufficient, will help alleviate the financial burden of Filipino families amid rising inflation.

Labor groups lauded the approval of the proposal in the Senate. The Nagkaisa Labor Coalition and the Federation of Free Workers said in a statement released last Sunday, “This Senate action renews hope among workers and their unions for a standardized wage increase across the country, paving the way for the potential establishment of a singular national minimum wage in the coming days. It highlights a pivotal concern within our present economic structure.”

Renewed hope is good. But we may all have to be ready to accept the possible implications, consequences, and tradeoffs that the country’s economic managers have pointed out.

MARIAN MONETTE FLORENDO is a Research and Business Analytics Officer of the Financial Markets Sector at Metrobank. She provides macroeconomic research for the bank. Her academic background is in Mathematics and Economics. She loves solving puzzles and watching mystery movies.