First the upside. Mostly viewed only from the unique perspective of the middle to lower income wage earners officially within the system, recorded among the formal labor sector assuming they are compensated correctly, the benefits of a P320 wage hike as demanded by the Trade Union Congress of the Philippines (TUCP) brings current compensation levels to a comfortable level. The latter is defined as that where net incomes allow wage earners to equalize recent increases in prices and current costs of living.
It is important to note that under the P320 wage increase, disposable incomes will not grow, so there will be no improvements in the already pathetic national savings rate. Spending might increase, but only in so far as these are needed to equalize former subsistence levels.
As there will be no increase in savings, there will be much less in investments. When the economic misery index (adjusted inflation rate plus unemployment rate) is computed, it will be zero sum for the increment demanded. Or even worse since the effects of what appears as run- away inflation and the fall of peso values are continuing, unmitigated with the latter not yet bottoming out.
Reckoned from 2017 as the benchmark year, the projected misery index for this year was 8.9, not counting the inflationary impact of the recently passed Tax Reform for Acceleration and Inclusion (TRAIN). With urban inflation in Metropolitan Manila currently at 5.6% and unemployment at 5.3%, we’ve well broached the barrier of our worst projections and historical ceilings.
If we apply the reported 4.6% inflation rate based on government data, we would still be beyond the projected maximum 8.9 for the misery index. It worsens when we add the more relevant albeit higher underemployment rate as an addend given the number of single-job individuals among most minimum wage earners.
The foregoing shows that the upsides of a wage increase are sorely limited. Unfortunately, the downsides can worsen whatever psychic upsides might be produced.
Let’s see why.
One, already strained by high utility and power costs, businesses will be compelled to pay the P320 increment which they can only do so by forcing employees to multi-task. Those with limited skills might be retrenched, or replaced by cost efficiency systems compelled by the higher costs of doing business. After all, inefficient high cost labor is naturally addressed with cost efficient systems and technologies – acceptable retrenchment rationale under the Labor Code.
The run-away prices we are experiencing is due to cost-push inflation where cost multipliers like petroleum products found in nearly every link in the value chain were applied an excise tax that tends to cascade down the chain. Likewise, oil products are vulnerable to uncontrollable geopolitical sneezes of extremely volatile oil producing states. Fortunately it is this very same volatility that says the global oil price shocks are temporary.
Installing a permanent solution to a temporary situation always leads to imbalances induced both by the different reaction times as one factor adjusts to others, and the unequal capacities to survive these imbalances. When high oil prices normalize as the uncertainties that caused them to rise disappear, labor cost increases remain thus transforming our labor sector uncompetitive.
As encompassing as the incremental excise on fuel was under TRAIN, so would the P320 increase as another value chain cost multiplier.
In an economy with a political bias towards labor given our high unemployment and underemployment rates and a deep fear of labor-replacing technologies and industrial mechanization, labor inputs are integral to just about every link in any value chain. Given such throwback to over a century ago, any inordinate increase in labor costs tend to increase aggregate costs across and thus catalyze price increases all around.
Do the maths. While it might alleviate the psychic effects of inflation much like a placebo, a wage hike fuels unemployment, catalyzes the misery index and inflates costs of living even more than TRAIN has done.