Why a wage hike will not help the poor

In the current national conversation on the minimum wage, there has been no informed discussion on this important topic: Exactly who will be benefited by the increase in minimum wage? And who will be hurt?

To answer this, we need to look at data from the Philippine Statistics Authority (PSA).

The latest data (January 2018 Labor Force Survey) tells us that the total number of employed in the Philippines is around 42 million. Since there are about 21 million Filipino households (105 million total population divided by 5—the average family size), that means there are, on the average, two employed workers per family. So that takes care of the assumption that only one worker per family is working, so he must be paid the entire amount needed for the family.

But of that total employed labor force, 76 percent, or over three-fourths, are in the informal sector. They are not going to be benefited by an increase in minimum wage, because they are effectively under the government’s radar.

That leaves 24 percent of the total employed labor force. These comprise managers, professionals, etc., as well as unskilled workers. So how many of these would directly benefit from a minimum wage increase?

Well, Reader, the World Bank’s recently published “Making Growth Work for the Poor” gives us a clue: “Only about 1/3 of workers in private firms are covered by the minimum wage policy.”

How many is that? The PSA data show that 48.7 percent of the total employed work for private establishments. One-third of that is about 16.2 percent. And 16.2 percent of  41.755 million total employed gives us 6.76 million workers covered by the minimum wage.

In other words, 6.76 million of our total employed labor force of 42 million are theoretically going to benefit from the minimum wage and its increase. Why theoretical? Because the minimum wage law gives many exemptions, like distressed establishments; new business enterprises; retail/service establishments employing not more than 10 workers; and establishments adversely affected by natural calamities.

So the number actually affected is going to be less than 6.76 million. It would probably range from 2-4 million.

In other words, only 5-10 percent of the employed labor force will be directly benefited by this minimum wage increase.

What will happen to the other 90 to 95 percent? Ah, there’s the rub. But let’s concentrate on those working in agriculture, the fisherfolk, and/or are self-employed (itinerant vendors, etc.). In other words, the poor, with which we all are concerned. And what about the rest of the working-age population who are not working, or looking for work? The pensioners, particularly, whose pensions are not indexed to prices? What happens to them?

They get zilch, or maybe a little more than zilch. They get hit by inflation (raising wages will have an effect on inflation), and have nothing to show for it.

You don’t believe me, Reader? Let’s go back to the World Bank’s latest report, launched a couple of days ago. It has this to say about minimum wage in the Philippines: “The Government of the Philippines is actively using minimum wage as a policy tool to address in-work poverty… However, the widespread informality means that the poor neither benefit from the minimum wage policy nor from employment protection legislation… Hence, the potential for the minimum wage to reduce in-work poverty in the Philippines is limited.”

So what can be done? The Report continues: “… The minimum wage set based on the wage distribution in the formal sector, as is currently the case, is too high to be used in the informal sector, where labor productivity is low. On the other hand, if the minimum wage were set based on the wage distribution in the informal sector, it would be too low to be meaningful for formal workers… An empirically informed discussion among social partners is needed to find a middle ground.” (World Bank 2013, 2016)