The government should consider the negative relationship between minimum wages and employment in its labor policy if it is really serious about creating jobs and pursuing inclusive growth, a study from a state think tank has concluded.
In its “Economic Issue of the Day” publication, the Philippine Institute for Development Studies (PIDS) featured a study authored by PIDS research fellow Vicente Paqueo, senior research fellow Aniceto Orbeta, and consultants Lorenzo Lanzona and Dean Dulay that revealed the damaging effects of increases in minimum wages on demand for workers in small firms.
The study found that small firms are hit hard by increases in the minimum wage and were forced to reduce the number of their
workers primarily because of scale effects.
“Because of competition from larger employers, they tend to offer higher pay just to attract workers. Small firms, thus, find it hard to mature into larger-scale firms, or are even forced to shut down, reducing the demand for workers,” the study said.
On the other hand, the study pointed out that larger firms benefit from the situation and are able to hire workers at lower starting salaries. Since large firms are unable to take in all the workers laid off by small firms, workers have no choice but to accept inferior arrangements.
It also said that in general, minimum wages appear to create significant employment effects unfavorable to the least educated, young workers, and women.
“This is likely because of the low levels of accumulated human capital and productivity compared with other workers. Employers would rather hire experienced workers rather than spend extra for training,” it said.
In the meantime, the state think tank said the authors acknowledge the aspirations of Filipinos for decent wages but challenge the idea that minimum wages and other labor regulations should be their “weapons of choice.”
They said alternatives include better education, increased labor-intensive manufacturing of tradable goods, and greater opportunities for on-the-job trading.
Since the minimum wage is also justified as a tool for social protection, general tax revenues should support part of it particularly the differential between the market wage and the socially determined suitable wage level, similar to the policy in Singapore, the authors said.
“In this way we will not sacrifice either of the twin desirable objectives of generating employment and paying socially determined wages. Achieving inclusive growth will require confronting the underlying causes of joblessness head on,” they said.
Meanwhile, in a recent forum, the authors of the study clarified that they are not calling for the abolition of minimum wage, rather, there should be a moderate minimum wage increases because they do not necessarily mean better incomes for the poor.
“If labor regulations stifle the incentive of firms to be productive and to employ people, then you are shooting yourself in the foot,” the authors said.
They added that the use of public revenues to reduce the gap between the wages generated by the market and what is socially considered decent wages should be looked at.
Enhancing the skills of workers will increase their chances of finding more productive jobs, which can be done by tapping training programs offered by the government, the authors said.
They also said that one option to finance on-the-job training is through co-financing by government, firms (through industry associations), and the workers themselves.