Anatomy of a Minimum Wage Increase

P75.00 per day! This is the minimum wage increase the labor sector in the Central Luzon area petitioned more than a month ago. Too high! The employer sector countered. So what about it? How does the increase in minimum wage in the Philippines gets to be discussed, negotiated, and finalized?

In the grand scheme of things, the petition for a wage increase would normally be coming from the labor sector. This is not always the case, however. The government has initiated petitions on its own in the past. But the employer sector never did. Not that companies would avoid this like the plague; in fact, companies, especially those making money, do provide management-initiated salary increases to their workers. It is part of supply and demand after all. If you want to keep your talented workforce, you have to provide salaries and benefits that would prevent your competition from pirating them—within the bounds of your resources, of course.

The problem is more on the lower rungs of the labor force; like those working in assembly-line manufacturing, agriculture, construction, and retail/service establishments not requiring high-level skills. These are the areas where the minimum wage rate gets to have its greatest effect and where the wage fixing gets to be contentious.

The granting of minimum wage increases used to require, not acts of God, but acts of Congress or acts of the President. Since the enactment of RA 6727 also known as the Wage Rationalization Act, however, Regional Tripartite Wages and Productivity Boards (RTWPB) in each of the sixteen regions of the country became the wage-setting bodies. A petition would be submitted to the RTWPB. The Board is composed of one representative each from DOLE, NEDA, and DTI; and two representatives each from both the workers and employers sectors.

What are the criteria for a petition? There are ten, categorized into the needs of workers and their families, the capacity to pay by employers, comparable wages in other regions, and requirements for national development. From past years, it is almost always the consumer price index (CPI) that is used as the major basis for the increase.

What is a CPI? Simply put, it is an estimate of the average price of a specific list of consumer goods and services purchased by households. The same set of goods and services from two years ago would normally be more costly this time around. The CPI is usually the magic number that dictates the positions of the various parties. The labor sector wants a wage increase much higher than can be calculated from the CPI, the employer sector wants it lower.

Last July 21, the Mitsumi Workers Union submitted a petition for a P75.00 increase. The RTWPB, after reviewing the petition, then sent letters to various organizations, including the SBFCC, requesting participation in an employers’ consultative meeting. On August 24, various chambers of commerce and other organizations in Central Luzon met to discuss the appropriate minimum wage increase for the area. Through voting, the majority agreed to a P12.00 increase to the daily Cost of Living Allowance (COLA) but that the minimum wage rate, implemented last June 2008, will stay as is. A formal opposition paper from the employer sector will later be submitted to the RTWPB.

Understandably, many from the manufacturing sector, hit hard by the global economic crisis and reeling from lower labor rates of competition from other countries, want a lower increase—P5.00 specifically. They did not get the majority vote, however, so P12.00 it is. As an aside, other regions already approved P10.00 to P22.00 increases.

So, what happens to the companies that cannot afford the wage increase? Fortunately, there is an option. Exemption may be applied by distressed establishments, new business enterprises, retail/service establishments employing not more than ten workers, those adversely affected by natural calamities, and other establishments that can prove strong justifiable reasons for exemption; or companies who simply want to take a crack at it.

On September 20, a public hearing for the original labor sector petition will be conducted by the RTWPB. Depending if a compromise can be reached, more public hearings may be held. In the end, it will be the RTWPB who will make the final recommendation and it has to be done within 30 days from the date of the last public hearing. The resulting Wage Order can be appealed by any aggrieved party within 10 days; otherwise, the Wage Order becomes effective 15 days after it has been published in a newspaper of general circulation.

What happens next? Well, employers pay their workers more and employees get what is more or less higher wages that are more in line with the current peso purchasing power. It will likely be a range from P12.00 to P18.00.

One important thing to take note of is that the RTWPB’s wage-setting function is confined to minimum wage and only to the private sector (the government, using our tax money, gets to set their own salaries, see?). It does not have the power to grant across-the-board increases; not to those with salaries higher than minimum wage. Companies will be in compliance already as long as all their employees have wages equal or higher than the minimum wage, which could mean that they may give increases only to those below the minimum wage.

In practice, however, an increase in minimum wage creates wage distortions on salary levels within a company. Because of this, a wage distortion formula is used. The result is that everybody gets an increase but the higher the existing salary, the lesser the amount of the increase.

And so it will be… until the next petition for minimum wage increase, which cannot be earlier than a year out from the date of this year’s implementation.