Carlo's Think Pieces

Reflections of a Filipino in the Netherlands

Philippine wages are too low

Posted by butalidnl on 28 December 2009

Philippine wage policy has been based on the principle of making the Philippines competitive by keeping wages as low as possible. With low wages, products made in the country will be cheaper and more competitive, and companies would want to base their manufacturing plants in the Philippines. The logic indeed seems impeccable. Unless, of course, we note the practice of the last few decades.

Foreign investors, even Philippine businesses, set up companies in the Philippines not mainly because of low wages. What counts more are things like productivity, infrastructure, location near markets or transport hubs, availability of specific skills, etc. The industries that are really labor-intensive have based elsewhere – thus, we see textile manufacturing in Bangladesh, small manufactures in China, etc. In short, the Philippines low-wage policy has not done much in terms of attracting foreign investors to the country. So, why bother with a low-wage policy? For one, low wages mean that profit margins are a bit higher; thus, businessmen will be the last to propose raising wages. Also, low wages makes it possible to employ more people to do the job than otherwise – notice how many salespeople crowd you when you enter some stores? Thus, it seems, the low wage policy is pro-employment, and pro-growth.

But we can try to look at things the other way. The low wage policy could be seen as hindering productivity growth and the overall growth of the economy. Since it is easier just to employ more people, the incentive of companies to become more efficient – and the workers more productive – is much less. With all the employees companies have, they have an incentive to have a revolving workforce, replacing one batch of temporary workers with another, in a bid to avoid employing them permanently and incurring higher wage costs. This hinders profitability in the long run, since stagnation in productivity growth will hamper competitiveness.

Another problem with low wages manifests itself at the level of the overall economy.  Workers’ wages are the main source of funds for consumption – the higher the overall wages in an economy, the higher the consumption capacity of that market. Minimizing wages may benefit individual companies, but the overall effect is that lesser products will get sold. This couldn’t be good for the economy.

How about foreign investors? Well, foreign companies do not really see the Philippines as a low-wage country.  Thus, wage levels are secondary for their basing decision.  It would be better if the country concentrated on the other, non-wage, measures e.g. improving infrastructure,  making the market efficient, ensuring an adequate pool of skilled labor, etc.  In addition, the country will be more attractive for foreign investors if they see that the domestic market is growing. Thus, if the total consumption capacity of the population is seen to be continually growing, this would be a plus point for investors – especially those which also wants to aim for the local market.

Low wages also mean that Filipinos will continuously be going abroad for employment. But, if wages increase continuously in the Philippines, at a certain point, they will be high enough to retain more workers.  Studies in Europe show that wages abroad have to be four times local wages for the flow of workers abroad to continue. Thus, if teachers earn Php 16,000 in the Philippines, they will be attracted by $400 wages as domestics in Hongkong. If they earn Php 20,000 they will stay in the country.

I propose that it would be best for the economy if wages are consciously made to increase every year.  The rate of increase should be just about 1 or 2 percent higher than inflation. This would at least keep it in pace with productivity growth, which we hope is improving every year. Actually, productivity is also a function of higher wages, because the prospect of increasing wages every year would push employers to increase the productivity of their employees.

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