Minimum wages: job killer

Minimum wages: job killer

19th May 14

One answer is that the investment rate is low. The investment rate of 19.7% is far below the rest of the region with Indonesia at 33% and Thailand at 27%.

Why is it low? Because there are monopolies and duopolies in strategic sectors — telecommunications, ports, shipping, power distribution, cement, etc. These monopolies “strangle” or fetter the downstream and upstream industries with the former’s bad service, high prices, and arbitrary demands, and therefore, manufacturers do not invest. Why put up a factory and hire workers when you have to face smuggled goods on one hand, and, on the other hand, you have to cope with bad mobile service, high prices of electricity, high construction costs, and high port charges for your raw material imports?The obvious solution to this problem is to remove the foreign ownership restrictions in the Constitution so that foreign companies can provide competition to the monopolies in these strategic and capital-intensive sectors. Solving the lack of competition in the strategic sectors represents the key link that can unlock more investments and the generation of new jobs.This is why the country badly needs to remove those foreign ownership restrictions in the Constitution and why President Aquino’s citing of China’s high growth despite foreign ownership restriction in land ownership is irrelevant.The other answer is that the country’s minimum wages deter job growth. Companies, especially small- and medium-scale companies, don’t want to hire more workers because the law forces them to pay wages above labor’s productivity. Dr. Gerardo Sicat, the country’s first National Economic and Development Authority (NEDA) Director-General and Dr. John Nye, Fil-Am economist at George Mason University and valedictiorian in President Aquino’s high school class, have been saying these for years.However, a recent paper by Drs. Vicente Paqueo, Aniceto Orbeta, Leornardo Lanzona, and Dean Dulay entitled “Labor Policy Analysis for Jobs Expansion and Development” has scientifically and indisputably shown that minimum wages are the biggest binding constraint to job growth. 

Let me quote relevant portions of their excellent paper: “Using various econometric methods and applying them on the combined sample of small and large enterprises, Lanzona (2014) found a statistically significant negative relationship between minimum wages and employment. The relationship implies that, on the whole minimum wage policy reduces employment.

“Lanzona’s study also finds that minimum wages cause firms to reduce their production workers.”

The negative impact of minimum wages is highest among the least educated, the teenagers, the young, and women because they are the least skilled, according to the study.

Unsurprisingly, minimum wages have a negative correlation with poverty alleviation because the young, the least educated, and the women in a household are unable to find jobs because of high minimum wages. “Support for these findings is further strengthened by statistical results showing significant damaging effects of minimum wages on demand for workers by small scale enterprises.”

Those who enjoy minimum wages are very expensive relative to their productivity. A World Bank report stated that minimum wage earners in the Philippines are among the least productive unskilled workers in the world. Indeed, Pacqueo et. al. has a graph on the international comparison of the ratio of minimum wage to value added and it shows the Philippines second to the highest in the world. We also have one of the highest ratio of minimum wages to average wages.

What to do? Obviously, it would be hard to repeal the minimum wage law. The leftist demagogues are even clamoring for P300-a-day increases, for Chrissake.

Dr. Gerry Sicat suggests special economic zones where minimum wages and labor security laws are suspended. The idea is worthwhile trying in labor surplus areas, say in Bicol or Leyte or the 12 poorest provinces. Or maybe, we should have urban economic zones, say in Tondo, where there are many jobless within the cities. It could even be a foundation for urban renewal.

Dr. Pacqueo et. al. suggest a number of labor policy reforms, such as transforming the present tripartite system of determining minimum wages into a quadripartite system that would give the poor, unemployed, underemployed and self-employed direct representation in the determination of labor regulations and policies. Pacqueo et al. also recommend that the compulsory regularization of young workers be lengthened from six months to two years. The six-month regularization rule has made companies shy in hiring more workers since they could be saddled with unproductive workers who will be hard to fire.

Since investment in human capital raises productivity and wages, organized labor should be focused on the training and education of its members.

This much is clear: the two biggest binding constraints to sustained inclusive growth of the Philippine economy are the monopolies in strategic industries and the high minimum wages. Economic reforms should be focused on these two big binding constraints, and not on minor ones like tax reform. Sure, lack of infrastructure is critical but solving it would require that foreign companies be allowed to operate airports, seaports, even toll roads and bridges deemed “public utilities.”

There is no better time to undertake labor and wage policy reform than now. Labor-intensive industries are leaving China because of high costs (labor supply is decreasing every year because of China’s graying population and one-child policy), Vietnam because of the unstable situation caused by the anti-China protests, and Bangladesh because of bad publicity associated with the factory fires that killed hundreds of workers.

Will the Aquino administration be up to the challenge?

 

Source: http://www.fef.org.ph/2014/05/minimum-wages-job-killer/