P125 wage hike to push inflation near double digits

MANILA, Philippines – Implementing the P125 across-the-board wage hike could cause inflation to shoot up to 9.7 percent, above the baseline of 2.1 percent, economic managers said in a position paper submitted to President Duterte.

The paper containing the simulation study conducted by the National and Economic Development Authority (NEDA) on the effects of the wage hike proposal was signed by NEDA director general Ernesto Pernia, Finance Secretary Carlos Dominguez, Budget Secretary Benjamin Diokno and Trade Secretary Ramon Lopez.

According to the assessment made by NEDA, the proposed wage increase could result in upward pressures in prices from 2017 to 2018, peaking at 9.7 percent in 2017 as businesses may be forced to raise the prices of their goods and services to remain profitable or operational.

Inflation accelerated to 2.3 percent in September, the highest this year because of higher food prices. Last month’s headline inflation rate outpaced the price increase rate of 1.8 percent in August and 0.4 percent in September 2015.

The wage hike proposal is expected to be filed in the 17th Congress.

“While the economic managers want to raise the living standards of workers and their families, we do not support the P125 daily wage increase as it is likely to have adverse impacts on economic growth, employment and inflation,” said Pernia in the letter to the president.

He reiterated his earlier warning that the wage hike would dampen investor confidence, especially those engaged in labor-intensive industries. Such companies may think twice about increasing the number of their employees or retaining employees to remain productive.

“Similarly, we do not support uniform wage increases across regions as this may erode the attractiveness of other regions for labor-intensive industries and enterprises, consequently worsening inequality across the regions,” said Pernia.

NEDA’s study also showed increasing the wage across-the-board could displace around 500,000 workers in 2017, raising the unemployment rate to 7.3 percent from the current 5.4 percent as of July.

“This will have a more pronounced effect on the poor, who are expected to suffer the most from any significant increase in inflation rate and reduction in economic growth and employment,” stated the position paper.

“Such a policy will likely have the unintended consequence of worsening inequality, and will be detrimental to regions as it will erode their attractiveness as investment destinations, particularly for labor-intensive industries,” it added.

The economic managers recommended, instead to strengthen the tripartite mechanism for regional minimum wage setting that takes into account the economic situation of the region.