Distorting the wage-setting process

The recent decision of the Department of Labor and Employment (DOLE) to unilaterally raise the current daily minimum wage by P85, to be implemented in two tranches of P60 initially this year and then another P25 next year through Wage Order NCR-27, has politicized the wage-setting process and is distorting the tripartite wage process.

This was the message of Employers Confederation of the Philippines (ECOP) director general Jose Roland Moya at the start of the week during a gathering of the Monday Circle Group at the Westin Manila in Pasig.

Moya explained that the ECOP is basically a business organization that is distinct and separate from the Philippine Chamber of Commerce and Industry or PCCI. ECOP is the counterpart organization of the Trade Union Congress of the Philippines (TUCP), which represents the labor sector organizations.

ECOP, Moya added, is the representative of employers or business on labor and social policy issues. Its mandate compared to the PCCI is more specialized. It deals extensively with the DOLE.

ECOP essentially deals with wage issues, with strikes, with collective bargaining, with skills development and employment. It also deals with industrial relations and anything and everything about the workplace, although in recent years there have been overlaps in the mandates of ECOP and the PCCI. It cooperates quite extensively with the PCCI and with other business organizations.

Moya clarified that “the issue before us is not whether Filipino workers deserve higher wages. Yes, they do. The more difficult question is how we raise wages in a manner that is sustainable, preserves employment, protects wage structures and strengthens rather than weakens the competitiveness of our enterprises.”

DOLE’s Wage Order NCR-27 was issued on June 23 this year and was approved by the National Wages and Productivity Commission on June 25, and published on July 9. It took effect on July 25.

For the non-agricultural sector, the minimum wage increased from P695 to P755 upon effectivity supposedly on July 25, with another P25 increase to P780 beginning Jan. 20, 2027.

For the agriculture sector, which is very minimal in the National Capital Region, the minimum wage increased from P658 to P718, followed by another P25, raising it to P743. Taken together, the NCR minimum wage has increased by P210.

Moya pointed out that in 2023, the order covered minimum wage earners in the private sector in the NCR. Subject to its stated exclusions, including the qualified Barangay Microbusiness Enterprises, it also provides exemption mechanisms for certain small retail and service establishments. These are the retail and service establishments with not more than 10 workers, and establishments affected by calamities.

However, Moya said, “the approval of Wage Order NCR-27 was not unanimous. I and my other employer colleagues dissented from the majority decision. The vote was five to two in favor of the new wage order. The three representatives of government - DOLE, DepDev and DTI, and two other labor representatives banded together.”

Moya revealed that “my dissenting opinion was not against improving workers’ incomes. I believe, however, that a more realistic adjustment of anywhere between P60 and P65, given ideally in two tranches, would have been more consistent with the economic conditions and the indicators presented to us during that time when the consultation, the public hearing and the deliberations were conducted, and with the high end of the simulations.”

He argued, “First, the economic environment, inflation during that time was already showing signs of normalizing. I think during that time from March - the Middle East crisis was at its height, but when the deliberation, the public consultation was taking place, there was already some amount of minimization of the conflict. I was concerned that a substantial wage increase at that point could create additional cost pressures that would eventually be reflected in the prices of goods and services.”

Second, he said, “I took into consideration the capacity of small and medium enterprises, which may not be able or which would have difficulty absorbing the increase. I should know, more than 98 percent of local enterprises are micro-small and medium enterprises, many of which have limited financial capacity to absorb abrupt increases in labor costs. This is particularly difficult for sectors already dealing with high fuel and operating costs and subdued demand.”

Third, he explained, “the potential impact on employment. Businesses facing significantly higher labor costs may have to reduce work hours, slow down hiring, restructure operations or in some cases undertake retrenchment or redundancy programs.”

Fourth, he continued, “the impact on the informal sector. Workers in the informal economy do not directly benefit from a mandated wage increase. But they can still be affected by the resulting increase in prices of commodities. At the same time, excessive labor costs may encourage struggling formal businesses to move from the formal into the informal economy.”

Fifth, he explained, “a substantial increase in the minimum wage does not start with minimum wage earners. It compresses the wage differentials between minimum wage workers and those who earn more because of their skills, experience, responsibilities and length of service. This is what we call wage distortion.”

As an example, he said, a worker earning P695 and another earning P805. Originally they may have had a wage differential of P110, but after a P60 increase, the lower wage becomes P755, reducing the differential to only P50 from P110, or a contraction of more than 54 percent. Correcting that compression can create additional costs for enterprises, because enterprises will be forced to increase the gap.”

Another point Moya warned about is that “the real cost of a wage increase is not the increase in wage alone. It is the increase in total employment cost. When the basic wage increases, the payroll impact may also extend to statutory contributions such as SSS, PhilHealth, as well as employer contributions, depending on the applicable contribution basis and ceilings. Thus, an P85 per day increase is not simply P85 per day from the employer’s perspective. It can have a cascading effect on statutory contributions.”