Calamitous

This is how calamity happens: a wrong-headed and discredited economic idea becomes profitable to enact.

Congress legislated wage increases in the early 90s despite strong objections from business groups and economic experts. The politicians promised this was the last time such a calamity will be inflicted by law. Instead of legislating wages, the matter of adjusting pay would be left to tripartite regional wage boards.

The worst outcomes happened because Congress decided to legislate wages then. Small and medium businesses that employed over 90 percent of our workforce suffered. Workers companies could not afford to retain were laid off. Unemployment rose. Inflation spiraled. Poverty deepened.

Today our politicians are threatening to inflict the same calamity all over again. Remember the classic definition of insanity: doing the same thing again and again, expecting different outcomes.

An insane Senate passed a bill raising the minimum wage by P100 across all the regions and regardless of industry. This week, an insane House of Representatives, trying to put one over their colleagues in the Upper Chamber, passed on third reading a bill raising minimum wages by P200.

Last month, our economy managed to bring down the inflation rate to 1.3 percent, owing to lower food prices and reduced tariffs on food imports. But unemployment edged higher.

Our economy continues to labor with a missing middle. Small enterprises are struggling to survive. There are hardly any thriving downstream industries. Our value chain is broken. Legislated wage increases will break the chain all the more.

We have difficulty attracting investments into our economy. There are many reasons for this: corruption and unpredictable policies among them. A major reason is that our labor is costly.

Labor costs are a function of productivity. Our productivity is low even if we feel our wages are miserable. Therefore, comparatively, our labor is expensive.

To raise productivity, we need more capital intensive production. Productivity is not a function of working more or working less. It is the outcome of mechanization. Mechanization requires continuous skills improvement and a lot more capital inputs.

Right now, jobs are threatened by the increasing use of artificial intelligence (AI). Our business processing enterprises are in most imminent danger from the increasing use of AI. Legislated wage increases will hasten the process of disemployment.

Legislated wage increases are futile. The inflation surge that follows it erases whatever might seem to be gains in purchasing power. Should the inflation rate surge, our workers will receive more but will be forced to consume less.

Costly wages will be a disincentive to the capital we need to raise productivity in our economy. This will lead to long-term stagnation of our economic production. We will never be able to be part of the strategic value-chains that power global economic expansion.

Legislated wage increases is an opiate peddled by the labor aristocracy. It will bring momentary relief to unionized labor in the large industries. But it will erase employment in small enterprises and obliterate the informal sector that allows millions of Filipinos to keep their heads above water.

Legislated wage increases guarantee that we will never have full employment. The economic losses will be borne by the most vulnerable.

There is a reason we are eating Vietnam’s dust. This rapidly rising Asian tiger economy is propelled by enlightened policy-making based on sound economic principles. Our economy is constantly derailed by politicized policy-making impervious to economic sanity.

Remember that time when our trade unions were strong and mounted politically inspired general strikes? That period encouraged our labor-intensive industries to flee to saner economies in the neighborhood.

Vietnam, in theory, is a workers’ state (like China). Therefore, its policymaking is not dictated by powerful trade union lobbies that seek to buy popularity by peddling wrong policies. Their political leaders gain legitimacy by planning on a long horizon and providing a strong foundation for sustained growth. Our political leaders craft policy on the basis of what is politically convenient at the moment. Transactional policymaking never produced miracle economies.

Unfortunately, in our case, workers in small enterprises and the informal sector do not have the capacity to mount large demonstrations to pressure policymakers. They are powerless in the scheme of things. They are the first to suffer disemployment.

There is a reason Congress revives interest in the calamitous business of legislating wages. The institution has lost much credibility. Fixing wages by state fiat could buy them the popularity they crave for. They are approaching our fragile economic growth with a sledgehammer.

All the major business groups and respected economic think tanks have spoken as one voice condemning the plan to legislate wages. But the Senate and House versions will be reconciled at the bicameral committee level – a secretive conclave that has proven immune to economic rationality.

If they push on with the projected legislated wage increase, the only way to spare our economy from calamitous policymaking is for the President to veto the measure and uphold the regional wage boards. But there are enough reasons to not be hopeful BBM will muster the vision and the courage to save our economy from certain calamity. He craves for popularity himself and will be receptive to populist grandstanding.

His father maintained his political hold by buying popularity through immense subsidies for power, fuel and water – leading to a debt crisis. Maybe the son has learned respect for policy sensibility.