THE labor market is a unique one, as the main product being sold, i.e. labor services, cannot be delinked from the one selling it—the human person. This is the reason the market price for the good, the wage is important as this will affect a person’s well-being and overall development. And, when the wage is too low and insufficient to cover the survival costs of a human, the government intervenes in the market by imposing minimum wage laws. The minimum wage has been the subject of numerous debates among economists and policy-makers on whether it has actually benefitted the workers that are typically targeted.
Anti-minimum wage advocates warn that whenever market wages are defied, unemployment may worsen, especially for the unskilled ones. Imposition of minimum wages would render small and medium enterprises to be uncompetitive and may result to closures and shutdowns. In addition, relatively high minimum wages would result to cost-push inflation, as producers pass the cost increases to consumers. The end result would be rigidities in the labor market, which would eventually affect the performance of the goods market, especially in the global economy.
Pro-minimum wage supporters, like trade unions, argue that wages are important determinants of labor productivity. When wages are too meager, the health and nutrition of workers suffer and, thus, their ability to produce goods in an efficient manner. In addition, since workers comprise the majority of consumers in the market, very low wages also imply very weak demand for goods and services in the market economy.
While both sides have valid arguments for and against the minimum wage, a consensus remains to be seen. Now comes the concept of a living wage. A proposed bill by Senator Legarda defines the living wage as “the amount of family income needed to provide for the family’s food and non-food expenditures with sufficient allowance for savings/investments for social security, so as to enable the family to live and maintain a decent standard of human existence beyond mere subsistence level, taking into account all of the family’s physiological, social and other needs.” In other words, the living wage is an ideal target for workers to enjoy a standard of living fit for human beings.
How does the living wage differ from the minimum wage? The minimum wage is mandated by law and, usually, is the subject of formal or informal negotiations among key stakeholders in a political economy process. For example, in the Philippines, the minimum wage in a region is set by a tripartite regional body composed of government, trade union and employer representatives. These key stakeholders try to determine a minimum wage based on the current cost of living, competitiveness of firms, inflation trends, the trajectory of the regional, national and global economies and other relevant economic indicators. However, the final minimum wage rate is actually determined by the current balance of power among the key players, although evidence and expert advice sometimes also sway the final decision on wage levels. The living wage meanwhile is a human development standard or a wage goal for decent living that should be achieved by every worker. It is also based on the actual needs of a human person. Thus, more often than not, the living wage exceeds the minimum wage.
While the living wage is usually seen from a moral and human-rights perspective, there is also an economic rationale for the living wage. Workers must be treated as “human capital”. And, just like with physical capital, you also need investments for human capital. Thus, it is important for government to provide basic-quality education for its citizens so that they will be equipped with skills that are marketable in the labor market. Note that, in a developing country context, government support for education through the public school system may not always be enough. Thus, educational expenditures are still important components of the living wage.
Health and nutrition are the other essential elements for human capital. Healthier workers are definitely more productive. In countries with significant malnourishment, raising workers’ caloric intake raises productivity. Concrete examples include that of South Korea and Great Britain. Over 1962-95, caloric consumption increased by 44 percent in S. Korea, and economic expansion during that time was remarkable. Nobel prize winner and economic historian Robert Fogel, in his research, showed that 30 percent of Great Britain’s growth from 1790-1980 was due to improved nutrition.
Thus, targeting a living wage has been the advocacy of local governments in different areas and regions in the US, UK, Australia and New Zealand and of global trade unions in sectors like the garments industry. The International Labor Organization has also commissioned studies to refine methodologies in the estimation of the living wage. Some companies have also become interested in the concept because they saw this as fully aligned with their promotion of corporate social responsibility. Given the Philippine government’s thrust of inclusive growth, maybe it is time for various stakeholders to revisit the Filipino living wage as a real target for our workers in the production and services sectors.
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Fernando T. Aldaba is Dean of the School of Social Sciences and Professor of Economics, Ateneo de Manila University, and a Senior Fellow of Eagle Watch, the university’s macroeconomic and forecasting unit.