Republic of the Philippines

BATANGAS STATE UNIVERSITY

Batangas City

ACCOUNTANCY AND MANAGEMENT ACCOUNTING DEPARTMENT

“Is/Should Policymakers Try to Stabilize the Economy?”

Submitted by:

Arellano, Aaron Justin P.

Babadilla, Kenneth M.

Santos, Jerome A.

BSA-1208

Submitted to:

Mr. Inesio Sadiangcolor

 INTRODUCTION

A minimum wage is the lowest wage per hour that a worker may be paid, as mandated by federal

law. It is a legally mandated price floor on hourly wages, below which non-exempt workers may not be

offered or accept a job. The minimum wage is a legally mandated price floor on hourly wages, below

which non-exempt workers may not be offered or accept a job. Individual states, cities, and localities may

pass different minimum wage requirements. Minimum wage laws set forth the lowest hourly wage rate an

employer may pay employees to perform work. Although minimum wage laws are fairly comprehensive

in their coverage, most provide exemptions and/or limitations to their applicability based on factors such

as an employee’s age, an employer’s size, the type of industry, whether an employee receives tips, the

type of work performed by the employee, etc. Additionally, minimum wage laws apply regardless of

whether an employer pays an employee by the hour, by salary, by piece, by commission, etc., unless an

exception to the minimum wage law applies.

In accordance with International Labour Organization (ILO), Minimum wages have been defined

as “the minimum amount of remuneration that an employer is required to pay wage earners for the work

performed during a given period, which cannot be reduced by collective agreement or an individual

contract”. This definition refers to the binding nature of minimum wages, regardless of the method of

fixing them. Minimum wages can be set by statute, decision of a competent authority, a wage board, a

wage council, or by industrial or labour courts or tribunals. Minimum wages can also be set by giving the

force of law to provisions of collective agreements. Minimum wage laws vary between the states. Many

states have either not passed any minimum wage laws or have simply adopted the federal minimum wage

laws set forth in the Fair Labor Standards Act (FLSA). Other states have passed their own minimum wage

rates, many of which are accompanied by their own complex sets of rules and regulations based on State

Minimum Wage and Overtime Summaries.

These laws specify the minimum amount that employers may pay their employees for doing a

specified type of work. The first minimum-wage laws in the United States were passed by state
legislatures in the mid-nineteenth century and applied only to women and children. For example, in 1842

Connecticut passed a wage and hour law for children. As mentioned in the article “Minimum-Wage

Legislation”, the concept of minimum-wage legislation gained popularity during the first two decades of

the twentieth century, often referred to as the Progressive Era. In general, people who considered

themselves progressives’ advocated using governmental authority to limit some of the negative effects of

rapid industrialization and urbanization brought about by the growth of large-scale corporate capitalism.

According to Daniel Liberto (2019), minimum wage laws were first introduced in Australia and New

Zealand in an attempt to raise the income of unskilled workers. Nowadays, most modern developed

economies, as well as many underdeveloped economies, enforce a national minimum wage. Exceptions

include Sweden, Denmark, Norway, Switzerland, and Singapore.

Minimum wage rates are set at a regional level by Regional Tripartite Wages and Productivity

Boards. Each Regional Board is composed of the Regional Director of the Department of Labor and

Employment as chairman, the Regional Directors of the National Economic and Development Authority

and the Department of Trade and Industry as vice chairmen and 2 members each from workers’ and

employers’ organizations. The employee and employer representatives are appointed by the President of

the Philippines, upon the recommendation of the Secretary, Ministry of Labour and Employment, made

on the basis of the list of nominees submitted by the workers’ and employers’ associations respectively.

Wages must be paid at least once a month and can also be paid at least once every two weeks or twice a

month at intervals not exceeding sixteen days. If on account of force majeure or circumstances beyond the

employer’s control, payment of wages on or within the time prescribed cannot be made, the employer

must pay the wages immediately after such force majeure or circumstances have ceased. The payment of

wages of employees engaged to perform a task which cannot be completed in two weeks in the absence of

a collective bargaining agreement or arbitration award, must be paid at intervals not exceeding sixteen

days, in proportion to the amount of work completed and final settlement upon completion of the work.

As a general rule, wages are required to be paid at or near the workplace. Payment in a place other than
the workplace is permissible only under certain circumstances. Wages may be paid through banks within

one kilo meter radius to entities with 25 or more employees, upon written permission of the majority of

the employees. Employers in the private sector are required to pay a 13 th month pay to their rank and file

employees on or before December 24 of every year. All the rank and file employees of the private sector

are entitled to 13th month pay regardless of their position, designation, employment status or wage

payment method provided that they have worked for at least one month during the calendar yearend

keeping with Labour Code, as amended; Presidential Decree No. 851 of Minimum Wage in the

Philippines.

In accordance to the Republic Act No. 602 section 3 commonly known as the Minimum Wage

Law “every employer shall pay to each of his employees who is employed by an enterprise other than in

agriculture wages at the rate of not less than -(1) Four pesos a day on the effective date of this Act and

thereafter, for employees of an establishment located in Manila or its environs;(2) Three pesos a day on

the effective date of this Act and for one year after the effective date, and thereafter P4 a day, for

employees of establishments located outside of Manila or its environs; Provided, That this Act shall not

apply to any retail or service enterprise that regularly employs not more than five employees”. “Every

employer who operates a farm enterprise comprising more than 12 hectares shall pay to each of his

employees, who is engaged in agriculture, wages at the rate of not less than -(1) On the effective date of

this Act and for one year thereafter, P1.75 a day, and no allowances for board and lodging shall reduce

this wage below P1.50 in cash during that year;(2) One year after the effective date of this Act, P2 a day,

and no allowances for board and lodging shall reduce this wage below P1.75 in cash; and(3) One year

thereafter, P2.50 a day and no allowances for board and lodging shall reduce this wage below P2.25 in

cash.

In 2012, the Department of Labor and Employment (DOLE), through the National Wages and

Productivity Commission (NWPC), implemented the two-tiered wage system (2TWS). The two-tiered

wage, as a policy reform measure, is aimed at minimizing the unintended outcomes of mandated
minimum wage, improving the coverage of the vulnerable sectors, and promoting productivity

improvement and gain-sharing. The two-tiered wage system is a reform that maintains the mandatory

minimum wage (under R.A. 6727 or the Wage Rationalization Act) as the first tier; complemented by a

voluntary productivity-based pay scheme as the second tier. Minimum wage rates are determined by

factors such as poverty threshold, prevailing wage rates as determined by the Labor Force Survey, and

socio-economic indicators (i.e. inflation, employment figures, Gross Regional Domestic Product, among

others), which insures better worker’s protection. Over and above minimum wage is the voluntary

productivity-based pay, which encourages workers and enterprises to become more competitive and

productive by rewarding employees supplementary pay based on the quality of their performance. There

are four factors that influence the fixing of minimum wage, namely: needs of workers and their families,

capacity to pay, comparable wages and incomes, requirements of economic and social development
 ISSUES AND RESEARCH QUESTIONS

This study aims to provide answers to the following issues and research questions.

1. What are the positive effects of minimum wage law to labour productivity?

2. Does minimum wage law reduces poverty?

3. How does minimum wage law affects the economy of a country?

4. What are the positive effects of minimum wage law to employment?

5. How does minimum wage law affect small businesses?

METHOD CONSIDERATIONS

Research Design

The entire study will use the descriptive method of quantitative research approach.

The descriptive research design according to McCombes (2020), aims to accurately and

systematically describe a population, situation or phenomenon. It can

answer what, when, where, when and how questions, but not why questions. To determine cause and

effect, experimental research is required. In addition, McCombes (2020) added that descriptive research

can used to describe wide variety of quantitative and qualitative methods to investigate one or more

variables. Unlike in experimental research, the researcher does not control or manipulate any of the

variables, but only observes and measures them. This design helps to provide accurate and reliable

information to the researcher.

The study will use the qualitative research approach. Bhat (2000) explain that the qualitative

research is defined as a market research method that focuses on obtaining data through open-ended and

conversational communication. Therefore, the qualitative research methods allow for in-depth and further

probing and questioning of respondents based on their responses, where the interviewer/researcher also
tries to understand their motivation and feelings. Understanding how your audience takes decision can

help derive conclusion in market research.

Sources and Instrumentation of Data Collection

The researchers used secondary data to gathered information. According to Margaret Rouse

(2020), secondary data is used to increase the sampling size of research studies and is also chosen for the

efficiency and speed that comes with using an already existing resource. Secondary data facilitates large

research projects, in which many research groups working in tandem collect secondary data. The main

researcher is then allowed to focus on primary research or particular areas of interest. This division of

labor helps researchers learn more in less time. Internet today is very indeed, it’s such a rich and powerful

source of help, information and expertise. With the use of internet and online sources the researcher

gathered reliable and credible information that the researcher used in their research.
 THEORIES AND ANALYTIC FRAMEWORKS

The Table 1 shows that the Bureau of Labor Statistics further notes that in 2015: “Minimum wage

workers tend to be young. Although workers under age 25 represented only about one-fifth of hourly paid

workers, they made up about half of those paid the federal minimum wage or less. Among employed

teenagers (ages 16 to 19) paid by the hour, about 11 percent earned the minimum wage or less, compared

with about 2 percent of workers age 25 and older.”

Evidence leads us to conclude that moderate increases in the minimum wage are a useful means

of raising wages in the lower part of the wage distribution that has little or no effect on employment and
hours. This is what one seeks in a policy tool, solid benefits with small costs. That said, current research

does not speak to whether the same results would hold for large increases in the minimum wage.

ANALYSIS

Positive effects of minimum wage law to labour productivity

Recent studies have shown that minimum wages not only help to reduce wage dispersion and to

channel productivity gains into higher wages, but they also can contribute to higher labour productivity –

both at the enterprise level and at the aggregate economy-wide level.

At the enterprise level, workers may be motivated to work harder. Various studies have supported

the hypothesis that first by Akerlof in 1982 that employees consistently provide higher effort levels in

response to higher wages, the so-called “efficiency wage” theory. Workers may also stay longer with their

employer, gaining valuable experience and encouraging employers and employee to engage in

productivity-enhancing training. Dube, Lester and Reich (2012) attribute reduced turnover for restaurant

workers in California to the effect of the minimum wage, which reduces wage competition between low-

paying enterprises. When employers can better retain their workforce, workers can learn on the job and be

trained to become more productivity over time.

Researchers have pointed out that productivity increases may be the result of a fall in

employment due to the minimum wage, as enterprises substitute capital for labour and adopt more

capital-intensive production technologies. While this remains a distinct possibility, particularly when the

minimum wage is set too high, other research shows that productivity increases in enterprises were the

result of organisational change, training and efficiency wage responses to increased labour costs from

minimum wages.

At the aggregate level, minimum wages can result in more productive firms replacing least

productive ones – and surviving firms becoming more efficient. These mechanisms can increase overall

economy-wide productivity. In China, for example, it has been observed that higher city-level minimum
wages resulted in lower survival probability of low-productive firms. There was no negative employment

effect, however, because employment and productivity increased in surviving firms. Hence the minimum

wage may have allowed more productive firms to replace the least productive firms, and forced

incumbent firms to strengthen their competitiveness.

Minimum wage law reduces poverty

Raisings the minimum wage in developing countries could increase or decrease poverty,

depending on labor market characteristics. Minimum wages target formal sector workers—a minority in

most developing countries—many of whom do not live in poor households. Whether raising minimum

wages reduces poverty depends not only on whether formal sector workers lose jobs as a result, but also

on whether low-wage workers live in poor households, how widely minimum wages are enforced, how

minimum wages affect informal workers, and whether social safety nets are in place.

If job losses in the formal sector are small, raising the minimum wage is likely to reduce poverty.

If informal sector wages rise when the minimum wage increases, higher minimum wages are likely to

reduce poverty. If the people earning the minimum wage are heads of low-income households, higher

minimum wages are likely to reduce poverty. If low-income workers lose jobs and cannot find jobs

because of a higher minimum wage, social safety nets for low-income households can protect against

increased poverty.

Based on Wendy (2007), raising the minimum wage reduces poverty in most developing

countries. But the impact is modest because the minimum wage applies to only a minority of poor

workers; in particular, it does not cover workers in the large informal sectors. And raising the minimum

wage creates losers as well as winners among poor households—depending on employment effects, the

wage distribution, and effects on the household head—pulling some out of poverty while pushing others

in. Raising the minimum wage could be part of a comprehensive poverty-reduction package but should

not be the only, or even the main, tool to reduce poverty.

 According to the book of Wendy (2007) entitled “Minimum Wages and Social Policy”, a popular

and compelling argument in favor of raising legal minimum wages is that higher minimum wages will

reduce poverty. Quite simply: putting more money into the pockets of low-income workers will allow

them to purchase more of the basic goods and services needed to survive. In theory, if the wage increase

is large enough, poor people’s incomes will rise, lifting them out of poverty. Most empirical studies of the

impact of minimum wages on poverty in developing countries conclude that increases in minimum wages

reduce poverty, on balance, though they find only a modest impact—for two reasons. First, a large share

of workers is not covered by minimum wage legislation. Second, higher minimum wages do not affect all

low-income households the same way: minimum wages pull some households out of poverty, but may

push others into poverty.

Minimum wage law affects the economy of a country

Minimum wage boosts the economy. Raising the minimum wage does not kill jobs. Leading

economists have found that increases in the minimum wage have no discernible effect on employment,

including employment in high-impact sectors like restaurants and retail. Recent experience in cities that

have raised their minimum wages provides further support. San Francisco increased its tipped minimum

wage to $12.25, before tips, and experienced positive job growth in the leisure and hospitality industry the

following year. Raising the minimum wage increases consumer spending and boosts the economy. A

study by Doug Hall and David Cooper estimated that a $2.55 increase in the minimum wage would

increase the earnings of low-wage workers by $40 billion and result in a significant increase in GDP and

employment. A raise in the minimum wage predominantly benefits low-wage workers, precisely those

most likely to put additional income directly back into the economy, kick starting a virtuous cycle of

greater demand for goods and services, job growth, and increased productivity.

Schug (2016) stated that wages could be set by supply and demand. If employers see difficulty

holding onto their staff, then they should simply pay more or have greater benefits, he added. The

interaction between the employer and employee would set that market rate for pay. “Why mess with a
price that’s set by supply and demand?” Schug asked. Other professions compensation based on their

market rates, and the minimum-wage workforce only makes up 3.3 percent of all hourly paid workers,

according to the Bureau of Labor Statistics. Too much effort is spent on discussing the issue of minimum

wage, which impacts only a small group of workers, Schug said. Nevertheless, it looks as though the

minimum wage will remain and continue to rise over time in some capacity. That doesn’t mean there

aren’t flaws with the system. Not all who earn a minimum wage would benefit from increases in the same

ways, so Schug said economists prefer policies that are designed to help the people they’re intended to

benefit. 

Minimum wage will also stimulate consumer spending, help businesses' bottom lines, and grow

the economy. A modest increase would improve worker productivity, and reduce employee turnover and

absenteeism. It would also boost the overall economy by generating increased consumer demand

Positive effects of minimum wage law to employment

Minimum wage increases most directly affect earnings and employment in the formal sector.

Higher minimum wages lead to higher wages for formal sector workers who keep their jobs. Studies for

developing countries suggest that the positive wage effect is strongest for workers earning near the

minimum wage. As a result, increases in the minimum wage tend to compress the wage distribution

(equalize wages) in the formal sector.

Monitoring the employment effects of minimum wages is essential. Employment effects have

long been at the centre of minimum wage research, with much debate over whether and how minimum

wages affect jobs, employee numbers and hours worked. As highlighted by Belman and Wolfson,

“support for the minimum wage is premised on its improving the lives of those most vulnerable in the

labour market. If a minimum wage leads to job loss for many of those same people, serious questions

arise with respect to its relative benefits and costs”.

 Debates on employment effects are also frequently controversial, with different economic

theories leading to different predictions. According to one view, minimum wages increase the cost of

labour above the marginal productivity of low-paid workers and thus prices them out of the market. Other

theories consider that up to a certain level, the cost of minimum wages can be absorbed through a

combination of lower wage increases for more highly paid workers, lower profit margins, higher

productivity, and/or lower employee turnover. Keynesian macroeconomics suggests that employment

may increase if minimum wages lead to higher domestic consumption and aggregate demand.

Neoclassical economic theory predicts that higher minimum wages will lead to lower

employment. This may happen for two reasons: firstly, because minimum wages may force enterprises to

raise the prices of their goods and services, and consumers or international buyers who face higher prices

may therefore cut back on their demand (the so-called “scale effect”). Secondly, when low-wage workers

become more “expensive” due to the minimum wage, firms may decide to replace some of them with

more machines and a few skilled workers to operate these (the “substitution effect”). If these effects are

large, aggregate employment levels of low-wage workers may decline. There is also likely to be a “cross-

industry” effect, as employment is predicted to fall in labour-intensive industries, where the proportion of

low-paid workers is higher and where labour costs represent a high proportion of total production costs

for enterprises. In other industries, employment may remain unchanged or may even increase, as

consumers spend more of their money on goods and services where prices are less affected by minimum

wages.

Macro-economic theories highlight the fact that higher wages not only raise labour costs for

employers, but they also increase consumption demand among the low-paid workers and their families.

Assuming there are no large negative effects on external competitiveness (which might be the case for

very export-oriented economies) or investment, such positive “consumption effects” can lead to increases

in aggregate demand and employment. Macro-economic perspectives show that even if some low-

productivity firms reduce employment or go out of business, this does not necessarily mean that
aggregate employment will be reduced. Employment may expand in other firms and higher wages may

attract more people into the labour market.

Although there are fewer studies in developing countries, similarly mixed findings emerge .1314.

A recent World Bank publication concluded that “although the range of estimates from the literature

varies considerably, the emerging trend in the literature is that the effects of minimum wages on

employment are usually small or insignificant (and in some cases positive).”15 One review of studies in

ten major economies (Brazil, Chile, China, Colombia, India, Indonesia, Mexico, the Russian Federation,

South Africa and Turkey), found small or no impact on employment, except in circumstances where the

minimum wage is set at very high levels.16 A review of experiences in Latin America also concludes that

employment effects of minimum wage increases are varied and depend on the level.

Raising the minimum wage increases worker productivity. Studies by leading economists,

including Nobel laureate George Akerlof of Georgetown University, found that employee morale and

work ethic increase when employees believe they are paid a fair wage. Economists have also linked

higher wages to better physical and mental health and reduced “decision fatigue,” leading to higher

productivity.

Minimum wage law affects businesses

An increase in wages can lead to longer tenured employees, reduced turnover, and significant

productivity improvements. Establishing an exceptional team that is committed to the goals and vision of

a company is an important element for success. Perhaps for this reason, a recent survey found that  47 %

of business owners actually favored an increase in the federal minimum wage.

With increased salaries, however, managers and owners should expect more effort and dedication

from their employees. Timekeeping software and better workforce management are good strategies to

increase worker output and keep your company focused on both short-term and long-term business goals.
Additionally, time and attendance systems or tracking automation can help you validate that your

employees are putting in the extra work needed to make up for increased labor costs. While increases in

minimum wage laws can certainly cause economic stress to businesses, a more efficient workforce

management might actually allow companies to turn extra labor costs into increased productivity and

efficiency leading to better, long-term profit margins. McDonald’s raised its minimum wage to $10 in

2016, and offered tuition help to employees. Workers who stay for a year can also earn up to five days of

paid vacation. Since this was started, McDonald’s workers are more accurate at taking orders, they are

serving customers more quickly, and customers are happier with their service.

Business executives support a higher minimum wage. A survey conducted by Republican pollster

Frank Luntz that was leaked to the Washington Post in April found that 80 percent of business executives

supported increasing the minimum wage. • Small business owners support a higher minimum wage. A

national poll of small business owners conducted by the American Sustainable Business Council found

that 60 percent of small business owners support increasing the federal minimum wage to $12 by 2020

and indexing it to inflation. Businesses are voluntarily raising wages. Hundreds of businesses across the

country have pledged to pay their workers at least $12 an hour by 2020.

Naturally, business leaders hoping to keep their operating costs low are likely to oppose a

minimum wage increase, but Cooper (2015) said this is because they’re not looking at the broader market

picture. With fatter pay-checks, workers have increased purchasing power, thus benefiting businesses.

And with a federal minimum wage increase, it impacts more than just a single business; all other

organizations with similar employee make ups will face similar changes to their payrolls.“Good business

leaders want their employees to have a decent life and want their employees to make enough money to

afford to live,” Cooper said. “They just don’t want to be put at a competitive disadvantage.” If leaders

think more holistically about how a rising minimum wage would affect the labor market and the economy

as a whole, they’re likely to be more supportive of minimum wage increases.