The Impact of Legal

Minimum Wages on
Employment, Income,
and Poverty Incidence in
the Philippines

Calica, Audrey
Dizon, Clarisse
Flores, John Rander
Sangalang, Franchesca
Introduction
Poor households do not have much valuable physical assets
to depend on.
Reliance on the labor of their household members and their
productivity in employment and other income-generating
activities (plus other sources).
To get themselves out of poverty, they need to increase their
work hours and productivity.
The problem, however, is that the Philippine labor population
is not fully employed.
Philippine Labor
Context
 Comparison of
Minimum Wages
Across Countries
 How effective in reality is
minimum wage legislation as
a tool for improving the
standard of living of the
poor and other
disadvantaged population
groups?
The Minimum Wage
Law and its Context
 Labor Code of the
Philippines (LCP) 1974

hiring and termination of private employees

the conditions of work
employee benefits
guidelines in the organization and membership in
labor unions as well as in collective bargaining
Three binding constraints
that employers face:
1 Article 234, 253A, 260 and 264
which regulate labor relations and protect
permanent and unionized workers whose services
cannot be terminated except for just and
authorized cause

2 Article 106
put restrictions to subcontracting arrangements)
Article 279
which mandates that an employer should offer
permanent employment to a worker after a
probationary employment period of six months

3 Article 127
establishes the minimum wage law
 Minimum wage
regulation
(1950s)
1 2 3
Only one minimum wage Tripartite meetings Bilateral monopoly
set by Congress for the bargaining process.
entire country regardless of
regional and industrial
differences
Congress enacted Republic Act
(RA) 6727
- Congress’ power to set minimum
wages

Regional Tripartite Wages and

Productivity Boards (RTWPBs)
- Mandated to prescribe minimum
wage rates for their respective
regions while taking into account
their regional conditions
Decentralized wage
Setting
 More efficient approach
for several reasons
allows for minimum wages to be better aligned with local
preferences and labor market conditions, which differ by
regions.
There were over 200 legal minimum wage (depending on the
type of industry and the size of firm
Enterprises with assets of less than PHP 3.0 million are
exempted from LMW
In consideration of distressed enterprises, they can ask the
Secretary of Labor and Employment (DOLE) for a temporary
minimum wage waiver.
Current Minimum Wages in
the Philippines (as of March
2016)
To what extent is the minimum wage
legislation being followed?

82 Percent However, critics think that the

real compliance rate is much
less than this figure.
CONFLICTING
HYPOTHESES ABOUT
THE LMW EFFECTS
 Increasing the Legal
Minimum Wage (LMW) WILL
COMMON SENSE ONLY increase the workers’
BELIEF income but will NOT AFFECT
the employment rate
 In Microeconomics, the Equilibrium (RIGHT)
price in a competitive labor market is set by
TEXTBOOK both the WORKERS and the EMPLOYERS, not
ANALYSIS by the government.

At the profit-maximizing condition of

marginal revenue = marginal cost, FIRMS
offer wages EQUAL to the MARGINAL
PRODUCTIVITY OF LABOR. And it is only FAIR
to do so

The final implication is that an increase in

LMW will reduce a firm’s level of
employment
 Because LMW is COSTLY,
the STANDARDS FOR
HIRING will be high, taking
EXTRA away employment
IMPACT opportunities for workers
with lower credentials and
human capital.
 The labor market is NOT PERFECTLY
COMPETITIVE. Firms can set their wages.

ALTERNATIVE Higher wages then, can make MORE

PRODUCTIVE workers.

VIEW “In a situation where the firm has control of its

workers’ wage rate, it earns excess profit over
what it would have realized, if the firms were
in a perfectly competitive market.”

“Cleansing Effect” – Make Firms Be

Better
Breaking the
Protectionist
Debate:
#LetTheDataSpeak!
EMPIRICAL
EVIDENCE ON
LMW IMPACT
 The theoretical impact of LMW on employment
can be:

positive, negative,
ambiguous or insignificant
 Negative Effects
I. Studies that show increase in unemployment as result:

1. ) Brown, Charles, Curtis Gilroy, and
Andrew Kohen. 1983. "The Effect of
the Minimum Wage on
Employment and Unemployment."
Journal of Human Resources. 18 (1):
3-31.
Case in the US
Brown, Gilroy, and Kohen
(1983) found that a 10%
increase in the minimum
wage reduced teenage
employment by 1-3%.
2.) Castillo-Freeman, A., & Freeman,
R. (1992). When the minimum wage
really bites: The effect of the U.S.-
level minimum on Puerto Rico.
Chicago: University of Chicago Press
for NBER.
Castillo-Freeman and
Freeman (1992) observed
large reductions in
employment in very small
industries in Puerto Rico.
A 10% increase in minimum
wages will reduce only 1% of
employment.
3.) Gindling, T. H., & Terrell, K. (2007).
Minimum wages and the welfare of
workers in Honduras. IZA Discussion
Paper No. 2892.
Gindling & Terrell (2007)
found negative impacts of
minimum wages on
employment in Honduras.
A 10% increase in minimum
wages reduces employment
by 4.6%.
 Negative Effects
I. Studies that show increase in unemployment as result:
4) Canales, K.L. S. “The effects of a minimum wage on
employment outcomes: an application of regression
discontinuity design,” The Philippine Review of
Economics, December 2014.
Philippines
Hours of work significantly declined, and the
probability of gaining/retaining employment
fell by about 8% to 22%, following an increase in
LMW (Canales 2014).
Inconsistent with the predictions of models
where firms have control over their workers’
wage rates.
Conclusion: the Philippine labor market as a
whole is better described as competitive rather
than monopsonistic.
Standard textbook analysis:
Predicts that under a perfectly competitive market,
an increase in LMW will reduce a firm’s level of
employment.
Alternative View:
In a situation where the firm has control of its
workers’ wage rate, it earns excess profit over what
it would have realized, if the firms were in a
perfectly competitive market.
LMW is set at a level LMW0 where the employer is
compelled to pay its workers a higher wage rate
equal to the amount that would have emerged in a
perfectly competitive market (a firm is a price
taker).
 Negative Effects
II. Studies with findings that support the view of traditional analysis that a higher LMW for a profit
maximizing firm would induce dis-employment effects that are discriminatory against workers with
weaker credentials and lower human capital:

5.) Montenegro, C., & Pages, C. (2004). Who benefits 6.) Sugiyarto, G. & Endriga, B. (2008). "Do Minimum
from labor market regulations? Chile, 1968–1988. In J. Wages Reduce Employment and Training?" ADB ERD
Heckman & C. Pages (Eds.), Law and employment: Working Paper Series No. 113. Asian Development
Lessons from Latin America and the Caribbean. NBER. Bank.

Montenegro and Pages (2004) in Chile also
found detrimental effects of minimum wages
Available employment are shifted from young
and unskilled workers to older and female
workers.
Sugiyarto and Endriga (2008) found that
doubling of minimum wage in Indonesia could
decrease the employment of unskilled workers
by 2%.
It would also decrease the provision of in-
house training to unskilled workers by 34-39%.
 Negative Effects
II. Studies with findings that support the view of traditional analysis that a higher LMW for a profit maximizing firm
would induce dis-employment effects that are discriminatory against workers with weaker credentials and lower
human capital:

7.) Lanzona Jr., L. A., “A Review of Labor Laws and its

Effects on the Philippine Economy,“ Standard textbook analysis:
That is, firms would first lay off workers with no work
Lanzona (2014) showed a “significant” negative experience, low education, low training and other
impact of LMW on labor force participation by characteristics associated with low human capital.
all individuals, and notably among the young,

inexperienced, less educated, and women.
An increase in LMW of 10% would lead to
declines in LFPR (negative elasticities) by
-6.36% (for all workers), by -5.97% & -3.64%
(among teenagers & young adults relative to 50
Moreover, it can be argued that high minimum wages
in conjunction with other restrictive laws such as the
6-month regularization rule could result in
discouraging firms from investing in on-the-job
training.

y/o and over), & by -2.36%(no schooling As a result, the disadvantaged group experience
relative to college educated). inadequate skills formation and high unemployment
rate.
Negative Effects
III. Study that shows increase in poverty incidence as result:

8.) Paqueo,V. B. et al. “Labor Policy Analysis for Jobs Expansion and Development,” in 2014
PIDS Economic Policy Monitor, Philippine Institute for Development Studies.

Average real income of households would have grown faster by about 20% and
household poverty would have been lower if the LMW had increased more slowly
over time (Paqueo, Orbeta, Lanzona and Dulay 2014).
Furthermore, the study finds that a faster rise in LMW significantly increases
poverty incidence by 1.7 to 3.0 percentage points.
 Negative Effects
IV. Studies that show negative effects on employment in developing countries as result:

9.) Several studies in South America and one in Indonesia

LMW has negative effects on employment in developing countries.

10.) Lanzona Jr., L. A., “A Review of Labor Laws and its Effects on the Philippine Economy,“
Canales (2014) reported that the LMW employment effects are generally negative in developing
countries.
11.) Lanzona Jr., L. A., “A Review of Labor Laws
and its Effects on the Philippine Economy,“
Negative
Significant adverse impact on
Effects
employment by smaller firms, those with
average assets below PHP 1.1 Billion
V. Literature that show
(Lanzona 2014). effects on employment is
In contrast, larger companies (asset size
above PHP 1.1 Billion) showed much
dependent on firm size as
smaller negative, and even some result
positive, elasticities (Lanzona 2014).
 Positive Effects
Study that shows positive elasticity, increase in employment, as result:

Some authors find positive estimates of employment elasticity with respect to minimum wages. In
particular, a 10% increase in the minimum wage increased employment by around

3.5% (Card, 1992) 7.3% (Card & Krueger,

1994) Even up to 17-26.5%
(Katz and Krueger, 1992)
12.) Card, David. 1992. "Do 13.) Card, David and Alan B.
Minimum Wages Reduce Krueger. 1994. "Minimum Wages 14.) Katz, Lawrence F. and Alan
Employment? A Case Study of and Employment: A Case Study B. Krueger. 1992. "The Effect of
California, 1987-89." Industrial of the Fast-Food Industry in New the Minimum Wage on the Fast-
and Labor Relations Review. Jersey and Pennsylvania." Food Industry." Industrial and
46 (1): 38-54. American Economic Review. 84 Labor Relations Review. 46 (1):
(4): 772-793 6-21.
Ambiguous 15.) World Bank, Philippine Development Report: Creating More and Better
Jobs, draft, 2013
Effects
International studies reviewed by the World Bank (2013)
Studies that show Impact of LMW on employment is mixed.
ambiguous effects
as result:

16.) Brown, Charles. 1999. "Minimum Wages, Employment, and the

Distribution of Income." in Orley Ashenfelter and David Card (eds.).
Handbook of Labor Economics. Vol. 3B. Amsterdam: Elsevier. 2101-2163.

United States
Minimum wage effect was unsure.
CONCLUSION
 1st POINT
LMW Theories say that it can be
positive, negative or no effect,
depending our assumptions and the
context in consideration.

One little issue today can turn into several major home problems tomorrow.
2nd POINT
Contrary to the findings in 1st world
countries, increases in LMWs have had
statistically and quantitatively significant
negative impact on employment and hours
of work.

One little issue today can turn into several major home problems tomorrow.
 3rd POINT
“A lesson learned here is the danger of basing
policy decisions on empirical results drawn
from foreign experience without validating
their applicability to local conditions”

One little issue today can turn into several major home problems tomorrow.
4th POINT
On a good side, at least the
government tried to decentralize the
effects of LMW by setting it regionally.

One little issue today can turn into several major home problems tomorrow.
Recommendation:
Reduce, if not completely reverse, the
discriminatory effects of LMWs to
promote greater inclusiveness.
Further Issues
6-month Regularization law and
Labor Contractualization
Thank you for
listening!