[Blog] Why Higher Wages Make Economic Sense -politicsforbreakfast.blogspot.com

Why Higher Wages Make Economic Sense
MAY 15, 2012

Last May 1, the usual arguments of the business sector were unleashed with its central theme: No, business cannot afford wage hike. Beset with high cost and poor business climate, business simply cannot survive added cost of labor. How do we attract investments if we increase wages? Look at China and Vietnam. Didn’t they have a cheap labor policy? Aren’t they getting much more investments than us due to lower minimum wages?

As if the anti-wage-hike position isn’t entrenched enough, an army of economists follows with a recital of the dogma of “labor flexibility”. They say, wage level should be equal to the so-called “marginal productivity of labor” – which is economese for whatever the employer wants to pay them. Labor is supposedly not exempt from the law of supply and demand. Raising minimum wage will only increase unemployment, as it supposedly disallows all voluntary labor wage contracts that pay below the minimum wage. It will also introduce inefficiency in the labor markets, now faced with a “deadweight loss” due to the intervention of the government who will always fail to set prices right.

But why, if they are right, aren’t we attracting investments still? What explains Philippine firms’ low level of competitiveness? Why does unemployment remain high? The response has always been, never mind the workers, that it is not enough. Lower wages a bit more, then we’ll get the investments that would have gone to China. Lax regulations a bit more, and we’ll have more productive factories and viable businesses. Dismantle a little bit more unions, and businesses will be more efficient and will eventually increase their wages in the long-run.

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