Wage Increases, Inflation, and Factory Closures

Time and again the specter of inflation and factory closures are being raised every time a wage increase is in the offing. And it is terribly insulting to workers that again this is being raised even if the wage and allowance hike being floated for workers in Metro Manila is a mere pittance at P20 per day.

BY BENJIE OLIVEROS
ANALYSIS
Bulatlat
Vol. VIII, No. 15, May 18-24, 2008

Time and again the specter of inflation and factory closures are being raised every time a wage increase is in the offing. And it is terribly insulting to workers that again this is being raised even if the wage and allowance hike being floated for workers in Metro Manila is a mere pittance at P20 ($0.467 at an exchange rate of $1=P42.80) per day.

“The price increase will inevitably trickle through the price chain,” said Frederick Neumann, an economist of HSBC. “It would generate pressure,” said Diwa Guinigundo, deputy governor of the Bangko Sentral ng Pilipinas (BSP or Central Bank of the Philippines). Sergio Ortiz-Luis of the Employers Confederation of the Philippines warned that small and medium enterprises, which constitute 97 percent of companies in the Philippines, would not be able to afford the wage increase; and coupled with skyrocketing prices of fuel and food, “there will be casualties,” Luis said, referring to the possible closures and downsizing that the impeding wage hike would supposedly cause.

There are two usual arguments being put forward by capitalists and economists alike in explaining the supposed effects of wage increases on inflation. First, capitalists would automatically pass on the added costs brought about by wage increases to consumers. Second, wage increases would stoke demand for commodities because of the increased purchasing power of workers.

Before proceeding to debunk these arguments, it needs to be clarified first that the clamor for a wage increase is merely a response to the inflationary effects of spikes in oil and food prices. It is much like the chicken and egg question, which came first? Definitely in this case, it is the increase in prices.

The recent price spikes in oil, rice, and other food products are caused neither by supply or demand shocks, nor by increases in production costs; it is caused mainly by speculation — meaning financial investors are betting that prices of these commodities would increase so they negotiate futures contracts for large purchases causing the volatility of prices in the market.This is self-evident if one is to read carefully the reasons being cited for the volatility in prices of oil products at the New York Mercantile Exchange and ICE Futures and of rice at the Chicago Board of Trade. What is appalling is that prices being used as benchmark are actually contract prices for future deliveries.

So why do we need to control wage increases when it is merely a response to unjustified increases in prices of oil, rice, and other food products? If the Arroyo government is really serious in addressing inflation, then it has to strike at the root causes. It is therefore more logical to control the prices of oil, rice, and food products to protect the people against speculators.

After clarifying this, we could now proceed to cutting down the arguments underpinning the wage-inflation arguments. Labor costs are fundamentally different from fixed costs. Fixed costs, such as expenditures on raw materials, electricity, and fuel are directly passed on to consumers. Likewise, capital expenditures such as purchase of machinery and buildings are also passed on to consumers, albeit gradually. So any increases in the prices of raw materials, fuel, machinery, and the like would immediately reflect on the prices of the end product. But the capitalist does not profit from this; they merely pass on the added costs to the consumer. Thus, the government does not tax the capitalist for this. This is the rationale for input VAT — the VAT paid by the capitalist in the purchase of raw materials, fuel, etc. – which can be deducted by the capitalist from the tax s/he has to pay for the sale of the end product.

Labor costs are a different matter because of two things. First, it is labor that adds value to a commodity: the value created by the production of the end product. When you buy a car, you do not only pay for the costs of all the components put into it but also for the value added by the labor of assembling it and making it work. This is what is being taxed by the government with the VAT for the sale of the end product, which the capitalist, in turn, passes on to the consumer. The capitalist does not pay the worker for the whole value added by the latter’s labor because that is the source of capitalist profit. The capitalist merely pays the worker enough to be able to reproduce his/her labor; that is why it is called a living wage.

Second, before a capitalist hires an additional worker, s/he makes sure that the increase in production, sales, and, of course, profit that the expansion in workforce would generate would more than compensate for the increase in labor costs that s/he would have to pay. In fact, the only motive for the capitalist to expand its operations and its workforce is the projection that it would double or triple his/her profits.

Any increase in labor costs brought about by wage increases, therefore, is not and should not be passed on to consumers. But any increase in labor costs brought about by wage increases would cut on the capitalist’s profit. Thus, wage increases do not cause prices to rise; it causes a reduction in profits.

The argument that wage increases would increase the purchasing power of workers and employees, and stoke the demand for commodities is even weaker. Even with a P125 ($2.92) across-the-board increase, the wages and salaries of workers and employees would still not equal the living wage. According to the NWPC, the family living wage as of March 2008 is already at P770 ($17.99). The highest minimum wage is at P362 ($8.457). With a P125 increase, it would only amount to P485 ($11.33) per day. How could that affect the demand for and supply of commodities?

With regards the doomsday scenario that wage increases would result in closures, well, is it not already a reality now, even without wage increases, because of the deteriorating state of the economy? To prevent the closures of factories, the solution lies not in limiting wage increases but in providing protection and support to small and medium enterprises, which are mainly owned by Filipino capitalists. The problem is that the government favors foreign corporations with its policy of liberalizing imports and foreign investors, which receive tax holidays, import privileges, profit repatriation guarantees, and other incentives, to the detriment of Filipino-owned small and medium enterprises, which lose out in the competition with the foreign giants.

The decision whether to grant wage increases or not is a choice between the survival of workers and protecting profits. And the impending P20 ($0.467) pay hike in Metro Manila — which is usually the highest being given by the different regional wage boards – -is too little to make an impact on the lives of workers and employees. It is a token that seeks to appease workers with a pittance while protecting corporate profits. (Bulatlat.com)