Measuring the impact of wage hikes on employment and inflation: Two new quantitative studies
We hope to contribute to the discourse on the impact of wage increases on employment and on inflation. Kapag ba tumaas ang sweldo ay tataas din ang bilang ng walang trabaho? Tataas din ba ang presyo ng bilihin? Ayon sa aming pag-aaral ay hindi.
The results of our two studies are elaborated below.
Wages and employment
Our model sought to determine whether regions that issued a minimum wage increase experienced any change in employment compared to regions that did not have minimum wage increase. We used a Difference-in-Difference regression model for each pair of consecutive years from 2013 to 2017. In 2018, all regions increased minimum wages so we did not include that year. The models were estimated using firm-level data from the Annual Survey of Philippine Business and Industries from years 2013 to 2017. The dependent variable is natural logarithm of firm level employment. The regressors are:
- a time binary variable that takes a value of 1 for second year and 0 for the first year;
- a treatment binary variable that takes a value of 1 if the firm is in a region where minimum wage increased, and 0 otherwise;
- an interaction of the time and treatment variables;
- other variables that include (a) industry group, (b) an indicator variable for exporters, (c) natural logarithm of real value added, (d) total income of firm, and (e) size of firm.
Table 1 presents the estimation results. We are interested in the interaction of time and treatment variables. The impact of new wage orders on employment is mixed. In 2013-2014, wage increases had positive impact on employment. Meanwhile, in 2015-2016, the impact was negative. In other periods, the impact was insignificant.
This is contrary to other studies, such as Lanzona (2014) and Canales (2014), which show that wage hikes lead to higher unemployment. However, even Lanzona found large firms increased employment after wage hikes. In other countries, some studies show employment increased after wage hikes. Others show unemployment declining.
Our results show that wage increases can have no impact, a positive impact or a negative impact on employment. The literature tells us that a catastrophe is not imminent. Instead, our study concludes that given the right set of policies we can achieve both goals of wage recovery for workers and low unemployment.
Wage and prices
We sought to measure the change in CPI after real wages increases. We used vector autoregression with two variables, quarterly real wages (from Labor Force Survey) and quarterly consumer price index (CPI) (available from PSA) from 2003 to 2020. Both time series are depersonalized. We computed the first difference of the natural logarithms of both variables to obtain stationary variables. The wage is assumed to be exogenous.
The impulse response of CPI to a shock in wages is presented in Figure 1. As shown, the impact of wage increases on inflation is very small, in fact insignificant. The solid blue line is the impulse response of CPI. The gray area is the confidence interval or margin of error. The results imply that wage increases do not cause high inflation. Using a different methodology Cacnio (2017) found that regional wage hikes have small impact on regional prices. In other countries studies find the same small effect and surprisingly in one study in US moderate wage hikes lead to lower prices.
If not wage hikes, then what leads to fluctuations in price levels? German economist Hansjorg Herr (2023) argues that inflationary pressure can stem from either cost-related factors or market demand and supply imbalances.
One example of cost-related sources is energy cost.
Wage increases contribute to elevated unit labor costs for firms. But any inflationary impact of high wage growth can be offset by high productivity.
Conclusion
Our two quantitative studies reveal that moderate wage hikes will not trigger a catastrophe of retrenchments and inflation as raised by some quarters. The possible employment and price impact of the pending bills for a P200 wage hike in the House of Representatives and P100 in the Senate cannot be directly answered by our study. Still, we do have a natural experiment in 1989 when the last legislated wage hike was enacted. The P25 across-the-board salary increase then did not trigger an economic crisis. This is consistent with the findings of our study. The 1989 legislated salary hike amounted to a 40% shock. In comparison, P200 amounts to a 31% wage hike for Metro Manila.
The two pending bills both seek to recover the lost purchasing power of workers due to past inflation. The bills also have laudable provisions that provide for a subsidy for micro and small firms. The informal economy is mainly sustained by the purchasing power of formal workers—sahurang manggagawa ang bumibili sa tindera sa kalsada, suki sa sari-sari store, sumasakay sa tricycle at jeepney. In fact, formal and informal workers live in the same household, so their interests intersect and coincide.
Finally, wage demands are justified by productivity gains. Labor productivity has been increasing since 2001, but real wages remain stagnant. Workers have not shared in the fruits of their labor. It is through the industry of workers that output is produced. When workers do not go to work, economic activities stop. We have seen this during the pandemic. Workers are essential and it is essential we grant them a wage recovery.