Wage Increases, Inflation, and Factory Closures

By BENJIE OLIVEROSANALYSIS
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.