Living Wage

This is a situation which faces so many workers especially in developing countries such as ours. Workers are often subjected to grave economic injustice because they are forced to accept what is available. Companies lack social responsibility and offer “leave-it-or-take-it” jobs. Big companies in the Philippines take advantage of contractual employees paying them less than minimum wages while the poor workers have no choice to accept because there are always others who would gladly take it. This is a sad situation considering that big companies should be the ones who are powerful enough to improve this situation. The economic laws of supply and demand are very much applied to jobs. Today there is a very high demand for jobs as there are so many unemployed people while there is a scarcity in the availability of jobs. As a result, wages are very low.

However, discussing about the just wage catechism of the Church telling us about it being the legitimate fruit of labor is one thing. But paying a just wage and still staying in business is a more difficult matter for companies.

Especially in emerging economies, low wages certainly has its advantages. Statesmen, politicians and economists have been struggling with issues such as wages. Most businesses and economists see liberal trade, including the rapidly-expanding off-shore assembly industries as a principal engine of rising living standards in developed as well as in developing countries.

But how long will this low-wage advantage last? It would be unreasonable to expect definite answers however we should bring light to some main factors at play which are quantity and quality of labor available to businesses, and trends in productivity and spread of knowledge. Where unskilled labor supplies are scarce, as in the industrial countries, international migration used to play an important role, and still does in some countries; but there are clearly limits to the number of foreign workers which the body politic can accommodate. Trade and foreign direct investment (i.e. off-shoring) are, in a way, substitutes for immigration.

We should note that there is a striking disparity between labor costs across countries. Hourly labor costs for spinning and weaving operators ranged from $27.3 in Switzerland in early 1996, to half a dollar or even less in Indonesia, Sri Lanka, Bangladesh, Pakistan, Kenya and Madagascar. U.S. and U.K. costs are about $12 and German costs $22. These labor costs include not only wages but also social contributions which in some cases, Turkey, Belgium and Colombia, for example, are equal to the wage itself. The scale of wages alone is even wider, ranging from highs of $21 in Switzerland, $15 in Japan and $14 in Germany to about ¢ 30-35 in Pakistan, Madagascar, Kenya, Indonesia and China, a range of 70 to 1 mirroring the 80 to 1 spread of gross national product per capita.

How can labor and businesses in the industrial countries withstand competition from low-labor cost producers? A major reason is that many, perhaps most, of the exports are an integral part of industrial country corporations' strategies, so-called "production-sharing" between industrial and developing countries within vertically-integrated international manufacturing industries. For example, in the mid-1960s semi-conductors, valves, tuners and other components began to be assembled for international electronics firms in Hong Kong, Thailand, Malaysia and Singapore. Wearing apparel and leather goods were assembled in the Dominican Republic, Jamaica and the Philippines for transnational firms. And much of the trade generated by regional agreements such as NAFTA and special European Community tariff schedules consists of production sharing. There are no precise statistics about production-sharing, but in the early 1990s, at least $800 billion out of total world trade in manufactures of about $2.7 trillion (or 30 percent) consisted of some form of global production sharing operations, much of it among industrial countries but also a considerable amount between industrial and developing countries4. Production sharing is one of the main reasons why foreign direct investment has been pouring into East Asia as well as other low-wage areas.

With this background, how long can the rise in emerging market exports last? One way to start is to ask why imports from emerging markets are not even larger. The major reason is that labor is not "cheap" where productivity is very low, and this is, unfortunately, the case in the vast majority of developing countries. Sub-Saharan Africa presents a striking example: even though wages are among the lowest in the world and even though the Lomé agreements allow African exporters virtually free access to the European market, only a single country, Mauritius, has expanded manufactured exports at a rapid rate. Likewise, it has been estimated that Mexican average productivity is about one-fifth that in the United States. Low productivity has to do with levels of training, but also with the broader setting in which manufacturing companies operate: the quantity and quality of the capital stock, in particular energy, transport and telecommunications, the quality and quantity of know-how. Relatively few developing countries offer productivity-enhancing environments. The low wages available in developing countries, such as the Philippines, after adjusting for their productivity, lose their appeal. When investing in developing countries, world-class manufacturers tend to locate their factories in the areas that have the most advanced infrastructure and workers' skills rather than in the areas that offer merely the lowest wages.

The answer to the question on how long the advantage of low wages will last is a very long time, but the benefits of continued free trade and relatively free capital movements to the developing countries as well as to industrial country consumers and most producers outweigh the localized social costs which industrial country governments have to cope with. The vision that industrial countries are increasingly going to be flooded not only with labor intensive goods but, because knowledge is globally transferable, with knowledge-based goods as well fail to convey a full picture. Yes indeed, ships loaded with cheap goods, even knowledge-intensive goods, will cross the ocean from the developing countries, but they will not return empty. Regarding tradable manufactured goods, we are talking about a relatively small and declining portion of the industrial countries' economies. As for services, even with the much vaunted Indian software export development, wages for software designers are still rising in the United States, besides which most services cannot efficiently be traded internationally.

So, if the low-wage advantage will last for a very long time, this is bad news for the individual workers. Countries, like our country, will not exert much effort in order to implement a living wage for the workers since it gives them an advantage. Something must be done in order to achieve what is recommended by Pope John XXIII in his encyclical, Mater et Magistra.

For businesses, giving living wages might not such be a bad idea. Maybe businesses should study these companies and adopt their employment practices. Many economists, businesses and policy makers recognize that higher wages often result in a variety of business benefits. Studies and surveys of businesses describe real business advantages as a result of higher wages. These businesses report that higher base pay and benefits attract more qualified employees, and that those employees have high morale, are more productive, and require less supervision. Businesses also report that higher wages reduce employee turnover and absenteeism, leading to lower costs in the recruitment and training of new employees and improvements in the quality of products and services delivered to customers. The cost of employee turnover is no small matter for many businesses. Therefore, having a motivated and stable workforce not only creates a work environment that supports increased productivity, but it reduces the significant expense of recruitment and training. Such business benefits can go a long way toward offsetting higher wage and payroll tax costs associated with paying a living wage.

These observations from businesses are consistent with those of economists who suggest higher direct labor costs may be offset by reduced indirect labor costs and higher productivity. It is a standard economic efficiency argument that as labor becomes more expensive, employers have an incentive to use labor more effectively and thus to improve productivity.

Not only do individual businesses benefit from paying higher wages, but entire local communities, particularly low-income communities, gain when low-wage workers’ wages increase. Low-wage workers are more apt to spend earnings locally, circulating money back into local economies, which has the potential to help rebuild the country’s poorest communities and spur job growth.

Increasing the economic self-sufficiency of workers enhances business productivity and opens new markets, while also reducing poverty, strengthening communities and shrinking the demand for government assistance to low-income families.

Indeed there are companies that give living wages and still succeed. I do not think that such a company exists in the Philippines, but there are several of those in the U.S. and will be discussed.

On of the said companies is United Airlines. United Airlines is the largest majority employee-owned enterprise in the United States. In July of 1994, employees represented by the Air Line Pilots Association (ALPA), the International Association of Machinists (IAM), and non-union employees at United purchased 55 percent the company. What has been the ESOP’s effect to date? The company has not improved its operating performance on the metrics commonly used in the industry to track quality and customer satisfaction. The most recent data show that, out of the ten major U.S. airline companies, United ranks fifth in passengers declined boarding (i.e., those who are bumped due to over-booking), ninth in on-time performance, tenth in baggage mishandled, and sixth in consumer complaints. However, it has improved its profitability, so have its competitors in the industry. One effort to decompose the sources of increased profitability concluded that 90% of the increased profits are attributable to the following: (1) the labor cost reductions provided in the ESOP; (2) the tax benefits of the ESOP; (3) the increased demand for air travel experienced in the industry; and (4) savings and market growth. The company’s stock rose in tandem with the overall rise in the stock market, increasing the value of the shares held by employees or cashed out by employees who left the company during this time period.

Another such company is Xerox. The Xerox Corporation employs approximately 150,000 workers globally and 90,000 in the United States. Within the United States, approximately 4,000 manufacturing employees are unionized, with the vast majority located in Xerox’s main manufacturing center in Webster, New York, a suburb of Rochester. Xerox has a partnership with its own union, the Union of Needletrades, Industrial, and Textile Employees (UNITE). This partnership is perhaps one of the most longstanding and successful labor-management partnerships in the country, as well as one that many researchers have been following since it was initiated. The Xerox-UNITE partnership began in 1980, when the company and union negotiated an agreement that provided for experimentation with employee involvement. At roughly the same time, Xerox implemented a major top-down Leadership through Quality initiative. Over the years, the bottom-up and top-down efforts were effectively integrated and continues to provide a shop-floor training and participative work system at Xerox. From a narrow employee participation process, the labor-management partnership expanded to support development of work teams, special study teams to address outsourcing decisions, self-directed work groups, and joint approaches to new facilities. Five successor collective bargaining agreements have been negotiated since 1980, the most recent for a long-term contract lasting from 1994 to 2001. The Xerox-UNITE partnership represents the most enduring example of the strengths and potential of sustained innovation and adaptation in American labor-management relations. The achievements of the Xerox partnership are the following: It is grounded in a proven, shop-floor employee involvement and teamwork process that has demonstrated its ability to improve quality and productivity. It tackled the tough issues of job security in ways that were viable for the firm and responsive to the deeply felt concerns of employees. It integrated the collective bargaining process into the change effort, using bargaining to join tough issues but also conducting negotiations in a fashion that reinforced the values and substantive objectives of the shop-floor participation and the organizational transformation process. The parties adjusted the terms of their agreement to accommodate the gradual broadening of the employee participation process and changing competitive conditions and firm performance. The process has been supported and reinforced with strong commitment by leadership—both of CEOs and union officials. This top-level commitment is maintained by biannually scheduled “summit” meetings to share information on developments in the company, in the union, and in their relationship. Of equal importance, strong professional leadership in Xerox’s IR department perpetuated the commitment. The partnership was responsive to the economic and strategic needs of the company to improve quality and reduce manufacturing costs by improving productivity and flexibility in its operations.

However, there is still strong opposition to paying living wages. Such opposition must be responded to if we are to see that paying a living wage is not only feasible but also beneficial.

The first opposition is that paying a living wage will cause inflation and inhibit economic growth. Higher wages may actually help firms reduce turnover and fill vacancies, according to some economists, and can also lead to greater worker productivity by improving morale and overall job satisfaction. These benefits generate efficiency gains that could allow firms to absorb the increase in labor costs. The businesses that pay living wages show cost-saving benefits resulting from paying higher wages that not only offset the higher labor costs but, in some cases, actually contribute to increased profitability.

Another opposition is that a living wage policy will chase away existing businesses and deter new investment. For many businesses, their assets have value in a particular location and not outside of it. For example, restaurants, hotels, utilities, construction, universities, and many professional and personal services are very strongly place-bound. If faced with a requirement to increase wages, it is likely that moving out of the city would be a last resort for such location-specific businesses. A further disincentive to moving to a new location is the numerous costs associated with relocation. Some communities are concerned that higher wages may discourage new businesses from opening or expanding. It is true that wage levels are one factor in a business’s decision as to where to locate. And if all else were equal, the wage level might very well be the determining factor. However, all else is never equal. Access to markets and transportation systems, infrastructure, the education and skill level of the available workforce, and overall quality of life all vary city to city and exert influence over location decisions.

Another disconcerting opposition is that the free market should determine wage levels. What is often referred to as free market often is not free at all. Government plays a rule-setting role, seeking to promote market efficiency, while also containing the social costs stemming from a completely unfettered market. For example, the Government tries to manage economic growth and control inflation by manipulating interest rates. Businesses are often beneficiaries of government intervention. National and local governments consistently provide billions of pesos in subsidies, tax breaks, and other forms of corporate welfare to businesses in the name of economic growth. Given the degree to which many businesses already benefit from market interventions, it is inconsistent and even spurious for businesses to selectively argue that the market should be left to its own devices in the case of determining wage levels. Additionally, businesses that pay poverty wages indirectly rely on government assistance programs to make up the difference between these wages and what it costs their employees to live. Without the intervention of government and private charities, paying poverty wages wouldn’t be a sustainable business practice.

Lastly, there is the opposition that companies have the mandate to maximize their shareholders’ profit. There are, however, many ways to profit. While it is true that a company can lower employee wages and possibly increase profitability over the short term, over the longer term, a fairly paid and satisfied employee will save the company money and lead to more sustained growth. Numerous studies have shown that reducing labor costs does not automatically result in reduced overall costs, improved profitability, or increased shareholder value. Meeting the requirements of global competition will necessitate new practices and strategies that include an emphasis on worker satisfaction. Developing new products and new markets, and flexibly responding to shifting market demands requires a satisfied, stable and participatory workforce who have an investment in making a quality product. Paying a living wage can lead to increased profitability by positively affecting worker retention and morale. Companies can also save significant amounts of money on expensive recruitment and training efforts, leading directly to a greater profit margin and happier shareholders. Given a choice of how to please shareholders and maintain profitability over the longer term, why wouldn’t a CEO choose the route that leaves all stakeholders, including the workers, feeling more satisfied?

In summary, we have effectively seen that there are problems in just paying low wages. There are problems for individual workers as well as businesses. In our country today, most businesses opt to pay minimum wages which are extremely below the living wage described in Pope John XXIII’s encyclical, Mater et Magistra. With the discussions on the advantages and disadvantages on paying minimum or living wage, it should be obvious that paying living wage is not only better in terms of business but also in terms of the social benefits it provides. In conclusion, paying a living wage should be adopted by businesses as a part of their employment practices and should be promoted by the government.