ILS Policy Brief Vol. 3 No.

January 2013

POLICY BRIEF
Translating research evidence and advancing new frameworks to inform policy and practice

This brief discusses the current reform of the Department - the Two-Tiered Wage System (TTWS) - in the minimum wage determination system in the country. It highlights the features and policy basis of the TTWS, as well as the issues and challenges in its implementation.

Performance Pay Above the Minimum Wage: Highlights of the Two-Tiered Wage System

What is the issue?

In 2012, the Department of Labor and Employment (DOLE), through the National Wages and Productivity Commission (NWPC), implemented the two-tiered wage system (TTWS). It consists of a mandatory regional floor wage system to protect the vulnerable workers as the first tier and a productivity-based pay system, as the second tier, to guide enterprises in adjusting wages above the floor wage. The TTWS aims to expand the minimum wage coverage to low-paid workers and to promote productivity improvement of workers and enterprises. The TTWS, however, received heavy criticism from certain sectors, highlighting some problem areas that may transpire once the system is fully implemented.

pay. This is of course without undermining the need for a genuine floor wage as a safety net for the workers.

What is System?

the

Two-Tiered

Wage

The TTWS is a reform within the current minimum wage system. It aims to improve the coverage of minimum wages; promote workers and enterprise productivity and; address the negative effects of minimum wage policies. As a reform under the current system, it maintains regional minimum wage setting by the RTWPBs. It also upholds the policy of setting minimum wage to protect vulnerable workers and recognizing collective bargaining as the primary mode for setting wages and other terms and conditions of employment. 1

Why is the issue important?

Wage determination, over the years, has become one of the most contentious issues faced by the Department. While workers demand for better pay during the consultations and deliberations by the regional boards, employers justify the grant of lower wage increases by emphasizing the lack of productivity by enterprises, and hence, lack of capacity to pay. It therefore becomes relevant to come up with a policy that strikes the proper balance between the need for higher pay by the workers and the capacity to pay the increase by the employers, taking into consideration the productivity level of the company. The TTWS, as a reform initiative to the current minimum wage system, is also germane to the current trend of expanding towards performance

What are the different theories on wage determination? To what theory is TTWS based?
There are several theories that explain wage determination. These are the following 2: Subsistence/ Iron-law Theory In this theory, the rise in population would entail a rise in the level of workers looking for employment. Consequently, the rise in labor supply would decrease the wage rates down to the subsistence level. Wages Fund Theory The determination of wages in this theory is based on the

1 2

Section 1 of NWPC Guidelines No. 02 Dejillas Leopoldo. Labor Economics. 1996

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ILS Policy Brief Vol. 3 No. 1 ratio between the wage fund (fixed fund for a specific period) and the total number of workers employed. If there is an increase in the number of workers, a decrease in the wage rate will be the consequence. Marginal Productivity Theory In this theory, the wage rate of an individual worker depends upon what the worker contributed to the value of the total output. Workers will continually be hired by the employer only up to the point where the cost of hiring the last worker can be covered by his contribution. Labor Theory of Value Real value of labor, according to this theory, is determined by four factors: (a) the labor time socially necessary for the production; (b) the value need for the subsistence of the workers labor power; (c) the value required to perpetuate labor; and (d) the value expended by the worker to acquire the necessary education, skills and training. Purchasing Power Theory This theory explains that the growth and prosperity of business is contingent on the demand for the companys products. If real wages (purchasing power) are high, then workers are able to effectively demand for more products, which in turn will stimulate more production. Demand-Supply Theory under Perfect Competition In this theory, an equilibrium wage, or wage level where supply is equal to the demand for labor, is achieved when supply and demand forces freely interact in a perfect competition. Bargaining Theory Wage rates in this theory have maximum and minimum limits, wherein wages can be adjusted without negatively affecting the supply and demand conditions in the labor market. Both the worker and employer have the bargaining power in adjusting the wage levels.

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based on the poverty threshold, average wage and capacity to pay of the employer (purchasing power theory), a productivity-based 2nd tier is also proposed by the system (marginal productivity theory, labor theory of value). However, the determination of the productivity-based incentives shall be based on the agreement between workers and employer (which is a characteristic of the bargaining theory).

What is the policy basis of the TwoTiered Wage System?

In 1989, Republic Act 6727 or the Wage Rationalization Act was enacted. This law established a mechanism for minimum wage determination through the creation of the National Wages and Productivity Commission (NWPC) and the Regional Tripartite Wages and Productivity Boards (RTWPBs). As a policy-making body, the NWPC is mandated to determine minimum wages at the regional, provincial and/or industry levels; and promote productivity improvement and gainsharing schemes, particularly among micro, small and medium enterprises. 3 To encourage higher levels of productivity, maintain industrial peace and harmony and promote the principle of shared responsibility in the relations between workers and employers, Congress also passed Republic Act 6971 or the Productivity Incentives Act of 1990. This law promotes the creation of a labor-management committee which shall initiate the formulation of productivity incentives program in a business enterprise. One of the sub-strategies contained in the Philippine Labor and Employment Plan, under the Rights at Work Pillar, is the development of a wage system where minimum wage as a safety net/social floor is set through a tripartite process. Wages above the minimum wage based on productivity are set through industry and enterprise collective bargaining or negotiations. In 2012, after a series of consultations, the Guidelines on the Implementation of

From the foregoing theories, it can be gleaned that the TTWS is a combination of theories on wage determination. While the system maintains a minimum level (bargaining theory) which is

NWPC website. www.nwpc.dole.gov.ph

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ILS Policy Brief Vol. 3 No. 1 the Two-Tiered Wage System (NWPC Guidelines No. 02) was adopted.

January 2013

How are wages determined under the two-tiered system?

Under the TTWS, the first tier shall be the regional minimum wage rates established by the wage orders of the RTWPBs. As it aims to protect vulnerable workers, the poverty threshold, average wage and socioeconomic indicators shall be factored in the process of its determination. The second tier, on the other hand, consists of productivity bonuses and incentives based on agreement between workers and management. 4 An Advisory shall be issued by the Boards to guide enterprises or industries on a range of productivity incentives. The Advisory may be used as basis for employer initiatives or enterprise-level negotiations.

Poverty threshold for a family is an indicator of needs of workers and their families. Average wage is an indicator of employers capacity to pay (affordability). Socioeconomic indicators such as labor force data, CPI, Gross Regional Domestic Product, meanwhile, are indicators/measures of the regions socioeconomic conditions. The TTWS serves as a guide in setting a genuine floor or minimum wage that is higher than the poverty threshold but not to exceed average wage, taking into consideration the socioeconomic conditions in the region. This means that by applying this new system, not only the needs of the workers (in reference to the poverty threshold) are being considered, but also the capacity to pay by the employers.

How is accuracy on the data on poverty threshold and average wage ensured?
The NWPC continues to coordinate with statistical agencies such as the National Statistical Coordination Board (NSCB), National Statistics Office (NSO) and Bureau of Labor and Employment Statistics (BLES) in improving the quality and timeliness of statistical data for minimum wage determination like the poverty threshold, average wage and other related indicators that the Boards may refer to. The recent initiatives of the NWPC include: (a) Pending request for annual poverty threshold estimates from the NSCB and (b) A proposal to study a methodology for estimating average wage for wages above the minimum wage to eliminate downward bias of current data on average wage.

Will the TTWS result in wage freeze or wage cuts? Will it push minimum wages down to just the poverty threshold levels? 5

The TTWS will not result in wage freeze or wage cuts, nor will it peg minimum wage only to the poverty threshold. It must be underscored that in the area of minimum wage setting, the TTWS is consistent with the policy goals of RA 6727 to protect vulnerable workers from undue low wages. It should also be noted that the first-tier of TTWS retains the standards/criteria6 for minimum wage fixing enunciated in RA 6727, which were simplified into: (a) poverty threshold; (b) average wage and (c) socioeconomic indicators.

Does the current minimum wage system (before the TTWS) factor in productivity and competitiveness?
The intent of the minimum wages, as a welfare tool, is the protection of vulnerable workers from undue low wages. Productivity and competitiveness factors are irrelevant to the current means of determining minimum wages. Under the 2nd Tier of the TTWS, which speaks of productivity-based incentives, these factors are considered.

4 5

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NWPC Guidelines No. 02 Some of the questions are based on the issues aired by certain sectors. Answers were elicited from the NWPC (document containing answers to issues raised) 6 The following are the standards/criteria under the Wage Rationalization Act: (a) The demand for living wages; (b) Wage adjustment vis--vis the consumer price index; (c) The cost of living and changes or increases therein; (d) The needs of workers and their families; (e) The need to induce industries to invest in the countryside (f) Improvements in standard of living; (g) The prevailing wage levels; (h) Fair return of the capital invested and capacity to pay of employers; (i) Effects on employment generation and family income; and (j) The equitable distribution of income and wealth along the imperatives of economic and social development.

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How will government ensure success of the implementation of the second-tier as it is not mandatory?
The Regional Boards shall adopt several implementation strategies to encourage enterprises to adopt productivity improvement and gainsharing schemes. These strategies are as follows:

Will the issuance of a wage advisory for the 2nd tier undermine the incentive to unionize?
The intent of the 2nd tier is to encourage enterprise level cooperation in the design and implementation of productivity incentive schemes. Unions can provide the ideal mechanism or platform for workers participation in developing productivity incentives program which can eventually form part of the CBA.

Showcasing of existing practices Providing technical assistance to enterprises in the design and development of productivity incentives schemes Recognition of successful schemes/practices Partnership with successful enterprises in encouraging their supply chain to adopt similar schemes Information dissemination on the advisories/guidelines issued by the Boards Capacity building for the Boards and the social partners

Will the TTWS employment levels?

help

increase

Is there a guarantee that productivity bonus/incentive schemes are commensurate to workers productivity?
Productivity-based schemes/programs in establishments is a product of a participative decision-making of both management and workers representatives. Factors in determining productivity under a productivity improvement program are upon the mutual agreement between the involved parties. Furthermore, the Guidelines also mandate the Regional Boards to issue an Advisory based on the results of the studies and consultations with industry stakeholders. The Advisory shall contain an assessment of the regions overall economic performance; industry/sub-industry/sectorspecific data on labor productivity, wages, profitability, outlook and other relevant information; and a recommendation on a range of productivity incentives.7

Placing primacy on productivity (while instituting floor wage as a safety net) is very important in the economic well-being of any country. By putting premium on productivity, certain problems like recession, inflation, unemployment, international trade competition, cost of living and others may be solved.8 Ideally, when there is higher productivity, the cost of production will be reduced, which in turn enables the market to have competitive pricing of goods and services. When prices are lower, it will create demand for products and services, which consequently will result to more profits. More profits for the company would mean that it may invest in better technologies and expansion of operations, entailing enhancement of productivity. This consequently would result to the creation of more jobs and improved wages and working conditions.9 During economic downturns, higher productivity also helps company retain the jobs of the workers, thereby helping the economy maintain the employment level. Improved productivity during these times help the company stay competitive, and provide employment security to its workers. The TTWS therefore, being a policy that puts premium on productivity, if properly implemented, may be a good measure to increase, or at least maintain, employment levels.

Foo Check Teck, Chan Choon Hian. Productivity in Transition.1990 Section 4(d) of NWPC Guidelines No. 2
9

Ibid

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Will the TTWS help expand access to employment opportunities?

One of the main inputs to total productivity is manpower productivity. This input includes job enlargement and advancement in the level of skills of workers education, trainings and upscaling. The other input is capital productivity, which refers to investment for mechanization, automation and computerization. 10 The TTWS, as a policy that promotes productivity, will induce workers to become more productive, thereby helping enterprises stay competitive and viable. Firms will be able to invest more for the improvement of manpower and capital productivity. As productivity of firms continues to improve, business expansion and job creation, as previously explained, will likely follow. People who have their skills upgraded, or those who have become more productive, are expected to move forward in the career ladder (job promotion). Workers whose skills have been advanced will also have their employment options and opportunities, or employability, broadened, since in the competition for better jobs, people with better skills normally get selected.

and management. Therefore, it becomes apparent that the success of this wage system depends on how the workers and employers are able to formulate a productivity improvement program that is acceptable to both parties.

What may be the challenges implementing the TTWS?

in

On a macro level, productivity improvement may have positive impacts on competitiveness and profitability, which would result in the pouring of investments and creation of more jobs. However, at the enterprise-level, productivity improvement may require introduction of new technology which sometimes displaces some workers. An issue on job security may ensue. Hence, it is vital for the enterprise to be able to come up with a productivity improvement program (2nd Tier) that takes into consideration the issue on job security. The program may include retraining or redeployment of workers who are affected. In some firms, it may be a very challenging task to measure productivity. Thus, it is imperative for the Boards to come-up with an Advisory that comprehensively tackles productivity measurement, as it will become one of the bases of labor and management in formulating productivity incentives. Research and consultations will be very crucial. In one of the studies of ILO11, it was reported that in some developed countries, there is a discrepancy between the growth rates of average wages and labor productivity (productivity growth outpaces wage growth). This resulted in the shrinking of labor share in the income. In the implementation of TTWS in the Philippines, this occurrence has to be considered. It has to be reiterated that the intent of TTWS is for workers to have their just share in the fruits of production. Again, productivity measurement, or analytics, will be very vital. There may be a need to revisit some literature on flexible pay experience and

Will it improve employment?

the

quality

of

The institution of the first tier of TTWS as the floor wage indicates that the system does not undermine the right to a living wage of each worker. The second tier, on the other hand, provides an opportunity for the improvement of the quality of employment. A more productive business environment would entail more profits. As a result, workers may get better wages and working conditions.

Will it help promote mutual and/or collective gains?

One of the fundamental preconditions in order to have a successful productivity improvement program is a conducive climate of labor management relations. The Guidelines is explicit in stating that the second-tier of the TTWS should be composed of productivity bonuses and incentives based on agreement between workers
11 10

Ibid

International Labour Organization. Global Wage Report 2012/13. Wages and Equitable Growth. (2013)

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ILS Policy Brief Vol. 3 No. 1 productivity approach of other countries, and see the pros and cons of their schemes. This may then be used in improving our wage policies (including the TTWS). This should however be

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balanced by the doctrine of equitable growth and the fundamental principle that wages are the most basic form of social protection for workers.

Policy Briefs aim to stimulate informed discourse on labor and employment issues. Each issue draws on current research and new frameworks to inform public policy, service delivery and practice.

Institute for Labor Studies Department of Labor and Employment 5F DOLE Bldg., Gen. Luna Wing, Intramuros Manila www.ilsdole.gov.ph 02 527 34 56

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