Cheap Labor Theory And Economic Growth: Philippine Edition

If we go by the mainstream's view of how trade competitiveness is achieved or how unemployment can be resolved, they'll reason out that cheap wages holds the magic wand in establishing "equilibrium".

Let's see if this reasoning works using the Philippines as example.

The above table shows of the daily minimum wages rates per region from the Department of Labor and Unemployment.

I'd be using the non-agricultural rates as basis for comparison. From this perspective, the highest wage rates can found in the National Capital Region (NCR) which is at Php 404 (US $8.6) while the lowest can be found in region 5 (Php 196-239) and the ARMM area (php 210 or US$4.5) or a spread of about 82-90% compared to the NCR.

So based on mainstream reasoning, Region 5 and ARMM should be thriving with economic activities.

The table above from the National Statistical Coordination Board shows of the regional economic growth rates in terms the industry (upper window) and the service sector (lower window) from which the above wages apply.

As a side note, the above table are referenced from 2006-2008, but the minimum wages are current. Nevertheless, I don't see material deviances in the changes of regional minimum wages, which are determined by the Regional Tripartite Wages and Productivity Boards, enough to affect the relevance of this discussion.

Despite the huge wage disparity, Region 5 and the ARMM hasn't significantly outperformed the NCR in the service sector from which growth rates seems to be about just even.

However, the NCR has substantially outperformed these regions in terms of industry.

This runs in contrary to mainstream thinking where investors should be stampeding into these "cheap wage" regions and where NCR's industry should be suffering from these losses.

To add, the NCR appears to be expanding its share of the pie relative to the other regions in terms the national output.

However, I have to admit that NCR has the highest unemployment rates of all, while the ARMM has the least, according to the NSCB.

Finally, the above table from ADB shows that the ARMM has the highest poverty incidences in spite of low unemployment rates while Region 5 has the third highest. So people in ARMM have jobs alright, but they are still very poor.

Seen from a different light, the reason why NCR maintains its dominance in spite of higher wage levels is because per capita GDP is the highest in the country. The variance is just too evident.

To conclude, NCR is where the concentration of capital accumulation is and where capital backed labor productivity is the highest. Therefore, NCR commands the region's highest wage levels in the country. And this hasn't reduced her trade competitiveness. Albeit, one reason why unemployment have been the highest here is because of the above average population growth rates and not due to losses from industry shifting to ARMM or Region 5. Yes, wealth attracts migration flows or urbanization.

Put differently, the cheap labor theory accounts for as an oversimplified and mercantilist mythology which is no less than a political propaganda to justify government interventionism or inflationism.

The other way to say this is that in order to drive down wages, one has to inflate strongly enough to reach levels that would drive down the standards of living to prompt for a surge in poverty levels. What a way to achieve economic prosperity!

Yet, as shown above, the expected economic advantages isn't assured.

To quote fund manager Rob Arnott, ``When data contradict theory in a discipline like physics, there is excitement among scientists about the potential to improve the theory. When data contradicts theory in finance, there is dismissal."