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HIGHER WAGES DO NOT MEAN HIGHER LABOR COSTS

by Rene T. Domingo (email comments to rtd@aim.edu)

Whenever there is a hike in minimum wages, it's panic time for most companies - big or small. The typical knee-jerk reactions to offset the additional cost are laying-off employees, cutting the advertising budget and junket trips, squeezing the suppliers and customers, closing some factories or the company itself, etc. These are nothing but simplistic solutions that endanger rather than assure the continued survival of the company since they antagonize its stakeholders: the employees, customers, and suppliers. What many executives fail to consider is that any wage hike, present and future, can be more than offset by increasing the productivity of the present workforce.

Seven decades ago, Frederick W. Taylor, the father of scientific management, said that it was possible to give the worker what he wants - high wages - and the employer what he wants - low labor cost. The secret is high productivity. There is nothing wrong with high wages as long as they result in higher productivity. High wages with low productivity is charity; low wages with high productivity is exploitation; low wages with low productivity is suicide; high wages with high productivity is progress. Workers and management both have rights and obligations: workers have the right to demand higher wages, and management should expect and give these without any qualm or surprise. Management, however, has the right to demand higher productivity from employees and the obligation to guide them in achieving this. Now the problem: which comes first, high wages or high productivity? This is not a chicken or egg problem; it is a chicken and egg one. The answer is both - ideally, both should be increased at the same time and raised continuously as long as the company is in business.

Since we started by increasing the minimum wage, this should be taken as an incentive and opportunity to increase, promote, and demand higher productivity from everybody. In short, higher wages should be taken positively as a challenge to improve efficiency, rather than negatively as a reason to gripe against the government and labor unions. The Japanese provide an excellent example. With the high standard of living in Japan resulting in high wages companies have to pay and the system of lifetime (no -layoff) employment, Japanese companies have to continually find ways to increase productivity in order to survive. When the oil shocks increased their production cost, they avoided passing on the increase to their customers by increasing productivity, reducing waste and improving quality. With the continuous pressure on the yen that caused its steep revaluation, again the Japanese companies, rather than increase their export prices and lose their market, countered with prudent cost cutting measures and productivity increases.

Wages will go up whether we like it or not. What is important to these investors is low labor cost, not wages, for it is total labor cost that affects profits, not the wage rates. Low labor cost can only come from a productive workforce that may be receiving high wages. In fact, most products in Japan, Korea and Taiwan, are cheaper to produce in these countries even though their wages are much higher than less developed Asian countries. The reason is the very high productivity of their operations and workforce. As wages in all countries go up, eventually the means to attract foreign investments will shift from low wages to high productivity.

Surprisingly, in many companies, the main bottleneck in increasing productivity is not the employees, but top management, especially the CEO. Usually lacking any background in manufacturing and production, these armchair decision makers usually do not understand and appreciate the potential of and opportunities in raising productivity; they fail to see it as the ultimate weapon in increasing competitiveness and countering inevitable increases in wages, raw material, and energy costs. These companies will not last very long.


 

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