By Atty. Gregorio B. Austral, CPA

Understanding Wage Distortion: The Hidden Cost of Legislated Wage Hikes

The recent passage by the House of Representatives of a bill mandating a P200 increase in the minimum wage has sparked both hope and concern among workers and employers alike. While the intent is to uplift the lowest-paid employees, such a move inevitably raises the specter of wage distortion—a phenomenon that can disrupt the delicate balance of salary structures within companies.

What is Wage Distortion?

Wage distortion occurs when a legislated wage increase, such as a new minimum wage law, eliminates or severely contracts the intentional quantitative differences in wage or salary rates between and among employee groups in an establishment. These differences are typically based on factors like skills, length of service, or other logical bases of differentiation. When the gap between pay grades is narrowed or erased, the distinctions that reward experience, responsibility, or expertise are effectively obliterated, leading to dissatisfaction and potential labor disputes.

This concept is well-established in Philippine law. For instance, Republic Act No. 6727 (the Wage Rationalization Act) defines wage distortion as a situation where an increase in prescribed wage rates results in the elimination or severe contraction of intentional quantitative differences in wage or salary rates between and among employee groups, thus obliterating the distinctions based on skills, length of service, or other logical bases of differentiation. The Supreme Court has echoed this definition, emphasizing that wage distortion means the disappearance or virtual disappearance of pay differentials between lower and higher positions in an enterprise because of compliance with a wage order or law.

How is Wage Distortion Corrected?

The law provides clear mechanisms for correcting wage distortion, depending on whether the workplace is organized (with a union and a collective bargaining agreement) or unorganized:

  • In organized establishments (with a union and a CBA), the employer and the union must negotiate to correct the distortion. If they cannot agree, the dispute is resolved through the grievance procedure in the CBA and, if still unresolved, through voluntary arbitration. The voluntary arbitrator is required to decide the dispute within ten days from referral.
  • In unorganized establishments (without a union or CBA), employers and workers should endeavor to correct the distortion. If a dispute arises, it is first brought to the National Conciliation and Mediation Board. If unresolved after ten days, it is referred to the National Labor Relations Commission (NLRC), which must decide the case within twenty days.
  • Importantly, the law states that the pendency of a wage distortion dispute does not delay the implementation of the wage increase. This means companies must grant the new minimum wage even as they work out how to adjust the rest of their salary structure.

The Unintended Consequences of Legislated Wage Hikes

While the goal of raising the minimum wage is laudable, legislating such increases without a comprehensive plan to address wage distortion can create more problems than it solves. Companies may face internal unrest as long-serving or more skilled employees see their pay advantage eroded overnight. The process of correcting wage distortion is often contentious, time-consuming, and costly, involving negotiations, arbitration, or even litigation.

In the end, a well-intentioned wage hike can inadvertently sow discord in the workplace, undermine morale, and strain labor relations. Policymakers must recognize that wage increases are not just about numbers—they are about maintaining fairness and order in the workplace. Any move to legislate a significant minimum wage increase must be accompanied by clear, practical guidelines and support mechanisms for correcting wage distortion, or risk turning a tool for social justice into a source of industrial strife.