Increase in Minimum Wages in the US
Effective January 1, 2020, the minimum wages across 24 states and 48 cities in the United States were increased by up to 20% from $7.25 per hour which was the federal minimum in 2019. Among these states are California, Florida, New York and New Jersey where many IT-related companies are headquartered. The legislation on wage increases at the state-level is attributed to the rising costs of living across those states. Moreover, earlier in 2019, the US House of Representatives passed the Raise the Wage Act, which aims to increase the federal minimum wage to $15 per hour by 2025. The bill, however, has not made it past the Senate. While several states and cities have raised their minimum wages, there are currently no public plans for a federal increase in the US.
Impact of the Minimum Wage Increases
Some experts argue that it may take time to gauge the impact of the minimum wage increases. Still, with the potential wage increases looming in the coming years, US businesses may be inclined to explore the following possible options:
(1) raise prices in response to increasing wages;
(2) hire fewer but more highly-skilled workers to fully maximize their labor expenditures;
(3) invest in labor-saving and process automation technologies; and
(4) outsource more work to emerging markets with lower labor costs
Outsourcing in the Philippines
Companies looking to reduce their operational costs find the Philippines an ideal outsourcing destination due to its wide talent pool base, lower wages, and cheaper operational costs. The outsourcing industry in the Philippines first emerged in 1992 and following the passage of the Special Economic Zone Act in the 1995, the Philippine Economic Zone Authority (PEZA) was created in order to promote investments and offer lower tax incentives to locators.
The incentives from PEZA have attracted foreign companies and allowed the BPO sector to significantly grow through the years. In 2000, the industry accounted for 0.075% of the country’s GDP. By the year 2016, the contribution of the BPO industry to the national GDP had increased to 7% and the Philippines was declared as the world’s BPO capital, with over 500,000 employees working in call centers alone. As of the end of 2019, the BPO industry in the Philippines employs over 1.2 million Filipinos and contributes over 12% to the GDP.
Colliers anticipates that the minimum wage increases will result in companies from the United States outsourcing more work to the Philippines given the strong IT-BPO capability of the latter. The Philippines remains to be an attractive hub for the IT-BPO industry as evidenced by the inclusion of several cities in the Tholon’s list of 100 Super Cities in 2019 which ranks the most ideal outsourcing hubs. Metro Manila and Cebu are ranked 2nd and 12th on the list, respectively, while the Philippines also has several emerging locations that are suitable for outsourcing operations such as Cavite, Pampanga, Iloilo, Bacolod, and Davao. Existing outsourcing locators have long expanded in provincial locations such as these to capitalize on the lower base of business costs and establish a first-mover advantage in these areas.