Wage Policy and Economic Disparities: Analyzing the Regional Impact of Minimum Wages on Income Inequality in the Philippines Using Panel Autoregressive Distributed Lag (Ardl) Model

Abstract

Income inequality remains one of the most persistent socioeconomic challenges in the Philippines, despite the implementation of region-specific minimum wage policies designed to improve worker welfare and promote equitable economic development. This study examines the impact of regional minimum wage policies on income inequality across seventeen Philippine regions from 1995 to 2023. Specifically, the study investigates the short-run and long-run relationship between minimum wage adjustments and regional income inequality. Using a panel data approach, the study employs descriptive statistics, trend analysis, Levin-Lin-Chu (LLC) and Im-Pesaran-Shin (IPS) panel unit root tests, Pesaran cross-sectional dependence test, Pedroni and Westerlund panel cointegration tests, Panel Dynamic Ordinary Least Squares (PDOLS), and dynamic panel estimators. The results reveal that both minimum wage and income inequality are integrated of order one and exhibit a stable long-run equilibrium relationship. The short-run estimation indicates that changes in minimum wage have a negative but statistically insignificant effect on regional income inequality, suggesting that wage adjustments do not immediately translate into measurable distributional improvements. In contrast, the long-run PDOLS estimates demonstrate a significant negative relationship between minimum wage and income inequality (β = -0.2075, t = -11.16), indicating that sustained increases in regional minimum wages contribute to reducing income disparities over time. The dynamic fixed-effects and random-effects models further confirm the robustness of the long-run findings. The study concludes that minimum wage policy functions primarily as a long-term redistributive mechanism rather than an immediate corrective instrument for inequality reduction. These findings provide important policy insights for labor regulators and wage-setting institutions by highlighting the role of sustained wage adjustments in promoting inclusive growth and reducing regional economic disparities in the Philippines.