MANILA, Philippines -- A package of relief measures which may include a wage increase and income tax exemptions is being drafted in an effort to ease the pain of 13 million wage earners in the Philippines, but economists are warning such measures may do the domestic economy more harm than good.

Low-income families are being hit hard by rising prices of food, energy and other basic commodities, and labor groups are calling for wage hikes and additional benefits for their members.

For a deeply unpopular leader like President Gloria Arroyo, giving in to those demands could boost sagging approval ratings.

However, "the inflation outlook could take an ugly turn as high food prices fuel wage (hike) demand," said Simon Wong, regional economist at Standard and Chartered Bank.

Higher wages could, in turn, create a home-grown inflation spiral that could force the central bank to lift interest rates, he said.

"At a time when the business sector is faced with a collapse in US demand, rising wage costs and interest rates are the last things the economy needs," Wong said.

In the Philippines, any proposal to increase wages can either be approved at regional wage boards under the Department of Labor and Employment, or submitted to Congress for a legislative change.

Employers are open to proposals for a "reasonable" wage increase, although they want the decision to be made at regional wage boards where they are represented and not in Congress, said Sergio Ortiz-Luis, president of the Employers Confederation of the Philippines (ECOP).

While waiting for the wage boards to act, Arroyo is urging big private companies to provide non-wage benefits to their employees. On Tuesday, she convened a legislative-executive panel to discuss "priority measures" that would help the poor cope with rising food and energy costs.

One of these measures is exempting minimum wage earners from paying income tax.

"We are urging (big corporations), encouraging them to make available to their employees non-wage benefits like rice, canned goods, shuttle service and other benefits, particularly those sectors that are making big profits such as telecommunications and oil companies," Arroyo said.

But labor groups are likely to ask for more relief measures, with crude oil and rice prices in world markets shooting up to fresh record levels this week, raising fear of runaway inflation in the Philippines.

Already the government has announced a 10-percent pay hike for its workforce of one million, starting July. And following discussions at the wage boards, the government is expecting the minimum wage across the country to be increased by June.

"The current boiling climate surrounding food inflation has clearly given teeth to demands for measures to assist low-income families, which spend a large proportion of their income on food," said Wong of Standard Chartered Bank.

"This plus the timing of the public servant wage hike clearly increase the risk of the government giving more ground than usual (to labor groups)."

PRICE PRESSURE

"It is wages, not rice, that concerns us," said Wong. "An eventual wage agreement that comes across as being too generous will have a major negative impact on macro policy management."

The Trade Union Congress of the Philippines (TUCP), one of the country's biggest labor groups, has filed a petition for an increase of P80.00 in the minimum daily wage, which is currently pegged at P362.00 for workers in metropolitan Manila.

In its petition, the group argued that the P12.00-wage hike granted to workers in the region in August 2007 "has been overtaken by extraordinary increases in the prices of petroleum products, transport fares, and in basic goods and services."

Between August 2007 and March 2008, the consumer price index in the region rose by 3.0 percent, the TUCP said.

Consumer prices are expected to rise another 10 percent between April and December of 2008, it said.

"The P80.00 daily increase is essential if workers are to cope with the increasing prices of commodities and cost of living, if they are to meet the basic needs of their families, even if only partially, and if the country is to give meaning and substance to the policy of equitable distribution of income and wealth," the TUCP said.

The leftist labor group Kilusang Mayo Uno (May One Movement) is seeking a bigger hike in the minimum daily wage of P125.00, and is lobbying for it to be mandated by law to make sure workers across the country are covered.

"Last year the workers in NCR (National Capital Region) only got an additional P12.00 in their basic pay which is not enough to buy a kilo of NFA (government-subsidized) rice which was pegged at that time at P18 a kilo," said KMU spokesman Prestoline Suyat.

Workers in other regions were given smaller wage hikes while some only received adjustments in their cost of living allowances, he said.

TIGHTENING THE SCREWS

Employers are amenable to a wage increase but there is no consensus as to how much will be reasonable for both the business and labor sectors.

"We have no problem about convening the wage boards earlier than usual and starting to deliberate on wage hike proposals," ECOP's Ortiz-Luis told Thomson Financial.

"We have said that any mandated wage increase that is reasonable and will not dislocate the economy is something that we have to live with," he said.

Rising food and energy costs pushed inflation to a 21-month high of 6.4 percent in March, and economists said consumer prices are expected to keep rising.

Depending on price trends in global commodity markets and the extent of the expected slowdown in the economy, inflation will average 6.0 percent to 6.5 percent in 2008, up from 2.7 percent in 2007, and well above the central bank's target range of 3.0 percent to 5.0 percent, said Frederic Neumann, economist at HSBC in Hong Kong.

The central bank is now expected to lift key interest rates by 75 basis points this year, he said.

"By themselves, higher rates will hardly bring down the price of rice or encourage global oil producers to lower the cost of crude. But monetary policy still needs to be deployed if there is a risk that second-round effects are taking hold, which is more likely the longer the supply shock lasts," Neumann said.

The central bank holds its next policy-setting meeting on Thursday and is expected to keep its overnight rate at 5.0 percent for borrowing and 7.0 percent for lending, according to five economists polled by Thomson Financial.

"A temporary spike in commodity prices hardly warrants a response and in this case, rates may be left safely on hold. But the longer the boom in commodity prices persists, the greater becomes the need to tighten screws," Neumann said.

Tax exemptions and the aggressive subsidy programs that the government has launched for rice and fuel also pose risks, he said.

"Rising food (and oil) prices have added pressure to lower the outright tax burden, thus threatening to cut into revenue at a time when pressure on expenditure is growing equally for everything from subsidies to pump priming," he said.