THRESHOLD FAMILY BUDGET

AN INPUT TO WAGE SETTING

How much must a family earn to live decently? One way to find out is by computing the
Threshold Family Budget. This article will explain in great detail what the TFB is and what it is
for.

Mr. Jose Leo Lemuel G. Caparas Jr.1

Economist
School of Economics, UA&P

In making proposals and decisions regarding salaries and wages, human resource
managers and labor leaders use wage comparisons, cost-of-living indices, productivity
measures, ability to pay, and the overall economic environment. Along with these tools,
one vital input is the TFB.
TFB is the amount required for a family to attain a reasonable standard of living.
It is a highly important consideration because a worker belongs to a family. His
aspirations, which drive his work performance and, thus, his value to the company, are
closely intertwined with his family life. Thus, a worker who is consistently distracted
because of worries about where to get the money for his children’s tuition or his wife’s
hospital expenses is likely to be unproductive and prone to be late or absent.
Company executives who want productive workers should know, even for
purely narrow interests, whether their workers are earning enough to satisfy their
families’ basic needs. In this area the TFB provides considerable help.

How did the research on the TFB start?

Research on the TFB started in 1970 with the efforts of Fr. Javier de Pedro, a professor of
social economics at the Center for Research and Communication, now known as
University of Asia and the Pacific (UA&P). Fr. De Pedro called attention to the need for a
working concept of what constitutes just wage, a notion that has figured in the social
teachings of the Catholic Church. The Catholic Church gives general guidelines.

Remuneration for work should guarantee man the opportunity to provide a dignified
livelihood for himself and his family on the material, social, cultural and spiritual level,
taking into account the role and the productivity of each, the state of the business, and the
common good. [221] Agreement between the parties is not sufficient to justify morally
the amount to be received in wages. (Catechism of the Catholic Church)

Just remuneration for the work of an adult who is responsible for a family means
remuneration which will suffice for establishing and properly maintaining a family and
for providing security for its future. Such remuneration can be given either through what
is called a family wage – that is, a single salary given to the head of the family for his
work, sufficient for the needs of the family without the other spouse having to take up

1
The author wishes to acknowledge the advice of Dr. Emilio T. Antonio Jr., Assistant
Dean of the UA&P School of Economics This article was published in UA&P’s Staff Memos, issue
20, 2002.

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 gainful employment outside the home – or through other social measures such as family
allowances or grants to mothers devoting themselves exclusively to their families. (Pope
John Paul II, Laborem Exercens, September 14, 1981)

The TFB concept links wages to the needs of the families and not of workers
alone. It departs from the traditional idea of poverty lines because it is not only
concerned with what is needed for survival. It involves the amount needed by a family
to live as dignified human beings.

What have more recent studies shown?

Since 1970, many economists have tried to quantify the TFB concept to make it more
useful for setting wages. The following are some of the findings and breakthroughs in
quantifying the concept.

• An income equal to the TFB is not the only factor needed by a worker to be
productive (Antonio and Torralba 1974). A worker’s productivity may depend on
some nonmaterial factors such as achievement, recognition, prospects for
advancement, good relationship with co-workers, corporate culture and the nature
of the work itself (Villegas 1979; Villegas and Antonio 1980).
• The TFB must cover the basic needs of the worker and of his family. Since families
vary, no single TFB figure would apply to all workers. (Villegas and Buencamino
1982).
• A study was done to estimate the TFB for nonfood items such as housing and
utilities (Caparas 1996). An alternative method of computing the TFB was made.
This accounted for the price fluctuations of housing, and fuel, light, and water. It
was shown that there was not significant difference of the results of the existing
method with the alternative method.
• Antonio (1983) and Antonio and Caparas (1990) have shown how averages could
lead to wrong conclusions. For example, the 2002 TFB estimate for a sample family in
Metro Manila consisting of five members (parents, a son in college, a daughter in
high school, and a son in grade school) ranges from P23,300 to P34,300 a month.
These figures could be wrongly interpreted to mean that: (1) the minimum wage
should be set between P900 and P1,320 a day, or (2) all workers earning below this
range are not meeting their threshold needs. However, hardly could one find a
family that has the same composition as the reference family. Besides, minimum
wage earners are usually new entrants to the labor force, and are either single or
newly married. Thus, they would need an income less than that required by a family
of five. This explains why firms should have a study made of their own TFB.
• Quality comes with a price (Antonio and Caparas 1990 to 2002). If the firm just pays
for the minimum wage, then the quality of workers that they would get are those
that are willing to work at the price of the minimum wage.

How can the TFB be a useful input for wage setting decisions?
For the TFB to be useful in setting wages, the following must be considered:

2
 (1) Credibility of results. If the audit will be used in collective bargaining
agreement negotiations then it should be done by a reputable third party.2
(2) Discretion. It is not advisable to do a survey. Surveys tend to raise workers
expectations of a wage hike. Some employees may give inflated answers. All the data
needed for the TFB should be found in the employment records.
(3) Ability to take into account different types of families. The TFB should estimate the
needs of all possible types of families (i.e., based on the family’s size and the age and
gender of family members). A budget that refers to only one type of family is
misleading.
(4) Capability to account for differences in costs of living. An effective audit method
considers where firms are located and where their workers live. Consequently,
standards of living used are based on those prevailing in the place being studied.
(5) Facility to develop strategies to address the firm’s problem. The TFB method to be
adopted should be helpful in (1) identifying who are earning less than the threshold; (2)
estimating the gap, and (3) determining the type of the employees and their families
through such questions as: Are the employees married or single? How long have they
been working in the company?
(6) Ability to simulate scenarios. The TFB method should be able to estimate the
impact of some changes in the firm’s wage and benefit package on the lives of the
employees. For example, will a child allowance result in fewer employees living below
the threshold? What would be the impact of an across-the-board wage hike?

Estimating the TFB and Poverty line generally share the same problem
Pinning down the quantitative dimensions of what constitutes a TFB as a basis of just
wage remains a difficult task, the same way the method of determining poverty is
considered a Holy Grail by scientists like Piachud (1981). Although many people
believe that there is a budget level consistent with a family’s needs for decent living,
there is no universal agreement on what this level should be. Economists have grappled
with this issue since 1901. It started with attempts to quantify poverty. Still, some
insights can be generated using four guided questions and some statistical studies done
on poverty.
1. What items should be included in the basket of basic goods and services needed by a
family to survive? The answers vary. For example, the approach of Rowntree (1901),
which was used by Orshansky (1965), and Hagenaars and de Vos (1987), defines the
absolute minimum in terms of basic needs, such as food, clothing, and housing. The
minimum amount needed to meet each of these needs is estimated and then added up to
arrive at a poverty line.
In pursuit of the same goal of arriving at a just wage, the National Wages and
Productivity Commission (NWPC), in a 1993 study, aimed to quantify the basic food
budget. The study defined certain features—for example, size (number of members),
age, and sex—of selected families in 14 regions. The figures used were derived from the
results of the 1988 National Demographic Survey conducted by the UP Population
Institute and NWPC. The food baskets for these families were arrived at on the basis of
2
For instance, for over ten years, UA&P has done audits of (a) labor union leaders, (b)
firms with employees based in key cities around the country, and (c) firms with employees
numbering from as low as 50 to as high as 6,000.

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standard menus prepared by the Food and Nutrition Research Institute (FNRI) of the
Department of Science and Technology.
2. How much of these basic goods are necessary for survival? To answer this, one
should first quantify the amount of food each family member needs, using certain norms
set by FNRI. These standards help measure the minimum daily nutritional needs of an
individual of a specific age and sex (Peronilla 1973; Villegas, 1980). For other
expenditure items—such as clothing, utilities, and other miscellaneous items—
consumption standards were set using the results of some surveys (Antonio and
Torralba, 1983; Buencamino and Guerrero, 1981-1986). These standards reflect actual
consumption patterns and do not represent the minimum requirements for survival.
3. How much would the basic bundle of goods cost? Two basic approaches are used to
determine total cost. First, the cost of each item included in the basket is added to come
up with the total cost (Villegas and Antonio, 1980 and Samia and Concepcion, 1988 and
1989). The second approach assumes that the ratio of the food budget to the total is
relatively constant. Once the food budget is established, the total family budget can be
easily calculated (Antonio, 1983; Antonio and Caparas, 1990 and 1991).
4. How do we account for the variations in the sizes and composition of families? It is
widely acknowledged that the available estimates of both poverty threshold and TFB
could give dubious information. The reason is that averages can be misleading.
The wages of workers must cover not only their own needs but their families’ as
well. Because families differ in size and their members’ gender and age composition
(meaning that the amounts required by the families vary according to gender and age).
No single TFB figure would apply to all workers. It is therefore wrong to look for a single
income threshold on which a firm could base its minimum wage (c.f. Villegas and
Buencamino 1982). Antonio (1983) and Antonio and Caparas (1990) have shown how a
TFB estimate for an “average” family could give rise to erroneous conclusions.
There are three approaches to accounting for varying sizes and composition of
families:
1. Balisacan (1992) used equivalence scales to show, at reference prices, the cost
differential for a household, due to demographic and other relevant attributes, to reach
the welfare level of the reference household. It shows in one measure the changing
“needs” of a family as it expands or changes attributes.
2. J. M. Damaso (1990) also grappled with the same issue when he attempted to
define the living wage for each of the five stages of family development. These are
formation, expansion, maturity, consolidation, and diminution. Since he was concerned
only with the estimation of five TFB figures, it was still manageable to use the detailed
approach to the quantification of TFB.
3. Antonio and Caparas (1990 to 1993) and Formoso (1993) suggest that firms
should do an audit3. Over the years, the need for an appropriate methodology to
conduct TFB audits has been acknowledged.
The TFB method estimates the needs of specific families by taking into account
the varying sizes and composition of the families concerned. The TFB is computed on the
3
Firms interested in having a TFB audit conducted may get in touch with the author at
bingo@uap.edu.ph. An audit usually takes two weeks if the data are encoded in a database file.
The fee, which depends on the number of employees and simulations, would serve as a tax-
deductible research grant to UA&P.

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basis of the share of food to total expenses. Although the estimates may not be accurate
to the last peso, they would not be far from the true values. The simplicity of the
approach offsets the other problems because the method requires few data.

In a nutshell
Companies whose employee were audited to have TFB which are significantly huge
relative to their total take home pay have experienced declining productivity.
Employees are often late or absent. The company has suffered instances of theft. While
companies that ensures that most, if not all, the basic needs of their employee’s families
have financial bottom lines that are in the black. They get productive high-quality
workers that have a sense of being. The firms usually get what it pays for.

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