Contractualization and the larger issue of employment and poverty reduction

By Gerardo P. Sicat (The Philippine Star), Mar 22, 2017

The Department of Labor and Employment (DOLE) has finally signed off on the “endo” problem with Department Order No. 174.

The outcome of the order will likely lead to more unemployment, some early confusion, and likely more dissatisfaction among stakeholders. The worst outcome is for labor – the unskilled and the unemployed and underemployed.

Endo ends, but contractualization continues. The new department order declares that the practice of “labor-only” contracting in which an agency recruits or supplies workers to perform a job or work, is prohibited. In the same breadth, however, it recognizes that some forms of labor contracting need to continue.

As a result, large companies serving the domestic market that have relied on some degree of labor contracting will continue with practices of labor hiring that they have with sub-contractors.

Also, many foreign direct investments operating especially in the industrial export sector will continue with their hiring practices with the help of labor contractors.

Those allowed to engage in labor contracting have been required to raise their capitalization. The order raises the financial requirement to qualify as a service contractor.

In the same order, however, it allows the contracting and subcontracting of labor services under specific conditions in which labor standards are observed and where the contractor has the ability to perform the job of subcontracting the labor activity.

Reactions of stake-holders. The government, through DOLE and its secretary, Silvestre Bello, undertook a difficult and almost impossible task of reconciling the conflicting demands of various stakeholders.

Organized labor groups wanted it to end contractualization to force enterprises to hire workers for longer term periods. Many labor supporters and sympathizers are also critical of the order. They see it as a continuation of the same contractualization practices, even with the termination of “endo”.

Business enterprises find labor costs to be too high in relation to productivity. A major reason is the high labor standards that have accumulated through the years of rising labor welfare legislation – from minimum wages, pension deductions, to vacation leaves to 13th month pay. Many local businesses are apprehensive that shouldering the costs of regularization of employees would result to less hirings and/or retrenchments.

Foreign investor groups already operating in the country are less bothered. As long as they can continue to hire their labor force, they are compliant with the changes.

The labor contracting that many foreign investors have been undertaking would continue without much disturbance. Moreover, their pay structures are, in general, able to deal with the cost of hiring labor which, from their viewpoint, remains affordable.

Of course, the foreign direct investments the country attracts depends on the choices about costs that the investors prefer and the industry they are in. Many investors in the garments industry are not present in the country, but semiconductor assemblers are plentiful. Foreign investments that depend on much lower labor costs would be squeezed somewhat harder.

Among local enterprises that do business mainly in the local economy, there is great sensitivity to the new policy. Some of the businesses are very sensitive to the cost of labor and the hiring practices that they have developed over time.

In general, many of the larger domestic enterprises serving the local market would survive some of the changes in the labor policy.

This is not the case with small enterprises. Will they survive a change in their framework, or will it mean their demise into the informal sector of the economy?

Many small and medium scale domestic enterprises will face a rising cost of hiring labor. Those unable to adjust to these circumstances would simply have to dispense with additional hirings or evaporate into informality.

In general, the worse hit among the stakeholders is the worker who could be forced out of a job.

Our hope is to improve labor and industrial policies. Our labor market policies have tilted more and more toward worker protection and safeguarding of income rather than on creating employment. The result of this bias has been to raise the cost of labor hiring within the economy to the great detriment of labor.

Other countries have avoided our problem by choosing the opposite approach. They did not focus on labor protection and income enhancements and in periodic government interventions in behalf of labor.

The solution of the contractualization issue mainly retained the importance of continued contractualization, but it did not touch on improving the labor market policies by making them more flexible.

The problem of creating employment depends on (1) more investments and (2) improvement of policies that open the way for investments that were difficult to materialize before. This means liberalization of policies, including those that might improve and make labor policies more flexible.

The government has not yet made any progress in liberalizing provisions for removing the economic restrictions on foreign direct investments in the constitution despite its plan to do so. There is no progress on this point in the discussions on constitutional amendments.

There have been no major changes in BOI policies concerning the improvement of incentives to foreign direct investments, despite pronouncements to that effect. Most FDI over the years have only come through the incentives given by PEZA, which are mainly dependent on tax-free imported inputs. As a result, most FDIs have little domestic impact. The BOI industries, had they welcomed more basic FDIs in greater quantities, would have enabled more industries that produce basic materials used by other domestic companies. The same policies on joint-venture preferences in incentives are still in play.

In the meantime, employment is rising in industry among our neighbors much faster than in the country. Recently, an Asian Development Bank official noted the transfer of many labor-using industries of restructuring China to Cambodia, Indonesia, Vietnam and other ASEAN countries. Conveniently omitted is the mention of the Philippines from the list.

This, unfortunately, is a continuous description of the lost opportunities the country has been unable to take full advantage of because of labor market policies that has out-priced Philippine labor through the mechanisms of very extensive restrictive labor laws and government mandated wage policies.

My email is: gpsicat@gmail.com. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/