Labor market policies and successful development

by Gerardo P. Sicat (The Philippine Star), 5 May 2021

May 1 or Labor Day leads us to thoughts about the welfare of our country’s working class. It is a fair question to ask how our working class has benefited from seven decades of political independence.

The work force and its well-being. We are now a country of 109 million people with an active labor force of around 64 million workers. On average, employment for years has hovered over a range of six to 10 percent of the labor force, but the underemployment covers around 20 percent among the employed.

One indicator of well-being, though imperfect, is GDP per head. Using dollars of equal purchasing value, the Philippine GDP per head in 2019 (well before the pandemic) was $9,302.

Compare this statistic with that of our neighbors in East and Southeast Asia: South Korea, $44,011; Taiwan, near-that-of-Korea; Thailand, $19,276; Malaysia, $29,619; Indonesia, $12,334; and Vietnam, $8,357.

It should be remembered that among these countries, shortly after our independence, development experts had viewed the Philippines as the country most likely to succeed in development, next to Japan, which was then a country rising from the ashes of defeat from the world war.

That opinion was not lightly given. The Philippines was among the most advanced economies under a colonial status before the outbreak of the war. It was highly tied then to the US economy.

The Philippine advantage was its access to the huge American economic market through trade. Economic recovery from the war was rapid in view of economic rehabilitation assistance that featured war damage payments. There were wide opportunities available in foreign trade because of a unique bilateral preferential trade with the US.

Moreover, our human capital was by far more advanced than most other colonial countries that secured their independence at about the same time. We possessed a wide base of highly literate population compared to many of these other countries because of the mass public elementary education and the public health investment from America before independence.

How the minimum wage became ‘prohibitively high.’ During the first two decades of independence, major labor laws were passed by the government.

Many of these were important for the protection of labor. The social security system was one of these. Much later, another law passed during martial law – the Pag-IBIG Fund, was designed to generate savings for housing. These were important laws in the form of withholding income to save for retirement security and housing investment.

Workers compensation and other standards of labor protection were in the law books even before independence.

One labor law that was well-intentioned and welcome was the minimum wage, which was enacted in 1951. It, however, suffered from a structural defect that stemmed from an ill advice. The Bell Economic Mission recommended a minimum wage that it considered was a fair wage. At that time, however, the peso was pegged to two pesos-for-one dollar so that, in Philippine terms, it was at a high level when considered in relation to prevailing economic conditions.

Given the high population growth rate and the low level of economic development at the time, the minimum wage was out of kilter with economic realities. It tended to protect the average worker rather than provide a decent entry wage for the first time, less skilled worker.

Having, thus, began at a “high” level, when the domestic economy began to suffer from exchange rate depreciations through the decades, it became the practice that minimum wage level adjustments tended to be also high. Such was the legacy effects of the initial minimum wage level.

This was so unlike the typical East Asian minimum wage rates. When they enacted their minimum wage rates, they applied a minimum wage to make it easy for unskilled workers to get employed and earn job experience. To this day, the minimum wage rates adopted in Thailand, Indonesia and Vietnam are so much lower than the basic minimum wage rate adopted in the Philippine setting. A result of this practice was that the minimum wage policy hardly was hardly a deterrent to employment.

Having said this, The original minimum wage rate enacted in the 1950s could not have been an impediment to employment creation in those days if the Philippines had only proceeded to continue having an open the economy.

However, after the initial balance of payments crisis in 1949-1950, fear of foreign economic domination plus the demand for industrial protectionism from domestic business became persistent. The restrictive economic provisions of the Philippine Constitution further encouraged this development at least in reference to the development of the domestic industrial sector.

To make labor market policies employment-friendly. During the late 1970s, in the consolidation of the Labor Code, then minister of labor Blas Ople yielded to the demand of labor to strengthen labor’s protection in their employment contracts and integrated these provisions in the labor laws.

An earlier reform was to organize the government to allow labor migration of Filipinos for employment abroad.

One consequence of these labor policies was to tilt employment creation of Filipino workers for foreign jobs. This jumpstarted the surge of OFW workers to foreign job openings.

Another consequence was the rise in the cost of prospective employment, an effect of the high minimum wage and the rigidity of the employment process at home. Firms could not fire or realign workers within the firm. This applied more to firms operating in the large domestic economy. Those operating in the export markets had the option to withdraw from the country. Thus, we lost attractiveness to many labor-intensive industries that pushed economic development in other countries.

In the end, these measures contributed to the hollowing out of the domestic industrial sector. Labor-using industries among foreign investors moved to locate to countries where lower labor costs and more flexible labor markets existed.