Making labor policies modern and flexible

by Gerardo P. Sicat (The Philippine Star), 12 May 2021

(Continued from April 14, 2021)

The labor market conditions that I describe are based on pre-pandemic information available. Certainly, the effects of the pandemic on labor market conditions is to worsen their influence on jobs and incomes.

Where the poor jobs and the high quality jobs are. Studies of poverty and employment in the country reveal that the prevalence of jobs in the economy can be found largely in the informal sector of the economy.

The informal sector is the final receptacle of job-seeking. It is where poor people and those who cannot find good jobs under the legally protected wage and employment standards obtain the means of livelihood for their sustenance.

The good jobs are available mainly in the organized, formal sector of the economy, where labor rules and regulations are applied. This is the modern sector of the economy where compliance with labor rules and regulations is followed.

In the modern formal sector, the establishments that positively respond to the government’s investment incentives undertake their economic operations. This is where established domestic enterprises find dominance. It is also where foreign direct investments locate.

The modern sector also includes the government which is the biggest employer in the economy.

Poverty studies also reveal that the median incomes of households is far below what might be considered the legal minimum wage income equivalent. A World Bank study analyzing such data (2013) wrote:

“The labor market is segmented into ‘good’ and ‘bad’ jobs, with the poor working in the latter. They hold jobs that are informal, temporary or casual, and low-paid. Widespread informality means that the poor neither benefit from the minimum wage policy, nor from employment protection legislation. They do not benefit from wage growth either, because their bargaining power is weak.”

Any good researcher can also undertake the following measurement. Tabulate all the members of the Social Security System and GSIS, netting out the retirees receiving pensions. I will be surprised if the resulting proportion of active members of the government’s pension system will exceed 25 percent of those reported as employed. The proportion of members of the pension systems is very low when compared to those employed.

The fact is that the informal sector of the economy is the mass employer of Filipino workers, largely as a consequence of minimum wage legislation. The substance of low wage income earners are those who cannot find and/or had given up finding employment in formal establishments.

There has been in the country a failure to attract a large base of investments in industry, manufacturing, and other fully compliant enterprises to Philippine labor laws.

A reason for this can be gleaned from a compelling study undertaken at the PIDS on “Labor Policy Analysis for Job Expansion and Development,” by Vicente B. Paqueo and Aniceto Orbeta, Jr. et al in 2014. Let me quote them:

“Philippine minimum wage is higher than that of China, Thailand, Indonesia, and Vietnam, and the East Asian average. Without productivity adjustment, Philippine labor cost is three times more expensive than Vietnam’s. Philippine labor cost remains higher than that of competitor countries, even when differences in workers’ productivity are taken into account…”

One of the worst effects of Philippine labor policies, especially with regard to the minimum wage, is that on the employment of the youth, those entering the labor force for the first time. Because the minimum wage laws protect the entrenched workers and those with better skills, the young cannot find good jobs that enable them to build upon a work experience. As a result they end up either unemployed or finding very low productivity jobs.

For many who live in the midst of poverty, who have family responsibilities – such as old parents to support in their golden years, children to feed and educate in their young years, and responsibilities to sustain a given standard of living that has allowed generations to exist – it is preferrable to have a steady income that brings in sufficient food, comfort, and day-to-day security. Chancy, seasonal work, with great variation in income flows, do not help to create for stability of income for families who just want to sustain their living standards and grow with that standard block by block, that is, slowly.

All labor union leaders and those who plea for worker protection and higher incomes and wages need to understand this fact. If they truly to have in mind the interest of labor and of job creation for the whole country, and if they want the country to achieve the progress and welfare that labor has a right to enjoy, then they must understand the ABC of true economic and labor reform.

Components of true labor and job reforms. Any sound economic recovery will require the improvement of labor policies to reverse their poor employment impact.

To adopt strong reforms that address what is wrong with existing policies requires that policy-makers must recognize the need for greater flexibility in labor market rules especially in the context of major modern challenges.

I associate my views with those recently made by the Foundation for Economic Freedom (FEF) in seeking the need to reform and modernize Philippine labor laws.

Below, I quote the call of the FEF:

“Reframing labor laws and regulations by all sectors concerned may be necessary to create an environment conducive to job generation while simultaneously protecting the rights of workers to decent livelihood.

“The framework of labor laws needs to be revisited and reframed to modern markets as these outdated systems may act as a barrier to growth of labor-intensive industries and reduction in high unemployment.

“A whole of society approach to solving labor market imperfections is necessary not just because of pandemic-related disruptions.

“It is also crucial as the fourth Industrial Revolution continues to bring changes in the country and is threatening even those who have retained their jobs.

“The present crisis should be an opportunity to rethink policies from security of tenure to unemployment insurance and worker retraining.”