Crossroads (Toward Philippine economic and social progress)
Philippine Star, 20 February 2013


Last week, I proposed a reasoned approach on how to generate a faster rate of employment growth. In spite of the recent positive economic news for the country, it is essential to create quality jobs in industry, agriculture and commerce. Good news does not bring in the jobs automatically.

Around one-fourth of the country’s labor force is desperately in search of quality jobs that provide them steady income and a hopeful future. Yet, judging from recent news, some policy makers are just tinkering with the wrong policy prescriptions!

The profit sharing bills in Congress. Proof that the country will have a hard time creating that kind of employment awareness was immediately confirmed by news coming from the House Committee on Labor and Employment. The committee approved a measure requiring private companies to give five percent of their net profit to their employees in the form of profit sharing. There is also a bill in the Senate that proposes to require that 10 percent of the profits of private companies be set aside for profit-sharing.

Profit-sharing is one tested option for profitable companies to improve employee morale and raise productivity. Prosperous companies will want to share their success with their workers. But to impose it as a requirement of law on all firms is not the answer. We will court disaster doing so.

The profit sharing bill is one of the “do-good” bills that, if transformed into law, will make it even more unpalatable to companies that have avoided the country for our labor regulations. Many investors have voted with their feet and don’t even bother to comment on what we try to do. Thus, focusing on such measures add to the difficulties that make us a country with a high rate of unemployment and underemployment.

Many companies are already forced to undertake some form of wage padding without link to productivity. The mandated 13th month pay, which is about one-twelfth of total yearly pay, is a forced kind of profit-sharing, when the firm earns some profits. Otherwise, it has added to a cost center attributable to labor.

If policy makers are thinking of earnest profit sharing, they should abolish the 13th month pay and require that profit sharing be linked with labor productivity. But firms that are forward looking and profitable already engage in such practices and don’t have to be told.

However, it seems that the profit sharing being contemplated is in addition to the 13th month pay, which is another form of mandated wage entitlement.

Mismatch of labor laws with the country’s huge employment problem. The country’s experience with various forms of regulations in the labor sector – including the state-ordered minimum wages that are out of line with business and economic realities – has made it difficult for the country to generate a healthy growth of employment. It has also fouled up the orderly progression of our industrialization and economic development.

Philippine labor laws are among the most advanced in East Asia – the result of premature populist policies. In turn, the government is saddled with impossible enforcement problems. The labor sector has spawned corruption – involving private companies, labor leaders and the bureaucracy that enforces the law. Labor adjudication is a problem area for governance.

Unduly high standards have kept good companies from setting up businesses in the country. Coupled with other policies, they have unduly hampered Philippine competitiveness in production. The country has lost out in the textiles, garments, and other heavily labor-using industries because of the uncompetitive wage and regulatory frameworks concerning hiring flexibility. Where are these companies located now? They have gone to our neighbors, who have done very well and built their economic experience based on these industries. These industries have been able to nourish a large segment of their labor force.

For the employed or for the unemployed or for all workers? Labor laws should be crafted so that they are fair for all workers in the labor force. The highly successful East Asian model of economic development emphasized job creation in their economic strategies and succeeded to create many jobs in industry, agriculture and commerce as a result.

The country’s labor laws marked by high, mandated minimum wages and on strict provisions on hiring and firing and on the regularization of employment have caused the decline of industries that use factory labor intensively. Coupled with the high cost of misguided nationalistic economic policies, such labor policies have brought about economic underperformance. It is the country’s domestic labor force that has borne the ultimate burden of the suffering.

Further explanation for the ‘labor employment zones’ approach. In an effort to recoup the possibilities of new and large employment gains for labor-intensive industries under factory work, I have suggested the “employment labor zone” approach.

This approach could be useful for relatively depressed areas of the country. The current labor market policies could continue nationwide except where labor zones could be established. Such zones will provide proof that great strides can be made in bringing about new employment in the country.

I did not have space to elaborate on this approach in last week’s column. The labor employment zone is designed to provide employment incentives to large scale, organized industries (in agriculture and in manufacturing).

The labor employment zones that would be free of the high cost of mandated minimum wage adjustments, where business conditions would enable wage setting policies. Firms within the zones are also exempt from the hiring and firing restrictions of labor contracts. But workers in these zones will enjoy social security and workmen’s compensation benefits so that they also have social insurance coverage.

The enterprises thus to be encouraged in these zones are still substantial: garments, textiles, shoes, toys, sophisticated handicrafts, furniture, and some forms of agricultural processing. Many of these industries have lost their foothold in the country. The country’s advanced labor laws have driven them out of sight.

New employment that is generated will surely enable a lot of workers with low educational attainment to obtain jobs. Workers who keep their jobs continuously develop additional skills and gain greater productivity with time. That provides them opportunities for future advancement. It is idleness – prolonged unemployment – that paves the road toward the poverty of families.

Before export processing zones were allowed in the country, domestic firms enjoying high industrial protection could not find success in the export markets. As a result of the export processing trade regimes, the country has realized a healthy growth of new industrial exports. The same could happen in the case of labor employment zones.