Crossroads (Toward Philippine economic and social progress)
Philippine Star, 16 December 2015

Mayor Eduardo Duterte, candidate for president, made a big splash on labor market issues when he said that if elected, he would put an end to the “contractualization of labor.” He said contractualization would kill the development of Philippine labor skills.

It is natural for all candidates to fall prey to populist pressures. We ought to understand these issues fully if we are to achieve progress that allows us to make use of our labor resources.

Contractualization defined. “Contractualization” in the Philippine context follows from a law that allows firms to hire labor from labor suppliers.  Another word for it is “outsourcing.” The firm hires another firm to furnish the labor supply.

Because of a requirement of law that all new hires who have worked continuously for six months must be regularized, the labor supply contract ends before six months is reached.

Regularization of employment has many implications: labor protection provided by the state; overtime and holiday pay; 13th month pay; and social security benefits.  Through outsourcing, it is possible to reduce the cost of hiring of labor requirements, simplify company operations, and, in general, reduce cost.

As practiced in the country, large companies have found it easier to source their labor requirements continuously from a provider who hires and organizes the labor pool that would supply the manpower needs of the enterprise.

We embraced advanced labor laws too soon. Many countries in East Asia have progressed by using their abundant labor supply as an advantage on which the attraction of investments could be built. They used low wages as the means to attract capital to set up industry.

The economic result for these countries has been a large degree of labor employment, faster development of the economy and, eventually, the rapid rise of productivity and incomes of labor.

This was the common story of East Asian countries: Japan, South Korea, Taiwan, Hong Kong, Thailand, Indonesia, China, and Vietnam.

These countries began to intervene actively in wage and other employment policies after they had achieved a high degree of employment in the country. By then, labor had also contributed a high degree of productivity as to enable a greater degree of gains for labor.

In the Philippines, advanced labor laws were instituted ahead of efforts to absorb labor more fully into industry. Early promulgation of high minimum wages tended to raise the price of labor in formal employment, resulting in high unemployment levels and greater poverty incidence as the years passed.

The accommodation of many benefits for employed labor and the government’s efforts to protect labor eventually led to the loss of critical industries that used to employ large amounts of labor.

The body of labor laws became excessively bureaucratized and made Philippine labor less competitive internationally. Contractualization was one way of keeping labor costs down. This, incidentally is mainly true for the employment of labor where there are many applicants.

For those companies that hire labor for short periods of time due to seasonal needs and also due to wage and labor cost concerns associated with the rigid regulations of the Philippine labor market, contractualization became desirable and a useful escape route.

Having said that, when the labor market for particular skills is tight, contractualization does not have any adverse effects and could even be of great help.  This is the case of the labor market for BPO (business process outsourcing) industry.

Wages in the BPO market are far above the range of minimum wages. Tightness of the market has made wages rise. The tightness of supply of workers has led toward efforts to expand across the nation rather than concentrating BPO human resources in the major urban centers.

It is a natural economic outcome: tight labor markets lead to higher wages. Firms in this case would look for the best way to hire their workers and better wages could only be the result.

When there is a high degree of unemployment and underemployment and in the presence of labor protection laws, laws that requires workers to be regularized as employees after six months of employment work against labor itself.

In this case, contractualization has been used to terminate employment arrangements before six months are up. This is where the contractualization problem becomes a ticklish issue.

This is why the countries that emphasized simple rules of employment have done better. They reduced the cost of doing business and enabled faster employment of workers as a result. They have removed barriers toward investments in the country.

As a result, they have succeeded in making their labor market conditions become tighter faster.

To prohibit contractualization opens a can of worms. If contractualization is to be disallowed by law, the useful course of action is to examine the labor policies that have made it prevalent.

There are many aspects of policy that contribute to this state of affairs. In fact, the government has undertaken study commissions to review labor market policies, only to shelve the recommendations.

Thus, prohibiting contractualization makes it imperative to understand how it ever got to be allowed as a labor practice. The country must address those features of labor market policies that make firms want to subcontract large labor requirements from labor suppliers.

Moreover, many of these added costs are derived mainly from the rigidity of labor hiring rules which aim to protect those hired from dismissal. It has become costly for firms to remove unwanted workers even when economic conditions warrant the move.

Rules of labor hiring is a mutual enterprise of firm and employee, and the main objective is to derive high and good output at the lowest possible costs. To improve labor market policies, any focus on contractualization has to require a review of the entire range of labor policies that made it into a wide practice .

To cite how these labor laws affect a business, simply consider this. To hire workers is an easy process. To require that a new worker become a regular employee within six months regardless of the performance of the worker could be an oppressive requirement.

To fire or to discontinue an employment for good reason requires a potentially large haggling with the labor bureaucracy if not large expense related to legal suits.