Crossroads (Toward Philippine economic and social progress)
Philippine Star, 22 June 2016

In last week’s column, I presented the discouraging aspects of employment generation in the country using a recent World Bank analysis of the problem.

If these facts are recognized at the start of a new president’s term, the stage could be set toward a proper reform of labor market policies. Economic growth could raise the demand for labor and therefore raise employment. But the reform of labor market policies improves wider and deeper employment that are facilitated from the supply side.

‘Good’ jobs vs. ‘bad’ jobs. In the terminology of the World Bank study, “good jobs” pay above the “low-pay threshold” or are held in the formal sector. Good jobs provide relative security of employment and are covered by social insurance, they are associated with a “low risk of poverty.”

“Bad jobs” pay below the wage threshold, are informal, are not covered by labor regulations, and are mainly part-time or are casual and temporary in nature. The large phenomenon of under-employment in the economy represents the scarcity of good jobs in spite of the presence of laborers willing to work at even lower wages.

When all else fails, poverty and the worst forms of self-employment become the only options for those who cannot find proper jobs.

How we got to this outcome.  Pro-labor policies made us forget that pro-employment policies are as pro-labor, if not more so. Pro-employment policies are likely to be more labor welfare enhancing through the encouragement of productivity unlike protection policies which tend to generate dependence.

Pro-employment policies, therefore, deserve a higher place than labor protection in the market economy. Creating employment cannot be guaranteed by government orders and dole-outs. Important balancing acts between protection and employment promotion need to be made. Labor protection and income assurance schemes could lead to less employment. Less employment means less labor welfare.

In the end, however, the generous policies for labor created a big chasm between those who found good jobs and those who could not. In trying too hard, the government has raised the cost of employment and established high barriers from gainful work of willing workers at less pay. Such jobs are “good jobs” nonetheless. They provide certain incomes for prolonged periods rather than intermittent incomes. Less skilled and younger workers can find good jobs earlier. Having a job empowers learning from job experience and thus raises productivity.

Thus, more workers are brought up from poverty through inclusion in good employment the better it is.

The optimal labor reforms. The optimal reforms require that the trade-offs be recognized and that steps be taken to address the measures.

The “living wage” concept has caused the minimum wage calculation to go higher. In a large labor surplus economy, the “entry wage” at employment is more relevant for job generation. Protection from dismissal should be calculated with severance pay issues. Regularization by the sixth month of employment simply abetted the contractualization phenomenon, as we know it. The 13th month pay needs to be reconciled with productivity as a basis for work performance and bonus.

A government with a strong political mandate (like Duterte’s in 2016) has a good chance of delivering a change in these policies. Good fortune and large political capital should be able to handle the expected criticisms which accompany policy changes. With political will, the gains could be delivered.

The fact is that the present Philippine labor market is highly segmented between a small beneficiary of good jobs who own only a third of all employed, and a large, almost dominating number of workers who are incapable of rising from the problems of underemployment and bad jobs.

The other segment is the less vocal side of the labor market. It has little voice in policy-making. Its major constituents are the poor with low-income jobs and whose employment falls under what we have described as “bad” jobs.

Pursuing a major reform of this type will reduce the level of labor segmentation in the long run as the country is able to broaden the extent of good jobs in the economy.

Second best solutions: labor employment zones, including the export processing zones. Given the long history of these policies and their sensitivity to political backlash, the government could opt to adopt “incremental” policies that help to achieve the same adjustments in favor of more employment.

We could continue with existing labor market policies as they are, but we ought to introduce schemes that enable us to generate more employment through other means.

A proposal I had made a few years ago focuses on heavy labor-using industrial zones. The government could create “labor employment zones,” which are along the same lines of the export processing zones. These special economic regions could be set up under private sector sponsorships in the manner of current private export processing zones (PEZAs). However, they are designed to attract labor-intensive industries.

The main feature of the proposal for labor employment zones is that they are to be exempted from the wage-setting process under the current minimum wage legislation. However, important labor protection schemes such as social security, workmen’s compensation are required elements of the labor policies. This means that labor is protected with the help of social insurance schemes.

It is still possible for the country to attract back a lot of industries that had moved to other countries. We still have large underemployment that could be attracted in industries that require much labor use: garment-making, shoe-making, metal fabrication and furniture making. Many industries in the past abandoned the country for other markets only because of our labor policies.

Such zones need not be confined to manufacturing industries. There are many agricultural operations that could be developed, following this concept. The idea could be extended to agricultural plantations or through schemes that involve land consolidations of contiguous land reform cooperatives. (I have not worked out this concept, but it seems compatible with the idea of contract farming and other forms of land rental schemes that could be worked out with land reform cooperatives.)

In fact, the idea could be seen as an extension of the export processing zones created under private sector support and management as many current PEZAs are today.