Crossroads (Toward Philippine economic and social progress)
Philippine Star, 12 October 2016
Upon his election to the presidency, President Rodrigo Duterte promised to get rid of “contractualization,” the practice of short term employment contracts and labor outsourcing that has become a tool for supplying labor services to enterprises within the country.
Endo, or contractualization. Contractualization as we know it today evolved as a means of simplifying hiring arrangements for enterprises. To some extent, the complex rules and regulations governing labor market policies created incentives for some enterprises to resort to the contractualization of labor.
A peculiar context in which the labor contractualization has come under criticism, the contracts of employment for the worker would end before six months are reached, hence the name, “endo” or end of contract.
The immediate culprit for this peculiarity is a provision in the Labor Code: employees who have worked for six months within an enterprise are required to be regularized. As a reform, the six months provision could be replaced by a longer period of transition toward “regularization.” (But this requires amendment of the law).
To end ‘endo’. The marching order to end the contractualization is not an easy task to undertake. The problem of endo involves three parties in general: the enterprise that uses the labor; the labor service supplier who hires and supplies the the labor; and the laborers who are hired.
Under the current setup, as contractualization has developed, the company using the labor is not the direct hirer of the worker. The enterprise in need of labor services uses the labor service provider to hire workers.
In short, the productive enterprise deals only with the labor provider in terms of the hiring. By using the labor service provider, the productive enterprise develops no direct employer-employee relationship with the worker.
In the course of years, high labor standards have been adopted: labor protection provisions include regulated working hours and overtime pay, holiday benefits, protection from firing, 13th month pay, sometimes, cost-of-living allowances. There are also benefits related to pension (social security); housing finance (Pag-Ibig); and health care (PhilHealth).
To top this, there is the highest component of labor cost, the wage. In reality, this is partly determined by the minimum wage. Since the late 1980s, the minimum wage has been determined on the basis of regional minimum wages applicable in the respective regions of the country. Despite this, the Manila minimum wage sets the anchor for all the regional wages.
Philippine labor costs have become relatively high. Thus, Philippine labor has become less competitive compared to some developing countries in the ASEAN region.
Many labor intensive operations that used to be located in the country have moved to other countries out of the volition of wrong labor policies: in the 1980-90s, to China, before; to Vietnam, and now to Cambodia. In the early 1980s, the movement of labor-intensive operations from investment operations went to Thailand and Indonesia.
Such labor costs have encouraged the practice of contractualization. Contractualization helped to reduce the cost of labor because temporary workers are not entitled to all the privileges associated with the benefits accorded to regular employees. But this has unsettled the skill growth and steady employment of the Filipino worker. Also, there are cost savings associated with recruitment.
However, such high cost is not commensurate with the fact that there is an enormous supply of labor seeking jobs at low wages. Poverty and lack of skills of many such workers also implies that their productivity often cannot match the high cost of mandated minimum wages. Factor in the various forms of benefits that employers are required for regular employees, then the gap in wage and productivity got even wider.
This applied to companies that are in export industry which require a high degree of labor. Contractualization is also commonly used by enterprises operating and selling their products in the domestic market.
A termination of endo will raise the cost of labor per unit since many of those affected are likely to be non-regular employees. These workers will benefit from an increase in income. The hiring enterprise will assume more of the mobilization costs in hiring labor that was once provided by the labor service contractor.
Definitely, a fall in employment arising from the termination of endo will come about. Some companies will reduce their operations due to higher costs. Also, some workers will no longer be hired. The negative impact will be severe for those losing their jobs.
Need to reform labor market policies. But the government wants to create employment, not unemployment!
In order to avoid the consequences just enumerated, it is essential to tilt the outcome toward employment creation. Some correction of policies would be needed to neutralize the impact of ending endo.
It is a paradox, but it is true. Measures that appear to be modest in terms of labor policy will allow us the greatest flexibility in achieving more development and improve the welfare of labor. This is borne out by the experience of many countries in our neighborhood.
The proposal of labor groups to raise the minimum wage and to make it national in scope will defeat the program, and even worsen the impact of endo termination. Their proposal to increase the minimum wage by P125 and to make it into a national minimum wage will defeat the economic reforms of the government.
The current regional minimum wage rate system is better than returning to the national minimum wage. The regional wage-setting process adds the element of competition in wages among different regions of the country and will facilitate growth of poorer regions.
The logic of minimum wage setting should be based not on “living wage” but on “reasonable wage” that workers seek for their first employment. The minimum wage should be seen as a fair minimum wage for people in need of jobs. This strategy will permit family income to rise since more members of the family could get employment, rather than only one (or even none at all).
Rising productivity should be the guide for raising wages. This will encourage investments in innovation as well as bring up more workers out of poverty.
Let’s promote more domestic investments, more foreign direct investments and more infrastructure investments in the country. With these activities, more jobs will be created and eventually, we eradicate unemployment and underemployment.
There are aspects of the labor laws that can be improved to enable greater flexibility for the firm to undertake decisions that encourage productivity and flexibility.
