Business World, 29 April 2018


HB 6908 or “An Act Strengthening the Security of Tenure of Workers” was approved on third reading by the House of Representatives. It proposes “Endo” or end of contractualization. Endo was DU30’s political promise he but refrained from issuing an executive order on Endo in favor of proclaiming his support for this bill. What is the extent of contractualization?

As per PSA data (ISLE, 2014), about 1.3 million workers or 30% of the 4.5 million workers employed in establishments with 20 or more workers in 2014 are non-regulars. Of these about 50% (630,000) are contractual/project-based workers. Non-regulars are most prevalent in Construction (27%), Manufacturing (22%) and Wholesale and Retail Trade (11%). Non-regular workers posted a growth rate of 16 % from the 2012 level.

We can safely assume that the overwhelming majority of workers in establishments of 19 or less workers (the informal sector) would be non-regulars, mostly casuals and seasonal. Workers here may not be covered by formal contracts, only verbal ones. No Endo here.

Contractualization has been painted as “evil” by rabid Endo advocates. Yes, abuses happen but even freedom is abused. We don’t ban freedom for a reason. Endo too can be beneficial as “labor sharing”: scarce employment opportunities are being shared by more workers; permanent work force are paid less than they would be without labor sharing; contractual work force realize some income, however sporadic, instead of none at all. Work attitude and work aptitude decay much faster among the long-term unemployed than among those with sporadic spells of employment.

If HB 6908 becomes law, fewer workers will be employed and many workers now currently listed as underemployed will become openly unemployed. Businesses will invest in labor-saving machines — more smart ATMs to replace bank tellers. Investment will locate in businesses where labor cost can be passed on.

HB 6908 does not outlaw “contractors” outright; it just makes life very onerous for would-be contractors to operate. HB 6908 would mandate 80% of every firm’s work force should be regular. The bill also mandates that employers and contractors are jointly and severally liable for violations of the provisions of the law. So McDonald’s will be now be liable for violation of labor laws by its blue guard and janitorial services contractors. That raises the cost of McDonald’s. But McDonald’s and its similarly burdened food service competitors can pass on the added cost to the consumers. Food manufacturers like Mama Sita and Universal Robina Corp., by contrast, cannot.

The Dominguez economics has identified Manufacturing as the vehicle towards accelerated economic growth and job creation.

For a low-income economy like the Philippines this strategy is spot on. Manufacturing average growth outstripped Services average growth in more successful neighbors South Korea and Thailand in the last four decades. The opposite is true of the Philippines.

No wonder we lagged behind these countries in poverty reduction and income growth.

Although we started to buck this trend from 2010 on, Manufacturing in the Philippines remains very shallow and very sparse outside Calabarzon, Metro Manila, and Metro Cebu. The Philippine investment rate remains puny at 22-23% when 25-40% is the norm in East Asia.

The Dominguez economics proposes to reverse this: TRAIN will bankroll a rise in government capital outlay from 4% to 7% of GDP to support the Build, Build, Build program. The upgraded infrastructure will reduce logistics cost which will spur private investment from around 15% of GDP to 18-20%. The investment rate of no less than 25% of GDP will be attained. Manufacturing will provide the extra push that was previously absent.

But there’s a rub. Manufacturing may not show up. Private investment may get stuck at 15%. The relative profitability of Manufacturing hasn’t risen significantly to attract investment away from Services.

What has happened thus far?

Power cost, a very powerful influence in Manufacturing growth, has just risen because of the coal tax and the elimination of VAT exemption of power transmission. We know that the 22% non-regular work force in Manufacturing lowers its labor cost which partly offsets higher power and logistics cost. This offset will be finito with Endo.

Mama Sita will see its labor cost rise and it cannot pass this on to consumers because foreign rivals will eat its lunch. Its profitability has to fall. Chances are Mama Sita and manufacturers as a group will reduce their work force by acquiring new equipment that supplant workers.

Endo will also lower the profitability of Manufacturing relative to Services in the Philippines. Why? Service sector firms compete only with local rivals subject to the same higher labor cost; they can thus as a group pass on the cost to consumers. Manufacturers cannot. Investment or what’s left of it will flock to the Service sector. The unintended consequence of misplaced generosity to organized labor may be less employment — as employment destruction over the long run takes over!

Contrary to rhetoric, the facts on the ground reveal a growing — not shrinking — anti-Manufacturing bias. What one hand proposes the other disposes. The clean separation between the DU30 politics and the Dominguez economics is proving illusory. In fact, the Duterte politics is beginning to pillory the Dominguez economics. Would that the Senate version is kinder to Manufacturing — to save not just the Dominguez economics but the nation.

Raul V. Fabella is a retired professor of the UP School of Economics and a member of the National Academy of Science and Technology. He gets his dopamine fix from hitting tennis balls with wife Teena and bicycling.