Wage policy and labor regulations have produced an army of poor and low productivity workers

June 11, 2014
Crossroads (Toward Philippine Economic and Social Progress) by Gerardo P. Sicat
(The Philippine Star) June 11, 2014

A new study that addresses jobs expansion and development strategy was recently completed at the government think tank, the Philippine Institute for Development Studies (PIDS ).

The authors (Vicente Paqueo, Aniceto Orbeta, Leonardo Lanzona and Dean Dulay) of the study are all Filipino economists who have worked on labor market issues for prolonged periods. Dr. Paqueo, who used to teach with the U.P. Economics faculty had a career at the World Bank. Dr. Orbeta is a fellow at PIDS, and Dr. Lanzona is with the Ateneo Economics faculty.

The PIDS study.” The major purpose of the study is to find ways to improve the expansion of jobs in the Philippine economy. The subject has many dimensions. The roots of the problem has to be investigated and sound evidence has to be provided.

Labor laws and regulations have been devised to protect labor from abuses by employers and to improve the power of labor to bargain for decent wages and working conditions.

Practices and regulations in the labor market are focused on minimum wage mandates, labor regulations concerning hiring and firing of workers.

Such practices have their costs. They render the labor market less flexible. For instance, long conflict resolution processes raise the cost of employment. Potential negative effects of these policies could defeat the objectives of improving labor welfare.

In other economies where the minimum wage has been adopted, the level of the government orders on the minimum wage did not impinge on the employment objective because their wage orders were minimal and not high.

Not so with us. Philippine minimum wage policy has been the object of a lot of attention because, from the very start, government minimum wage mandates have been “high.” They were made to carry the burden of raising wages for workers.”

Because of the critical role played by minimum wage policy in setting wages for workers in the country, the first order of business of the study was to focus on the evidence concerning minimum wages.

Last week, a seminar on this study was organized at the AIM (Asian Institute of Management) Business Policy Center in Makati. I agreed to react to the study and here below are some of the comments I made.

Minimum wage and employment: the overall effects.” The study’s findings support many of the points that I have been saying for ages about the ill effects on employment and on our development performance!

Their findings reinforce the conclusions of economic analysis based on the country’s large labor supply. Aggressive minimum wage rates increases have led to reduction in employment, making households dependent on wage incomes suffer significant drops in their welfare, some falling into poverty.

Such detailed findings are now possible because there is much more body of statistical data available. The statistics include labor force surveys; surveys of business enterprises; and more specific household income and poverty incidence panel data.

Research methodologies have also improved. Imaginative ways to link demographic characteristics with other wage variables have led to micro studies that focus on the impact of employment on firms and on household welfare.

Minimum wage and business enterprises.” The first major finding is that when minimum wages are raised, business enterprises reduce their hiring of labor. (The rise in minimum wages has often meant significant increases in the daily wage rates and/or in wage benefits as mandated by government orders.)

The study finds a significant negative relationship between minimum wage and the number of production workers employed. Thus, minimum wage changes reduce employment.

In addition, further investigation on the impact on production workers have shown that the most vulnerable groups – the young, less educated and inexperienced workers – suffer most from these observed relationships.

Minimum wage and increasing household poverty.” Another quite important finding is that minimum wages have aggravated the adverse income shocks to poor families and have contributed to the increase in poverty among the already poor.

This outcome is true for families dependent on industrial incomes and also for those on agricultural wage incomes. The study finds that rapid increases in either industrial or agricultural minimum wage leads to a reduction of household income.

Links to early studies of low employment impact of economic growth.” The results of the study validate many early findings associated with high minimum wage policy on employment and on labor welfare. These have been stated more or less in terms of other policy issues affecting employment and incomes.

Low employment creation is associated with Philippine economic growth. This poor performance is related to economic policies that promoted protection and import substitution in the past. Past industrial policies led to uncompetitive industries and to the allocation of labor and capital in highly protected policies with low productivity.

One way of interpreting such an outcome is through poor “total factor productivity” of Philippine growth performance compared to those of many East Asian neighbors. “Jobless growth” is also as much a description of this poor quality of performance in which growth was accompanied by low creation of quality jobs.

The army of under-productive and poor workers.” At the outset of the study, the authors constructed a table of “full-time equivalent” low income workers who are either employed or underemployed, who receive very low incomes or who are unemployed. Most of these work in the informal sector of the economy where income is very low.

Such workers constitute what the authors call “under-productive workers” and they turn out to be very significant.

This under-class of low income workers grew from 13.9 million in 2001 to 20.7 million workers in 2011. I would call this the labor surplus that cannot be absorbed into gainful jobs that support a decent living standard.

What is more significant is that this class of low income workers has been growing at an average of 4.5 percent based on the numbers that they have calculated, even more than twice the growth of the Philippine population (!).

As a percent of the population in 2011 of 93 million, it comes out as more than one-fifth of the country’s population.

The implication of this is massive. The country’s job creation program has been falling behind. The reason is that we are stuck with a wrong policy that fails to promote employment!