Labor Market Challenges in The Philippines

Alejandra Cox Edwards

September 26 2014

Employment in The Philippines

• Total labor Force 40 million

• Employed 37 million

• Wage and Salary 21 million

• Employed in Establishments

• With 20+ employees 3 million

• (Regularized contracts 1.7 mill)– Employment in 20+ employees sector grows slowly (4% per

year) from a small base (8% of E) – The labor force grew at 3% per year from 85 to 1995 and is

currently growing at about 1.7%

GDPpc Growth Rates (1975-2009)

The Philippines 1.2%

78

910

11

1950 1960 1970 1980 1990 2000 2010

Philippines

MalaysiaTaiwanThailand

South Korea

LN(Real GDPpc 2005 PPP dollars)The Philippines has lagged behind other Asian Tigers

77.

58

8.5

99.

5

1950 1960 1970 1980 1990 2000 2010

Philippines

ChileBrazilPeruColombia

Mexico

LN(Real GDPpc 2005 PPP dollars)The Philippines looks like a poor Latin American country

Unlike Asian neighbors, The Philippines has stayed relatively “closed”

• A good proxy for trade orientation is the Fraction of years in which a country's economy was open during the period 1965-1999, using Sachs and Warner (1995) criteria. (Source: Wacziarg and Welch (2008)).

Korea 0.92Singapore 1Thailand 1Malaysia 1The Philippines 0.34

Mexico 0.68Chile 0.69Colombia 0.4Peru 0.32Brazil 0.26

Open economies have done better in GDP growth, employment growth and manufacturing earnings

(1970-90)

Real earnings per worker Wage employment Highly protected economies India 2.2 2.0 Peru -3.3 2.6 Argentina -0.9 -2.5 Zambia -0.9 2.0 Ghana -5.5 2.2 Export-oriented economies Korea 8.2 6.6 Malaysia 2.2 8.2 Thailand 3.0 5.1 Source: Banerji, Campos and Sabot 1995.

The slow growth in labor demand

• Shows up in– STAGNANT WAGES– SIGNIFICANT OUTMIGRATION– LARGE FRACTION OF NEET – NOT

EMPLOYED OR EDUCATION OR TRAINING YOUTH

Slow growth in labor demand shows up in stagnant wages

1100

011

500

1200

012

500

1300

0P

P 2

013

1995 2000 2005 2010 2015YEAR

Survey covers non-agricultural establishments with at least 20 workers. Wages reflect pay for full time

Source: Occupational Wages Survey (OWS)

Real Average Wage

Growing outmigration flows• Based on Census data from various countries, it is

estimated that 8 million Philippinos work abroad (20% of LF)

• Philippinos with close family ties (who are captured in the annual Household surveys) represent 3% of LF in 1996, 6% in 2013

• About 6% of households report family members abroad • Remittances represent 10% of GDP. Only India and

Mexico receive more remittances

2.2 million OFW in 2013Source: OFW (Overseas Filipino Workers) Survey conducted

with Labor Force Survey annually

Trend in Youth NEET Rate, 2001-2010 (% of total youth population)

Source: Philippines Household Labor Force Survey, 2001-2010.

What is the problem?

• Strict Employment Protection Legislation– Workers hired become regular employees after 6

months on the job– Employers can dismiss with justified cause (major

fault or economic necessity). In either case, a severance is due, proportional to tenure on the job.

– Employees can allege unfair dismissals and judges can order reinstatement with back wages

A method to measure this cost

Expected Discounted Cost of Dismissing a worker measured in monthly salaries at time of hiring

LA Average

Industrial Countries Average

The probability of dismissal

• Heckman and Pages (H&P) (2000) study used a 12% rate of job destruction (based on US estimates)

• It turns out it was an underestimate.

• Department of Labor Manila used 16.4% (based on their own survey data)

Monthly Labor Turnover in the US

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2004 2006 2008 2010 2012 2014period

Accession Rate Separation Rate

JOLTS (Job openings and labor turnover survey) data

Quarterly Turnover US Labor Market

From 2004 to late 2007 the difference between accessions and separations lead to 1.4% annual employment growth

From 2008 to late 2009 accessions-separations lead to 3% annual employment reduction

From 2010 onwards accessions-separations have lead to 1.4% annual employment growth

68

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erce

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2004 2006 2008 2010 2012 2014period

Accession Rate Separation Rate

LTS (Labor Turnover Survey) data

Quarterly Turnover Manila Labor Market

The difference between Accessions and Separations results in an annual rate of employment growth of 4%

Evidence on effect of dismissal costs

• An increase in expected dismissal costs equivalent to one month of pay is associated with a 1.8 percentage points decline in employment rates (H&P)

• The impact on young workers' employment rates is almost two times larger (H&P)

• OECD studies have emphasized the impact of litigation costs, and probability of reinstatement

• World Bank (2012) compares the job security legislation and unemployment insurance as alternative policies to help workers in case of dismissal.

Policy Challenge for The Philippines

• Bring awareness

• Bring awareness

• Bring awareness

• Currently looking at the possibility of reforming SOT (Security of Tenure) and introducing some form of Unemployment Insurance with UI accounts.