Labor Market Challenges in The Philippines Alejandra Cox Edwards September

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 ( ) The Philippines 1.2%

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 , using Sachs and Warner (1995) criteria. (Source: Wacziarg and Welch (2008)).

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

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

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 2013 Source: OFW (Overseas Filipino Workers) Survey conducted with Labor Force Survey annually

Trend in Youth NEET Rate, (% of total youth population) Source: Philippines Household Labor Force Survey,

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

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

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