How to raise employment quickly and reduce poverty

The Philippine Development Forum (PDF) was held in Davao last week. The PDF is a meeting chaired by the Philippine government and the World Bank and took the place of the Consultative Group for the country, a legacy from the development efforts of the 1970s.

“Growth and jobs.” The forum was a formal discussion among Philippine government officials and its development partners where relevant issues on economic growth and development endeavors were taken up.

There was a celebratory mood in the meeting due to the spate of good news on the development front. Strong macroeconomic performance and positive judgments from most observers of the economy have been streaming forth. In recent times, the main problem has become one of how to work the country’s way toward stable progress in a time of relative plenty rather than of crisis.

The summary statement of Motoo Konishi, World Bank Philippine director, sums up well this optimism about the country:

“The Philippines is no longer the sick man of East Asia, but the rising tiger. There is macroeconomic stability, and the fiscal situation of the government is sound and improving. The fight against corruption is being waged with determination, and it is paying off. Transparency is improving everywhere in government.”

Though this perception is backed up by recent data, it is tentative and fragile. If one read between the lines, there is great hope in such words of encouragement: “sound and improving… with determination… improving everywhere.” I read these as a plea for the application of correct reforms and the continuation of what is succeeding.

The message is most overwhelming when the country’s employment challenge was tackled. The magnitude of the problem is big but it also demands providing not simply jobs but good quality jobs which bring in economic security for workers and rising productivity for the nation.

“The hidden employment problem for Philippine labor.” Philippine statistics on employment and underemployment are misleading. They are not informative about the quality of jobs that those employed hold. In fact, many of the employed are underemployed or are seeking better jobs that they are unable to find.

Judged by the poverty of many common workers, there is a large segment of the labor force that earn less than the equivalent of the mandated minimum wage. The ILO estimates that 40 to 80 percent of Filipino workers – or an average of 60 percent – is in the informal economy and that this situation has not shrunk but has risen.

“The challenge of 14.6 million seeking quality jobs by 2016.” Mr. Konishi elaborated on the employment problem at hand. There are 10 million unemployed or underemployed Filipinos in 2012. With one million new job entrants entering the labor force every year up to 2016 under current population age distribution, there would be 14.6 million jobs to fill. These are the evident projections from the ranks of the unemployed and underemployed from 2012.

“More quality jobs and a heightened sense of urgency.” NEDA’s Arsenio Balisacan gives us some sense of the investment requirements. Just to provide 621,000 direct and indirect jobs, he states that the country needs $3 billion of new investments (or, P123 billion after multiplying by P41 per US dollar). This calculus implies that each quality job will require $4,831, or P198,000, per laborer.

These numbers are rough, too optimistic, and could be on the high side. They are based on the provision of highly capital-intensive types of investments in various sectors of the economy, including manufacturing and agriculture. Moreover, we could still generate many quality jobs that do not require that much investment in labor-using industries that would require lower wages but which employ a lot of less skilled and less educated workers who form the bulk of the unemployed and underemployed!

Some of the job opportunities will come from up and coming investments in infrastructure and new private investments from local industry and from new FDIs attracted by current trends. Beyond the much-touted improvement in governance, much bolder economic reforms are still needed if we are to raise the level of employment in the economy. The reforms have to be based on labor cost advantage and on more favorable FDI policies than are presently written in current policy.

Among the most important proposals that could change the employment landscape are those directed at labor market policies. This is a major area that the government has been shy to move into.

One reason is that policy makers, egged on by labor leaders who seek privileges mainly for those who are already employed, are too blind to see the obvious benefits from more flexible labor policies. Also, foreign development partners rightfully do not wish to get muddled in the local politics of the problem but many investors are likely to select investment sites that provide them advantages so that they might choose to migrate elsewhere than to us.

In my view, the creation of more jobs could be undertaken by providing a strong stimulus for the private sector – including foreign direct investments – to employ more workers in organized industry and agriculture. I have talked about this type of reform in the past.

“Labor employment zones again.” It has the following ingredients. Let the current labor wage fixing and labor standards under existing policies exist for the developed parts of the country but reform the same corresponding laws to allow the setting up of “labor employment zones.”

The companies that locate in these zones will hire labor under rules that are free from the minimum wage setting standards and from the rigid rules of hiring and firing. The zones are to be located – like export processing zones – in the poorer regions of the country. Many of the unemployed will rise from poverty in these regions and they will no longer flock into Manila and other richer cities as much.

The country became an exporter of manufactures only after we set up export processing zones and worked around the highly protected domestic industrial regime. The same will happen if we apply the labor employment zones scheme. We will attract labor-intensive domestic industries and FDIs and accelerate job creation, reduce poverty in the countryside, beat the ill effects of rigid labor laws and transform the country into a faster rising tiger economy.

Two recent papers that I had written at the UP School of Economics elaborate on the rationale of the labor employment zone proposal.[ References: G.P. Sicat, “Spotlighting on High Economic Growth, Employment of the Poor, and Poverty Reduction,” Discussion Paper 2010-07 and “Reform of Philippine Labor Policies” delivered as the Angara Fellow Lecture, August 21, 2012, UP School of Economics.]

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