Employment productivity and wages in the Philippine labor market : an analysis of trends and policies

Abstract

The present government's concern is aimed towards poverty alleviation, productive employment generation, income redistribution and sustained economic growth. Given these development goals, issues concerning employment, wages and productivity which have gained prominence through the years should be dealt with. Rising levels of unemployment and underemployment along with declining productivity and real wages continue to plague the economy. Likewise, the balance of payments problems and the increasing indebtedness further aggravate the worsening economic condition. These major problems began to attract much attention for there arose dissatisfaction among the populace with the upsurge in the incidence of poverty and the occurrence of other related problems. With the task of finding solutions to these problems, the government implemented policies and initiated a structural reform program. The purpose of the .present study is twofold. First, the nature of the abovementioned problems is studied by looking at the labor market conditions. Specifically, an analysis of the trends in employment, wages and productivity, and a comprehensive historical account of how policies and policy changes affected them directly and indirectly, are presented. Moreover, the impacts of policies adopted by the government in the 1980s on employment, wages and productivity are assessed qualitatively. Policy recommendations are drawn based on the findings of the study. Secondly, the employment impact of the various structural adjustment measures adopted in the 1980s is re-examined within a general equilibrium framework. Specifically, the study provides estimates of the employment and wage effects of the structural adjustment program based on simulation experiments using the PIDS-NEDA (1987 version) macroeconometric models and Habito's (1986) computable general equilibrium model of the Philippine economy. Based on these, policy recommendations and new directions for future research in the area are provided. Part I of this study discusses the recent trends in employment, unemployment, underemployment, wages and productivity. It was observed that employment has generally increased over the period 1970-87 with a few years exhibiting slight declines. It was also observed that more than 50 percent of total employment was engaged in agriculture while the share of agriculture to total employment showed an apparent tendency to decline. The structural shift has been from agriculture to services, instead of agriculture to industrial sector. Unemployment rates in the country were high especially during the 1980s. Likewise, underemployment rates were also rapidly rising. Labor productivity roughly measured by output per worker has increased from 1961 to 1980 but declined thereafter until 1986 afterwhich a slight increase was observed in 1987. Nominal agricultural and nonagricultural wages has been increasing through the years. However, real wages in both sectors declined. A review of the past and present policies showed that the industrialization policies implemented during the post-war period generally increased output and investments but their inherent capital bias resulted in the low rate of labor absorption. The manufacturing sector failed to generate enough jobs necessary to absorb the increasing labor force. This was due to factors like the limitations in the domestic market for output of import substituting firms, and the misallocation of investible funds to high cost industries as a result of incentives and short-sighted labor legislation which raised labor costs and discouraged employment. In addition , the adoption of an outward-looking strategy like export promotion is hindered by the lack of reciprocal response in the international setting due to increasing protectionism and stagnation among developed economies. In search for policies which can increase labor absorption, the following points were made based on the analysis. First, what is called for is a system of taxation and protection which is nonfactor price distortive. Secondly, economic growth and employment generation can be accelerated with a firmer commitment on the part of the authorities in implementing the structural reforms. And lastly, the outward-looking strategy is worth pursuing giving emphasis to light manufacturing industries which showed resiliency to the impact of the economic crisis as evidenced by its ability to maintain relatively high levels of sales and small levels of labor displacement during the crisis years. Part II provides a quantitative assessment of the impact of structural adjustment measures on employment and wages. Using the PIDS-NEDA macroeconometric models, three counterfactual experiment related to structural adjustment policy reform were conducted to appraise their employment effect for 1980 to 1990. Firstly, simulation results showed that the tariff reform program (TRP) has a positive effect on output, employment, exports and prices. Secondly, removal of export taxes on all products except logs in 1986 has a small positive effect on output and total employment except in 1989 and 1990. The policy has favorable influence on current account balance by effecting an increase in exports. Thirdly, an evaluation of the financial liberalization program using the PIDS-NEDA model was found not to be feasible given the shortcomings of the present version of the model. Using Habito's computable general equilibrium model, two simulations were. done. First, the estimates showed that TRP increased total output and average wage implying positive effect on the labor market. The policy increased the relative price of nontradables while it decreased relatively price of importables. It also decreased average wage in agriculture and manufacturing while it increased that of nontradables. TRP was found to favor middle income groups. Second, BOI incentives decreased total output, average wage and total employment. It has a regressive impact on real income across household group. The shift to a flexible exchange' rate regime has a positive effect on output and prices. Labor is reallocated into export and import substituting sector away from nontradables