ONE of the key events affecting the Philippines today is the formation of the Asean (Association of Southeast Asian Nations) Economic Community (AEC) by 2015. The goal of the AEC is regional economic integration, which envisages the following key characteristics: 1) a single market and production base; 2) a highly competitive economic region; 3) a region of equitable economic development; and 4) a region fully integrated into the global economy.
The impact of the AEC on the labor market is twofold: The first is through the change in economic structure that results from the unification of markets with the partner-countries; the second, from the expected demand for the harmonization of social standards with these countries. One particular issue is the establishment of professional qualifications that all countries are expected to enforce. The promotion of best practices in labor policy, the formalization of contracts and migration restrictions are also enshrined as being among the standards. Although the other Asean members currently do not expect the Philippines to match every high labor standard, and while many agreements still need to be finalized, we are expected to conform to these international labor norms, despite their associated costs.
Nevertheless, various areas of cooperation can benefit the country and the labor market in several ways. For one, there will be trade intensification for certain goods, and, for another, there will be a freer flow of certain types of workers, especially professionals, across the different member-countries. It will be important to weigh the costs and benefits of these new arrangements, as these can favor only a few sectors of the economy.
In any case, even without the AEC, labor standards should be improved for two reasons. First, certain non-Asean members that intend to forge a free-trade agreement with us would often insist on integrating labor-market standards with their trade partners. As the country, as a whole, stands to benefit also from such arrangements, it is important to maintain country standards at international levels. Second, the workers whose rights are often ignored are also the poor and disadvantaged. As a result, even though they may be able to find work, it would be difficult for them to reach a higher income status.
One particular case of labor standards being ignored is seen in decent work hours. Data from official sources show that roughly 25 percent of the employed had recorded excessive work hours, equivalent to more than 48 hours per week. The following points are important: first, the women tend to put in more hours at work than the men; second, services have a greater proportion of excessive work hours, and this is found mostly in retail trade and other types of low-productivity work; third, the self-employed are more inclined to spend additional hours than other worker classes. These types of activities requiring excessive work hours can have a negative impact not only on the time allocated for their household activities, but also on their health.
While there is no issue about the need to meet the core labor standards, the main area of contention is the process by which these are going to be met. In an 1995 article linking labor standards, trade and labor-market conditions, Mita Aggarwal of the US International Trade Commission proposed that a distinction must be drawn between standards related to labor processes and structures, and standards related to labor outcomes. This distinction would apply some definition of what constitutes a “minimum” standard to the determination of basic worker rights in terms of labor processes. Presumably, the point of differentiating labor processes from the outcomes is to make allowance for differences and changes over time in the level of economic development and related factors. What remains ambiguous, however, is the difficulty of deciding whether the identification and guarantee of labor processes lead to the improvement of labor outcomes or not.
One solution is to implement tax and subsidy measures to increase human capital and enhance training in the country. In effect, labor standards, instead of reflecting market adjustments, become the means for income distribution. Changing income distribution through policy is equivalent to a change in labor standards. With better standards, large firms and higher-income classes will have to give up part of their profits and resources to improve workers’ welfare. There is nothing peculiar to labor standards in this, and a nondistortionary lump-sum income (or wealth) redistribution policy is the first best policy to move income distribution (and the equilibrium labor standards) in the right direction. If the first-best policy is not feasible, then other policies (like commodity or factor taxes or subsidies, for example) could, in principle, be used to achieve better income distribution and labor standards, albeit at the cost of lower production.
Which taxes and what levels would be used to achieve the desired change in labor standards while minimizing production losses will vary across economies. If the question of labor standards could hinder regional integration, it may be in the collective interests of countries to cooperate in setting these standards. With sufficient encouragement and increased financial support, the Asean can provide a multilateral forum that would serve to strengthen its role and authority in pursuing improved labor standards within the region. For us, the challenge is to reinforce the institutional reforms that the AEC is designed to achieve, that is to ensure that everyone benefits from the economic integration.
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Leonardo A. Lanzona Jr., PhD, is the director of the Ateneo Center for Economic Research and Development of the Ateneo de Manila University and a senior fellow of Eagle Watch, the school’s macroeconomic research and forecasting unit.