Can PHL get out of the low-wage, low-skilled, low-value-adding economic trap?

One of the root causes of the “endo” problem is the poor structural character of the economy that has developed in the last four decades. Unlike our neighboring Asian countries which have successfully transitioned into high-value and modern industrial set-up, our economy has been trapped in low-wage, low-skilled, low value-adding economic structure.

While unemployment is going down, underemployment remains high. Most of the jobs available are in the low-wage and low-value-adding services sector, informal economy and low-tech manufacturing. Workers hired in these sectors are simply called by some employers and human resource managers as “replaceable labor”. These are workers who can easily be recruited and can easily be disposed of under various short-term “endo” hiring arrangements. It is doubtful if the proposed security-of-tenure (SOT) legislative remedies can cure or abolish the “endo” problem without a miraculous transformation of the economy.

Now what is the evidence for the foregoing observations?

The World Bank, in its Philippine Economic Updates (April 2018), concluded that the “Philippines has transitioned from an agricultural economy to a (low-end) services economy without developing a manufacturing sector”. Of course, this observation is not new. What is new is that it is coming from the World Bank, one of the authors of the “structural adjustment program” (SAP) of the 1980s-1990s. The SAP program, it will be recalled, was supposed to transform the Philippine economy into a modern industrialized one. This has not happened.

But some of the findings of the World Bank, using their own words, are worth citing here.

First, GDP growth and employment increase do not translate into higher incomes for the workers. “Although employment increased by 20 percent between 2006 and 2015 when the country’s GDP increased by about 60 percent, real wages remained stagnant, with only a four percent increase in real terms over the period”, the World Bank wrote. Further, it warned that “the low growth of real wages is likely to have a negative effect on the competitiveness of the country’s economy in the long run, as the most educated Filipinos leave the country for better job opportunities”. The truth is that this talent exodus has been happening and has given rise to the twin problems of talent shortage and “talent poaching” in critical industries such as those reliant on skilled/experienced engineers and ICT programmers.

Second, the “structural change” in employment, from the 1970s to the present, did not follow the East Asian pattern. Instead of surplus agricultural labor moving to labor-intensive manufacturing, “majority of workers in the Philippines who transited out of agriculture were employed in the services sector”. And worse, many of “the unskilled labor that transitioned to non-agriculture employment ended up in low-wage and low-skilled jobs in the informal services sector”. It cited another World Bank report, Philippine Development Report (2013), which concluded that more than three-quarters (3/4) of the services sector are “composed of low-paid and low-skilled jobs in areas such as petty retail trade and public transportation”.

Third, real wages for private establishment workers grew by only 1.5 percent compared to 11 percent for those in government and the 9 percent for those working in private households. These are figures for 2006 to 2015. With the recent surge in commodity prices under the TRAIN 1 economic policy regime, real wages must have been eroded further. This explains the loud demands of trade unions for new higher minimum wages. As to the higher rates of real wage increases in the public sector, the explanation was the round of salary standardization wage increases under the Macapagal-Arroyo Administration. In the case of the rise of  private household compensation, the reason cited is the Domestic Workers Act (Kasambahay Law) of 2013. Additionally, one may add the continuous upward demand for Filipina domestics in East Asia and Middle East countries, a labor market reality that forces household employers to pay higher in order to get quality household helps.

So what then is the solution?

The solution of the World Bank is for more investments on human capital development, which simply means more spending on education and skills development. Naturally, the higher the skills a person has, the more marketable he/she becomes. With the right skills and educational background, a person’s negotiating power in demanding higher wages and better benefits is strengthened.

The other solution given by the World Bank is to encourage more investors to invest by further opening up the economy. The problem, however, is that this is precisely what the Philippines has already been doing since the 1980s, and yet the results have been poor as reflected in the relatively low rates of investments in industry and agriculture compared to investments in consumption-oriented distribution industries. Think of the malls and service industries being put up by the Sys, Ayalas, Gokongweis, Tans, Gaisanos and so on.

What is clearly needed is a more decisive and integrated program of industrial development, agricultural modernization, all-out education upgrading, science and technology development and business and people participation in an honest-to-goodness industrial and agricultural policy. The Philippines has already tried the program of opening up of the economy through trade and investment liberalization, deregulation of key sectors of the economy and privatization of government corporations, assets, services and infrastructure development. Somehow, the gains are limited. SAP as a program has not worked. It is time to change gears and be more proactive.

It is also time for the trade unions to look beyond their call or demand for laws restricting or banning “endo”-type hiring arrangements. The big development challenge is how to transform a low-wage, low-skilled, low-value-adding economy into a high-skilled, high-value-adding and eventually high-wage one.

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