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Philippines: Selected Issues

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
August 2014
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The Philippines’ Employment Challenges1

A. Population and Labor Force Dynamics

1. The Philippines’ favorable demographics can help raise GDP growth, but only if job creation keeps pace with the flow of labor force entrants. At just over 60 percent, the Philippines’ working age population (WAP) ratio is low owing to the sizable population share below 15 years of age. As a result, the WAP is expected to swell from the current 60 million to near 70 million in 2020, on the entry of 1.35 million new workers annually, up from the current 1.25 million. This so-called demographic dividend compares favorably with other young-population countries in Asia (Indonesia and India), and contrasts with workforce aging that is occurring or predicted in many countries in the region. However, generating sufficient domestic jobs to reduce the relatively high unemployment rate (7.0 percent in 2014:Q2) and poverty rate (41 percent of the population on the World Bank’s US$2 per day threshold in purchasing power terms in 2009) has already been challenging.

Figure 1.Projected Working Age Population Ratio in Asia

(In percent)

Source: United Nations.

Figure 2.Philippines: Projected Working Age Population

Source: United Nations.

2. Keeping pace with the rapid increase in the WAP over the past decade was achieved in part through outward migration, despite solid employment growth. Employment in the Philippines expanded by nearly 40 percent during 2000–13, the third fastest pace within Emerging Asia. However, employment growth failed to translate into a higher employment rate or, equivalently, a lower unemployment rate due to the rapid increase in the WAP and labor force. The unemployment rate for new labor force (LF) entrants was a very high 25 percent in 2013, although down significantly from the 35 percent during 2008–09. Nonetheless, this outcome would have been considerably worse if the nearly one-third of the annual increase in the WAP had not taken up overseas foreign work (OFW).2 These young OFWs are part of the 1.8 million annual overseas deployment of Filipinos, of whom at least 400,000 are new hires.3 While the OFW profile is becoming more skilled, they are tending to accept less skilled jobs overseas in response to large wage differences and limited employment opportunities at home. This represents a significant brain drain for the Philippines.

Figure 3.Average Employment Growth, 2001-2012

Figure 4.New Entrants to the Labor Force

(Percentage employed and unemployed)

Figure 5.Annual Deployment of Overseas Filipino Workers

Figure 6.Annual Distribution of OFWs by Major Occupation Group

(In percent)

Figure 7.Detailed Employment by Sector 1/

Source: Philippines, Bureau of Employment and Statistics (BLES-DOLE).

1/ Formal sector includes finance, real estate and other business activities, including BPOs, public administration and other personal services. Informal sector includes wholesale and retail trade and transportation, communication and storage. Figures for 1st quarter of January excludes Region VIII(Eastern Visayas Region).

Employment

3. The large increase in total employment since 2000 has been accompanied by sizable shifts in the sectoral composition of employment. The employment share of agriculture has shrunk from 60 percent in 2001 to 30 percent in Q1:2014, and is now the same size as informal services. Employment in formal sector services (encompassing retail and wholesale trade, business process outsourcing, tourism, among others) has risen to more than 20 percent. Meanwhile the employment share of manufacturing has moderated to below 10 percent, while that of other industry (including construction) has risen to a similar level.

4. Over the past decade, employment has consistently grown more slowly than real GDP. The employment intensity of growth was particularly low in 2013. Low responsiveness of employment to GDP growth is apparent in all major sectors of the economy, but especially prevalent in manufacturing and other industry. This suggests that economic activity is becoming more capital intensive over time.

Figure 8.GDP Versus Employment Growth by Sector

(2005-2013 average, in percent)

Source: BLES DOLE, NSCB.

Figure 9.Aggregate GDP and Employment Growth, 2005-13

(In percent)

Quality of Employment

Figure 10.Employed Persons By Nature of Employment

Source: LFS BLES-DOLE.

5. Since 2008, the increase in employment has been sourced primarily by hiring temporary workers, rather than permanent employees.4 Currently, one third of employed persons is under a temporary work contract, a 17 percent increase in 2012 alone, while the number of permanent employees is declining. Companies are likely shifting to contract workers to bypass rigid labor regulation. Specifically, a temporary worker is required to be converted to permanent status on the expiration of his six-month employment contract, at which time the employer is required to bear the cost of hiring and termination. As a result, many employers are instituting temporary 5-month employment contracts and extending hours worked by permanent employees. While temporary work contracts are a second-best solution to overcome the high cost of permanent employment, the very short tenure is likely to discourage on-the-job training and result in higher search costs for employers and employees. On a more positive note, however, the vulnerable share of employment—defined as self employed and unpaid family workers, has moderated since 2000, but remains above 40 percent of total employment.

Table 1.Philippines: Labor Outcomes 1/2/3/
200020102011201220132014
Labor force participation rate63.664.164.664.263.964.5
Unemployment rate11.27.47.07.07.17.3
Underemployment rate21.718.819.320.019.318.8
Vulnerable employment rate49.345.544.842.841.642.6
Mean number of hours worked per week42.741.741.141.241.740.7
Labor productivity growth rate (GDP per employed person)13.929.50.45.65.7
Average daily wage (in Philippine peso)221.5306.5317.4333.8347.0
Source: Philippine Statistics Authority.

No data available for 2014 average daily wage and labor productivity.

For 2014, average of January and April 2014.

Vulnerable employment is defined as sum of self-employed and unpaid family workers as a percentage of total employment (Philippine definition).

Source: Philippine Statistics Authority.

No data available for 2014 average daily wage and labor productivity.

For 2014, average of January and April 2014.

Vulnerable employment is defined as sum of self-employed and unpaid family workers as a percentage of total employment (Philippine definition).

6. Wage-related labor costs no longer appear to be a major impediment to employment. The Philippines has a longstanding centralized (regional) minimum wage bargaining framework between employees, employers and the government, which affects the pay scale across most sectors and regions. However, while the relatively high level of minimum wages in the past may have impeded manufacturing employment growth, international surveys no longer identify labor costs as the key constraint to labor-intensive manufacturing in the Philippines (JETRO, 2013). Moreover, wages elsewhere in Asia have been growing strongly, improving the Philippines’ relative competitiveness. Additionally, the Philippines piloted in 2012 a two-tier wage system consisting of a mandatory floor wage and a voluntary productivity-linked component. Nonetheless, other labor market regulations continue to be widely cited as an impediment to investment and employment.

Figure 11.Daily Minimum Wage Range1/

In U.S dollars

Source: Countries websites.

1/ China covers Beijing (2002), Shanghai (2010 onwards).

Figure 12.Salary Base Rate Compared to Previous Year, 2012-2013 1/

(In percent)

Source: Survey of Japanese-Affiliated companies in Asia and Oceania, FY 2013 Survey (JETRO).

1/ Number in parentheses represents number if firms responded.

Figure 13.Annual Unit Labor Cost, 2001-2013

Table 2.Percentile Ranking in Selected Labor Market Efficiency Indicators
Labor Market Efficiency
PhilippinesMalaysiaIndonesiaThailandSingaporeVietnam
Percentile

Rank 1/
Value 2/Percentile

Rank
ValuePercentile

Rank
ValuePercentile

Rank
ValuePercentile

Rank
ValuePercentile

Rank
Value
Overall1004.1254.81034.0624.415.8564.4
A. Flexibility1084.1294.91333.71204.016.1974.2
Cooperation in labor-employer relations 3/344.8195.2494.6374.826.0644.4
Flexibility of wage determination 4/1094.5335.51064.61114.556.0695.1
Hiring and firing practices 5/1173.3264.5394.3314.435.6813.9
Redundancy costs 6/12427.411023.914157.813536.036.011124.6
B. Efficient use of talent824.1324.7564.3314.745.4414.6
Pay and productivity 7/444.225.2294.4314.445.2154.7
Reliance on professional management 8/325.0215.4344.9574.485.11193.6
Capacity to retain talent 9/713.4204.6394.1274.385.1953.0
Capacity to attract talent 10/863.2224.6284.1324.126.0693.5
Women in labor force (ratio to men) 11/1110.61210.61150.6650.8840.8210.9
Source: World Economic Forum, Global Competitiveness Index 2013 -2014 data platform.

Percentile Ranking reports the country’s position among the 148 economies covered by the GCI 2013–2014.(1=best, 148=worst).

Value reports the country’s score on each of the variables that compose the GCI, with 7 being the most desirable outcome.

Characterize labor-employer relations, 1 = generally confrontational; 7= generally cooperative.

How wages are generally set, 1 = by a centralized bargaining process and 7 = by each individual company.

Characterize hiring and firing of workers, 1 = heavily impeded by regulations; 7 = extremely flexible.

Redunduncy Cost estimates the cost of advance notice requirements, severance payments, and penalties due when terminating a redundant worker, expressed in weekly wag

Measures if pay is related to worker’s productivity, 1 = not related to worker productivity, 7 = strongly related to worker productivity.

Measures if Senior management positions in a particular country is usually held by relatives or friends without regard to merit (1) or mostly held by professional managers chosen for their superior qualification (7).

Brain drain was split into two indicators, one of which is the capacity to attract talent. Measured from 1 to 7, 1 = the best and brightest leave to purse opportunities in other countries and 7= best and brightest stay and pursue opportunities in the country.

Brain drain was split into two indicators, one of which is the capacity to attract talent. Measured from 1 to 7, 1 = not at all and 7= attracts the best and brightest from around the world.

measure is the percentage of women aged 15–64 participating in the labor force divided by the percentage of men aged 15–64 participating in the labor force.

Source: World Economic Forum, Global Competitiveness Index 2013 -2014 data platform.

Percentile Ranking reports the country’s position among the 148 economies covered by the GCI 2013–2014.(1=best, 148=worst).

Value reports the country’s score on each of the variables that compose the GCI, with 7 being the most desirable outcome.

Characterize labor-employer relations, 1 = generally confrontational; 7= generally cooperative.

How wages are generally set, 1 = by a centralized bargaining process and 7 = by each individual company.

Characterize hiring and firing of workers, 1 = heavily impeded by regulations; 7 = extremely flexible.

Redunduncy Cost estimates the cost of advance notice requirements, severance payments, and penalties due when terminating a redundant worker, expressed in weekly wag

Measures if pay is related to worker’s productivity, 1 = not related to worker productivity, 7 = strongly related to worker productivity.

Measures if Senior management positions in a particular country is usually held by relatives or friends without regard to merit (1) or mostly held by professional managers chosen for their superior qualification (7).

Brain drain was split into two indicators, one of which is the capacity to attract talent. Measured from 1 to 7, 1 = the best and brightest leave to purse opportunities in other countries and 7= best and brightest stay and pursue opportunities in the country.

Brain drain was split into two indicators, one of which is the capacity to attract talent. Measured from 1 to 7, 1 = not at all and 7= attracts the best and brightest from around the world.

measure is the percentage of women aged 15–64 participating in the labor force divided by the percentage of men aged 15–64 participating in the labor force.

Unemployment

7. Unemployment in the Philippines has hovered around 7–8 percent, which is elevated from a regional perspective. However, nearly half of those unemployed are aged between 15–24 years, and the youth unemployment rate stands around 50 percent. Unemployment is highest among those with higher educational attainment, particularly among the youth. This points to the existence of a significant skill mismatch. While on the one hand, enterprise surveys highlight shortages of qualified workers in export orientated sectors and large unfilled job vacancies including in tourism, a sizable proportion of college graduates and undergraduates remain unemployed. This may however reflect that students seek an education that equips them for foreign employment, rather than for the domestic job market given the very large income advantage from working overseas and the limited number of well-paid technical jobs in the Philippines.

Figure 14.Unemployment by Educational Attainment

(In percent)

Source: BLES-DOLE.

Figure 15.Youth Unemployment by Highest Grade Completed 1/2/

(In percent)

Source: BLES-DOLE.

1/ January, April and july 2013 average.

2/ Per Philippine definition of youth: Ages I5-30.

Figure 16.Youth Unemployment to Total Unemployment 1/2/3/

1/ Employment and Unemployment rates in LFSPRS are not comparable with previous period since the definition Unemployment was revised starting April 2005 LFS.

2/ Starting with January 2007, estimates were based on 2000 Census-based projection.

3/ April 2014 LFS data excluded Leyte Province heavily devastated by Typhoon Yolanda.

Underemployment

8. Inadequate use of labor resources is reflected not only in elevated unemployment, but in high underemployment. The underemployment rate—defined as employed persons seeking additional hours of work—was nearly 20 percent in 2013. Visible underemployment—defined as those working less than 40 hours per week and seeking additional hours of work, and is consistent with the ILO definition—represents about 60 percent of the total underemployed. At 11 ½ percent, visible underemployment is among the highest in the world. Underemployment is likely a significant factor in the high incidence of poverty and income inequality in the Philippines. Skills related underemployment, though harder to measure, is also likely prevalent in the Philippines, given the large share of science and engineering graduates working in retail and wholesale trade (World Bank 2013).

Figure 17.Annual Underemployment by Sector

(In thousands)

Figure 18.Underemployment Rate by Income Quartile

Source: World Bank staff estimates using LF5 and FIES data.

Figure 19.Emerging and Developing Countries: Employment Versus Labor Force Participation, 1990-2012 Average

Figure 20.Underemployment and Income Inequality in Emerging and Developing Countries

B. Cross-Country Empirical Comparisons

9. In this section, we analyze empirically how several characteristics of the Philippines’ labor market compare with other countries.

Elasticity of Employment to GDP

10. An unbalanced panel dataset spanning 125 countries and the period 1980 to 2013 is used to estimate the long run response of employment growth to output growth. This elasticity is the complement to Okun’s “law.”5 For the Philippines, the elasticity is estimated at 0.48, while the global average is pegged at 0.5. Loungani (2014) reports a similar average elasticity for the world. This implies that in the long run, employment (in the Philippines, as elsewhere) grows at half the pace of real output.

11. However, Philippine employment growth has fallen short of this long-run tendency during 2012–13. As a result, at end-2013, actual employment was short 600,000 jobs relative to the predicted long-run level. These missing jobs represent 1.5 percent of total employment. As discussed earlier, recent slow growth in employment occurred alongside an increase in the average number of hours worked per person. Nonetheless, re-estimating the regression using hours worked still reveals a significant shortfall between 2011 to 2013 (see Appendix 1). These results suggest that output has become less employment intensive in recent years. A similar episode of missing jobs occurred around the time of the Asian financial crisis, but employment quickly recovered. The drop in the unemployment rate from 7.5 percent in early 2014 to 7 percent in Q2:2014 might indicate this recovery has begun.

Figure 21.Predicted and Actual Employment

(In thousands)

12. Nonetheless, unemployment remains high on a persistent basis, suggesting that the employment intensity of output in the Philippines is relatively low. Several explanations have been offered in the literature for low employment rates, including a rapidly growing labor force, financial crisis, housing sector boom and bust cycles, trade openness, and rigid product and labor market policies (Bassanini and Duval (2006), Crivelli and others (2012), IMF (2010), and World Bank, (2012)).6 To assess the role of policies and institutions in explaining unemployment patterns, we follow the cross-country panel data approach of Bassanini and Duval (2006), but extend the analysis beyond OECD countries to emerging market and developing economies, which likely face additional jobs and growth challenges (see IMF, 2013).

13. A cross country panel data analysis suggests that unemployment is related to structural factors, including product diversification, FDI and external openness.7 As shown in the table, numerous structural factors and labor market characteristics are found to be associated with unemployment:

  • GDP growth significantly lowers unemployment. This result is large and holds across all specifications, highlighting the important role of economic growth for reducing unemployment, consistent with Okun’s law.

  • A breakdown of the cyclical and trend components of GDP also confirms that the cyclical component is associated with lower unemployment while the trend has a negative impact as expected.8

  • Faster labor force growth tends to raise unemployment (Crivelli and others, 2012).

  • Rigid hiring and firing practices and more generous unemployment benefits tend to keep unemployment higher. A higher tax wedge proxied by the average personal income tax rate also appears to be a disincentive for job creation. Minimum wages relative to average wages do not have a statistically significant effect.

  • Greater product diversity (proxied by export product diversification), a smaller share of government consumption, greater openness to international trade, a larger share of FDI in GDP, lower average tariffs and current accounts restrictions, and a more liberal but well regulated domestic financial sector are associated with lower unemployment.

14. On the other hand, remittances—which are thought to raise the reservation wage and hence discourage recipients from seeking employment and potential employers from creating jobs—is not found to significantly affect unemployment. In addition, the share manufacturing value added in GDP is not found to significantly lower unemployment.

15. These results suggest that unemployment in the Philippines has been kept elevated by relatively slow growth until recently, limited export product diversification, low trade openness and FDI, a high effective PIT wedge, labor market rigidities, and high costs of compulsory pension and health contributions.

Table 3.Regression on Unemployment Rate 1/
VariablesUnemployment Rate
GDP growth-0.837***-0.572***-0.593***-0.617***-0.568***-0.527***-0.613***-0.75***-0.432***-0.358***-0.433***-0.546***
(0.1910)(0.0613)(0.0639)(0.0611)(0.0608)(0.0611)(0.1030)(0.1100)(0.0845)(0.0850)(0.0759)(0.0893)
Trend GDP growth0.0344***
(0.0041)
Cyclical GDP growth-4.206***
(0.3980)
Diversification-0.111***-0.108***-0.108***-0.102***-0.0928***-0.127**-0.111*-0.141***-0.164***-0.114***-0.147***
(0.0331)(0.0346)(0.0347)(0.0329)(0.0326)(0.0506)(0.0586)(0.0409)(0.0420)(0.0379)(0.0433)
Trade-to-GDP-0.0021-0.0012*-0.0011*-0.0022***-0.0013**-0.002**-0.0032***-0.0018**-0.002**-0.0021***-0.0024***
(0.0006)(0.0007)(0.0007)(0.0006)(0.0006)(0.0009)(0.0011)(0.0008)(0.0009)(0.0007)(0.0009)
Labor force0.612***0.617***0.518***0.619***0.585***0.957***0.892***0.56***0.599***0.503***0.471***
(0.1080)(0.1140)(0.1120)(0.1070)(0.1060)(0.1700)(0.1800)(0.1350)(0.1420)(0.1240)(0.1420)
Manufacturing value addded to GDP-0.0008
(0.0037)
Remittances to GDP-0.0027
(0.0046)
Government consumption to GDP0.0196***0.0167***0.0448***0.0396***0.028***0.0401***0.0279***0.0266***
(0.0039)(0.0038)(0.0060)(0.0074)(0.0043)(0.0056)(0.0042)(0.0045)
FDI to GDP-0.0044*-0.0064*-0.0104***-0.0046-0.0083**-0.0078***-0.0089***
(0.0024)(0.0038)(0.0039)(0.0031)(0.0037)(0.0030)(0.0032)
Labor market costs0.324**0.468***
(0.1480)(0.1490)
Minimum wage to mean wage0.157
(0.1310)
Generosity of unemployment benefits0.706***
(0.1810)
Tariff rate0.443***
(0.1240)
Personal income tax0.49***
(0.1490)
Current account restrictions-0.325***
(0.0783)
Domestic financial reforms-0.513***
(0.1010)
Constant1.992***2.123***-3.849***-3.711**-1.969-4.333***-3.955***-9.685***-7.415***-4.6**-5.131***-3.712**-2.459
(0.0096)(0.0142)(1.4370)(1.5490)(1.5070)(1.4270)(1.4130)(2.2490)(2.4440)(1.8180)(1.9150)(1.6670)(1.9990)
Observations2,5611,4041,4311,2801,3081,4301,4166986151,0598521,109944
R-squared0.10.10.10.10.10.10.10.20.20.20.20.10.1
Number of country1701011111071031111116755102709277

Standard errors in parentheses.

p<0.01

p<0.05

p<0

Standard errors in parentheses.

p<0.01

p<0.05

p<0

16. While underemployment has been studied less than unemployment, similar factors are likely to explain the two measures of labor underutilization (see Wilkins and Wooden 2011). Available studies have generally focused on advanced economies, with a few exceptions (ILO 2014). Here we undertake a preliminary analysis of the cross country determinants of underemployment in 5-year non-overlapping panels from 1980, using ILO cross country data on underemployment in parsimonious specifications. The results indicate that sustained economic growth and product diversification are associated with lower underemployment, as well as unemployment. Raising secondary education completion rates also lowers underemployment. While remittances are not found to raise unemployment, they are associated with higher underemployment, which is relevant for the Philippines where 29 percent of Filipino families receive remittances from abroad. By creating quality jobs, this would reduce emigration and brain drain by educated youth, and lower remittances that tend to raise underemployment and income inequality.

Table 4.Regression on Underemployment 1/
Variables(1)(2)(3)(4)(5)(6)(7)
GDP growth-0.101 *-0.135 *-0.117 *-0.105 *-0.143 ***-0.0731-0.0277
(0.0588)(0.0722)(0.0622)(0.0632)(0.0553)(0.0580)(0.0646)
Diversification-5.335 **-4.168 *-3.218-5.024 *0.959-0.716
(2.250)(2.460)(2.514)(2.697)(2.541)(2.593)
Remittances0.138 *0.164 *0.174 **0.06370.22 **0.561 ***
(0.0815)(0.0901)(0.0885)(0.129)(0.0889)(0.140)
Working-age population growth1.158 ***
(0.398)
Secondary education-0.036 **
(0.0162)
Employment industry-0.15 ***
(0.0520)
Employment services0.0489 *
(0.0281)
Agriculture labor productivity-2.567 *
(1.373)
Constant7.258 ***447 ***6.432 ***5 ***8.767 ***4.623 *3.834 **
(1.192)(0.619)(1.351)(1.470)(1.809)(2.802)(1.530)
Observations183202172172138169101
Number of country51605050505036

Standard errors in parentheses.

p<0.01

p<0.05

p<0.1.

Standard errors in parentheses.

p<0.01

p<0.05

p<0.1.

Appendix 1. Philippines—Hours Worked

Philippines: Actual Hours Worked Versus Predicted

(In thousands of hours)
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Prepared by Charmaine Bagacay, Vic Delloro and Shanaka J. Peiris (IMF Resident Representative’s office, Manila).

See World Bank (2013).

OFWs are not reported in the labor force survey. In 2012, almost 10.5 million Filipinos were working overseas under permanent or fixed-term contracts.

Temporary contract workers are those under short-term and seasonal contracts. It also includes unpaid family workers.

Okun found that a 2 percentage point decline in real GDP relative to trend is associated with a one percentage point increase in unemployment.

IMF (2010) undertakes a two-step procedure to explain the determinants of the dynamic employment elasticity and the forecast error from Okun’s “law” that is interpreted to reflect more episodic factors beyond changes in output. While the latter could be more closely linked to the “missing” jobs puzzle in the Philippines recently, the short time series of data and difficulty to distinguish between episodic events in EMs including the Philippines precludes such an approach.

Results are derived from a fixed effects panel of 110 ADs and EMs, estimated from 1980 to 2012 using annual data from IMF’s International Financial Statistics and Structural Reforms database and World Development Indicators.

An alternative specification of including total factor productivity instead of trend GDP growth as in Bassani and Duval (2006) give virtually identical results indicating that the trend is likely capturing TFP dynamics.

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