Philippine growth: Wages, employment, and poverty reduction

Two current World Bank studies dealing on the Philippine economy provide a useful framework for reviewing the status of economic development and of labor market issues in the country.

The first of the two documents is the Philippine Economic update, April 2018, which is the current economic memorandum assessing developments in the country. The other, Philippine Labor Market Review, January 2016, is an in-depth analysis of the country’s labor market, released some two years ago.

General conclusions: the update memorandum. Three major thrusts emanate from the World Bank’s current analysis of Philippine developments.

First, the Philippines was with the three top growth performers in the East Asia region, along with Vietnam and China in 2016 and 2017. The country could sustain this high growth.

Second, the medium-term outlook is positive, but prominent domestic risks and challenges are present. They need to be dealt with sufficiently.

Third, higher real wages are essential to achieve shared prosperity and inclusive growth. (To grasp this essential point, we need to turn to the findings of the labor market study document.)

Growth performance and challenges. The Philippine economy grew at 6.9 percent in 2016 and 6.7 in 2017. Only Vietnam and China topped this growth performance in the East Asia region.

This growth was driven by rising exports, by consumption, and by investment. In 2017, consumption and investment faltered slightly, but exports were strong.

The medium-term outlook up to 2020 is for sustained growth, projected at 6.7 percent in the next two years, which is the current potential growth. This growth hinges on the government’s ability to deliver the infrastructure program and to stimulate private sector participation in the effort.

The economy faces the following risks: inflationary risks from domestic and external sources; the risk of overheating; prudent fiscal management and tax reform need to be sustained; policy normalization in advanced countries (meaning, rising interest rates) could impart financial volatility and capital outflows; and rising protectionist sentiments in advanced countries could affect trade and investments.

Poverty reduction. Sustained economic growth should lead to poverty reduction. The World Bank notes that there is a trend toward a reduction of the country’s high income inequality through economic measures.

Assuming historical trends and the robust growth expectations, the poverty rate in the country (on the basis of the lower middle-income poverty line of $3.20 per day) would decline from 27 percent in 2015 to 22.9 percent and 21.7 percent in 2018 and 2019, respectively.

The projections would mean uplifting one million Filipinos from poverty each year. At play in supporting this trend and possibility are: continued development (that induces the movement of workers out of agriculture to other economic sectors), sustained inflow of remittances, and the government’s conditional cash transfer program.

Need for rising real wages and attaining inclusive growth. The World Bank notes that the country has made, in recent years, “great strides in delivering inclusive growth.”

Falling poverty rates and a drop in inequality (“falling Gini coefficient.”) are cited as evidence. Moreover, the unemployment rate has also been falling toward five percent.

However, the underemployment statistics hint at a better understanding of the labor market situation. It has remained close to the 18-20 percent decade-long average. This is not a mystery about the employment statistics. It tells about a negative aspect of the economy’s capacity to generate good jobs.

In explaining the phenomenon, the World Bank observes that “unlike its high-performing East Asian neighbors with booming manufacturing sectors that provide large numbers of labor-intensive jobs, a majority of Filipino workers that transition out of agriculture generally end up in low-end service jobs.”

A result is that even as employment increased between 2006 and 2015, average wages have remained relatively stagnant, with only a four percent increase in real terms over the same period.

A truly inclusive economic growth would mean rising wages as economic growth and productivity are rising. But in the Philippine case, there is a low job quality generated even as economic growth is moving up.

Growth of real wages is the missing link toward higher inclusive growth in the Philippine case. An appreciation of this problem is provided by the analysis provided by the second World Bank document mentioned at the beginning.

Labor market study. The document provides a technical analysis of the labor market and the policies that surround it. There is an innovative analysis of the data, and some interesting concepts surround its analysis.

But essentially, there is little that is new about what is known concerning labor policies and the structure of the market for labor. Philippine labor laws are very advanced, compared to other countries in the region. The result is that there is a high degree of labor protection. Also, the minimum wage is high relative to the average income of workers.

A consequence of these policies is the segmentation of the market, one for formal, which is regulated, and the other, the informal labor market which falls outside of the labor regulations.

The rigidities of regulation and the high minimum wage have segmented two markets for jobs – the “good” jobs which are found in the regulated formal labor market and the “bad” or poor quality jobs which are mainly in the informal sector.

The interaction of economic forces – the result of economic development arising out of the interplay of these labor policies with other policies (such as those that had a bearing on the protection of domestic industries and the exclusion of a lot of foreign direct investments in the past) – has discouraged the expansion of good jobs, and consequently, higher labor productivity within the dynamic sector, of the economy. The result is the high preponderance of open unemployment and a high degree of underemployment.

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