flexible labor contracts and employment consequences_final

8/8/2019 Flexible Labor Contracts and Employment Consequences_final

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Leonardo A. Lanzona, Jr.

April 28, 2008

Drake Room

Discovery Center

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Review f iter ture

PerverseRel ti shi s

sequences f theReducti n f is iss l sts

Gener l ssess ent

E irical nal sis

emand f r Flexible ntracts

Su l f W r ers in Flexible rrangements

nclusi n

Major constraint: availabilit of data

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Main Thesis of thePaper: To theextent that otheralternatives, such as wor in the informal sector orabroad, exist, wor ers belonging toaparticular class ofs ills arenot li el toaccept offers below their personalvaluationof their productivit .

onsequences of Flexible ontracts, givena relativelounger wor force, are the following: dverse Selection: Thepool of wor ers may beof lower quality

as themoreproductive will look for better options abroadorin the informal sector. Employers on theother handarenotwilling to hire these workers at higher wages.

Violationof oase Theory: Notwithstanding thedistributionof

property rights, bargaining wouldproduceanoptimalallocationof resources as long as transactioncosts areinsignificant. However, given theprivilege to hire temporaryworkers, labor costs, including bargaining costs, will be lower.

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Observednegativecorrelation betweenflexiblecontracts andemployment:

eading toa higher turnover of workers, as more

workers aredismissed. Firms seem to indicatethat workers in flexiblecontracts aremoreproductive.

ausing anartificial tightness in theentry leveljobs, leading to greater unemployment

More workers search for better high-paying options butfirms onlyoffer the flexiblecontracts.

Workers with moreexperience in flexiblecontracts areable toobtainemployment more thanother workerswith lesser experience in the labor market.

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However, employment is observed toincrease if the following conditions aresatisfied:

The shareof long-term unemployment is reduced Moreentries thanexits of workers are realized

by the firms

Moreprivate sector investments are formed,leading tomore hired workers

n increase in the sizeof the formal sector

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Flexiblecontracts aremore suitable ineconomies whereahigh level of competition is involved. evels ofdevelopment maynot be thecrucial factor as somedeveloping countries seem to benefit flexiblecontracts

Flexiblecontracts should bematched byother forms of

deregulations, such in theproduct and the financialmarkets, since these will induce the firms toexpand theirscaleof production. To someextent flexibility in the labormarket eases thecosts of deregulation.

Flexiblearrangements by themselves arenot substitutesfor greater liberalization in theother markets.Imperfections in theother markets can hinder theexpectedoutcomes of flexiblearrangements.

In thepresenceof imperfect markets andasymmetricinformation, labor markets institutions can be used toaddress the issues of conflict betweenemployers andworkers.

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Table 1. Number of Surveyed Established Reporting Non-Regular Workers, 1998 and 2000.

Type of Workers

1998 2000

No. % to Total No. % to Total

Total Surveyed 1,208 100 1,208 100

Part-time Workers 74 6.1 109 9

Casual Workers 283 23.4 366 30.3

Contractual Workers 262 21.7 333 27.6

Agency-Hired Workers 173 14.3 236 19.5

No non-regular workers 416 34.5 164 13.6

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Table 2. Number of Establishments Employing Non-regular Workers by Type of Industry, 2000.

Manufacturing Construction Wholesale & Retail

Trade

Transportation,

Storage &

Communication

Financial &

Business

Services

No. % No. % No. % No. % No. %

Total 514 100.0 117 100.0 220 100.0 83 100.0 110 100.0

Part-time Workers 58 11.28 9 7.69 23 10.45 5 6.02 14 12.73

Casual Workers 195 37.94 25 21.37 84 38.18 32 38.55 30 27.27

Contractual 146 28.40 74 63.25 53 24.09 26 31.33 34 30.91

Agency-Hired workers 115 22.37 9 7.69 60 27.27 20 24.10 32 29.09

Source: Bitonio (2004).

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Factors causing a higher demand for flexiblecontracts (Bitonio, 4) The uncertainties and theneed to respond

immediately to various forms of dislocations broughtabout bychanging external market conditions werecitedas thekey reason for the useof casual workers.

The importanceof external conditions suggests thatthecasual workers weremeant primarily to fill intemporary vacancies that occur during theperiods ofhigh demand.

In thecaseof part-time, contractual, andagency-hired workers, firms are looking mainly for theirspecialized skills in highly specificjobs.

Theneed to trainnon-regular workers for morepermanent positions and thequalityof the work theybring in werenotedas the least important reasons foremploying non-regular workers.

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Table 3.Percent Share OF Non-Regular Workers to Total Non-Agricultural Establishments Employment

by Ownership, Market Type, Market Reach and Unionism, 2003

Establishment Characteristics Percent of Non -Regular

Workers to Total

Employment (%)

Ownership

With Foreign Equity 21.0

Without Foreign Equity 26.1

Type of Market

Domestic Only 25.9

Export Only 28.4

Both Market 20.1

Market Reach

Multinational 22.6

Not a Multinational 25.7

Unionism

With Union 21.1

Without Union 26.8

Source: Bitonio (2004).

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Data fromPLFFS suggests that indeed the firms areable to limit their costs substantially (Bitonio, 4). cross various firms surveyed, non-regular workers are

paid lower wages than regular workers even if theyperform the sameor similar work. Higher payments are

foundonly in two to fivepercent of firms. Lower pay isespeciallynoticeable for casual, part-timeandcontractual workers.

In thecaseof benefits other thandirect wages, non-regular workers typically received lower than regularworkers. Only 6 % of firms pay their non-regular workersthirteenth month pay, compared to 9 . % for regularworkers, although this benefit is statutory.

Incases where benefits areprovided, non-regularworkers also receive lower medical benefits,employment accident anddisease benefits, maternity,paternity leave, transport allowanceor assistance, andmeal allowanceor assistance.

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d onclusionTable 4. Number of Workers Employed in Specific Categories, Survey Years (In Thousands)

INDICATOR 1991a

1992 1993 1994 1995 1996 1997 2003 2004

EM e LOYMENT OF S e ECIFIC GROU e S

OF WORKERS

(Establishments employing 10 and over)

Total Establishment Employment b 2,292 2,504 2,561 2,493 2,692 2,606 2,865 2,603 2,413

Female Workers 892 1,018 1,010 933 1,028 973 1,077 1,031 962

Minimum Wage Earners 499 545 461 648 705 640 794 837 817

Time-rated Workers 2,136 2,347 2,376 2,289 2,553 2,465 2,691 2,500 2,295

Piece-rated Workers 97 91 95 91 90 69 89 52 55

Task or "Pakyao" Workers 17 35 35 28 43 32 40 10 7

Commission Workers 163 90 129 135 143 119 170 73 74

Part-time Workers 34 37 46 37 48 51 63 66 51

Casual Workers 95 102 87 108 119 108 134 158 141

Contractual Workers 161 250 250 197 319 320 401 307 298

Notes:aExcludes Agriculture, Forestry and Fishery

bEmployment based on the Survey Conducted, excludes agency-hired workers

Source: Bureau of Labor and Employment Statistics, Survey of Specific Groups of Workers.

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0.00

10.00

20.00

30.00

40.00

1991 1992 1993 1994 1995 1996 1997 2003 2004

Years

Figure 1. Percentage of Total Non-Regular Work to Total Establishment

Employment

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2

4

6

8

10

12

14

16

1991 1992 1993 1994 1995 1996 1997 2003 2004

Years

Figure 2. Percentage of Specific Non-regular Workers to Total

Establishment Employment , Selected Years

Piece-ratedWorkers

Task or "Pakyao" Workers

Commission Workers

Part-timeWorkers

Casual Workers

ContractualWorkers

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Table 5. Establishment Employment by Industry and Type of Worker, 2003 (in

Thousands)

Total Total Type of Workers

Major Industry Group Number of Establishments Working Unpaid Managers/ Super - Rank & File Contractor/

Persons Employment Owners Workers Executives visors/ Regular Non-Regular Agency-

Engaged Foremen Hired

Workers

Total Non-Agriculture 2,919 2,603 16 5 148 221 1,562 651 316

Mining and Quarrying 25 20 a a 1 4 13 3 5

Manufacturing 1,126 1,000 5 1 37 78 634 245 126

Electricity, Gas & Water Supply 87 71 a a 3 10 50 9 16

Construction 85 81 1 a 4 8 25 44 4

Wholesale and Retail Trade 422 374 4 1 24 31 232 83 48

Hotels and Restaurants 172 152 1 1 12 16 66 56 20

Transportation, Storage &

Communications 222 203 1 a 10 23 136 31 19

Financial Intermediation 155 132 a a 25 16 82 8 23

Real Estate, Renting &

Business Activities 289 255 1 a 15 15 121 102 34

Private Education Services 208 195 2 1 10 10 125 47 13

Health & Social Work Except

Public Medical Dental and

Other Health Services 63 59 1 a 3 5 42 9 4

Other Community, Social &

Personal Service Activities 65 61 a a 4 6 36 15 4

Note: Details may not add up to total due to rounding.

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5,000

10,000

15,000

20,000

25,000

30,000

35,000

No. of workers

Years

Figure 3. Comparison of Total Employment and Total Establishment

Employment, Selected Years

Total EmployedWorkers

Total EstablishmentWorkers

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Overall, some effect in formal establishment but negligible to

total employment. May have brought about some biased

negative effects on the workers in formal establishments.


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The failureof thepolicy todeliver its promisenopositiveeffect onemployment, leading to inefficiency in the labormarket

Effects of adverse selectiondue to thepolicies:

Thenegative impact onemployment Becauseof theease to set upcontracts, the

percent engaged in

formal establishments has drivenout of themarket themoreproductiveworkers whoare seeking tenure

Thenumber of dismissals arepresumably greater, thereby raising thenumber of the unemployed.

Theconsequence is a set of distorted incentives. Peoplewhoaremoreproductiveandmotivated will not beable tofind work, making investment in humancapitalunprofitable. The labor force surveys indicate that thecollegeeducatedpersons havea lower probabilityoflanding ajob.

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5

10

15

20

25

Years

Figure 4. Unemployment and Underemployment Rates in the Philippines,

1991-2005

UnemploymentRate

UnderemploymentRates

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Table 6. Relationship between average number of Non-regular Workers, Unemployment and

Underemployment, 2004

Non-regular Workersa

Unemployment Underemployment

Philippines 97583 11.8 17.6

National Capital Region 34715 18.1 11.9

Cordillera Administrative Region 215 9.1 13.3

Region I- Ilocos Region 1175 12.8 16.2

Region II -Cagayan Valley 2852 8.6 19.8

Region III - Central Luzon 13068 13.2 7.4

Region IV - A - CALABARZON 11827 14.2 12.1

Region IV - B - MIMAROPA 1159 9.7 17.2

Region V - Bicol Region 2752 8.5 29.5

Region VI - W. Visayas 4734 9.7 21.5

Region VII - C. Visayas 7318 13.1 11.4

Region VIII - E. Visayas 1643 9.7 26.2

Region IX - Zamboanga Peninsula 1757 7.1 20.5

Region X - N. Mindanao 4364 7.8 32.3

Region XI -Davao Region 7224 10.0 24.1

Region XII - SOCCSARGEN 1264 10.7 22.6

ARMM 1092 7.3 10.3

Caraga 424 10.4 23.3

Notes:aAverage Numbers of Non-regular Workers per Region. Includes Piece-rate, Commission,

Contractual, Task and Contractor/Agency Hired Workers.

Source: Bureau of Labor Employment and Statistics, National Statistics Office

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0

10

20

30

0 10000 20000 30000 40000Non-regular Workers

Unemployment Underemployment

Fitted valuesFitted values indicate relationship between Non-regular workers and unemployment

Regional Data (2004)

Figure 5. Non-regular Workers vs. Unemployment and Underemployment

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Bootstrapmethod tests the stabilityof thecorrelation:This is done byconsidering different sub-samples of agiven sample, testing the significanceof each of the sub-samplecorrelations, and thenestimating the significance

of theaveragecorrelationobtained from the whole sampleusing theobserved sub-sample variances

Results:

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0.171 1.361ln , adj-R 0.34, 17

(0.03) (1.96)

unemp nreg n

A one percentage increase in employment in flexible contracts is

offset by a 1.361 percent increase in unemployment, hence

associated to a net increase in unemployment by 0.36 percent.


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0

10000

20000

30000

40000

50000

60000

70000

80000

90000

1995 1996 1997 1998 1999 2000 2001 2002 2003

Fig.6. Number of Displaced Workers due to Economic Reasons

All Industries

Agriculture, Forestry and Fishing

Mining and Quarrying

Manufacturing

Electricity, Gas and Water

Construction

Services

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Market imperfections Becauseof the lackof investments, theemployment has not

increaseddespite the lower labor costs that have resultedfrom thecontractualization. Given thecountrys largepopulation, the fast-growing businesses in the service sector donot need to rapidly increase investment toenjoy rising profits

(Bocchi, 7). Theeconomy is able toachieve higher growth becauseof its

least protected sectors - the informal labor market and thenon-capital-intensiveactivities.

Furthermore, the burgeoning remittances due tomassive labormigration stimulateconsumption-led-growth whilea few non-capital-intensivemanufactures and services boost exports.

Theeconomic system is inequilibriumat a low-level of capitalstock, whereall economicagents haveno incentive tounilaterally increase investment, and thedismissed workersareoften thecarrying thecosts of the growth. s aconsequence, growth is slower and less employment isachieved

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More search hourson the average!

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{ onclusionYear Average percentage of the Labor

Force who looked for work during

the past week

Average percentage of the Labor

Force Available for Work during

the past week

Average Weeks spent Looking

for work

1997 0.0275 0.0851 7.8016

1998 0.0341 0.1057 7.5999

1999 0.0340 0.1005 7.6872

2000 0.0329 0.0880 8.4453

2001 0.0424 0.1240 8.8377

2002 0.0382 0.1174 8.2378

2003 0.0285 0.1013 8.5271


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Sameas theproposed reasons for theobserveddecreases in labor forceparticipation rates: Increased resources todelay formal participation in the labor

markets. Remittances fromother familymembers Household Involvement in the informal sector Aldaba et. al. ( 6) noted

y Families as a wholeare sub-contracted in theinformal sector

y Familymembers arecomplementary, though notsubstitutable

y Incomes are shared in the family The latest LFS noted the increasedproportionof

unpaid familymembers to the total employment


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Further Evidence of Negative Relationships

between Contractualization and Employment

3

9

39.5

40

40.5

41

Hours

.08

.09

.1

.11

.12

Percentage

1997 1998 1999 2000 2001 2002 2003Year

Availabillity for work Total hours of work

1997-2003

Fig. 8. Worker Availability and Total Hours of Work

Source: LaborForceSurvey, National StatisticsOffice


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As an increasing number of scholars havecometo see, theevidence for anycausal link betweenwage flexibilityand unemployment is thin. Thispaper contributes to thedebate bypresenting afew trends inemployment and flexiblecontractsand finds theassociationposited by theconventional view to fail in very simple tests ofassociation.

Analternative hypothesis, which specifies thathigh flexibility in various regions correspondinglyincreases unemployment rates, seems to fit theevidencemore satisfactorily.

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First, unemployment has nothing todo with thedurationof contracts. Greater investments areneeded from the firms especially in the trainingof workers and in the formationof labor-inducing physical capital.

Toaccelerateeconomic growth, and increasejobcreation, local firms must be induced to investfurther. Todo this, rent seeking by the lites thatexercisepolitical andeconomicpower - or litecapture - must beaddressed.

While it is necessary to improve the investmentclimateandcompetitiveness, thecrucial steps in

attracting investment andcreating more local jobsare in terms of liberalizing and reforming thesectors dominated by rent-seeking corporateconglomerates.

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Finally, institutions that allow greaterparticipationof the workers inpolicymakingneed to be strengthened. As shown from thecontractualization reform

experience, nopolicymeasure that seeks toincreaseemployment can succeed without firstdetermining how workers will react to thepolicy.

The formationof institutions maycertainlycausecertain setbacks in theeffort to increase theeconomic growth of thenation. But one thing iscertain: these institutions will bring about greater

welfare Labor unions need to be strengthened.

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Thankyou!

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flexible labor contracts and employment consequences_final

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