Along with Mexico, the Philippines is one of the top migrant origin in Asia-Pacific Economic Cooperation (Apec). Furthermore, the country receives the highest remittance inflow in the region. Because of these reasons, the Philippines is considered a global model in managing international labor mobility. While this perception may have its merits, there are, however, certain weaknesses in the country’s labor mobility governance that need to be recognized and which a regional framework can address.
In the labor market, information problems have two main consequences on workers’ quality and their contribution to total output. First, since employment contracts rarely specify all aspects of the workers’ level of effort, employers cannot measure fully the productivity of workers on which their payments are based. If workers decide not to reveal their true productivity and if the workers’ efforts are unverifiable, employers face a moral hazard problem in setting out the proper wages. Second, because of worker heterogeneity, their potential productivity is unknown to the employer. Workers can then be misallocated to tasks and sectors. This may lead to adverse selection, if the average wage rates offered drive out the more productive workers. While the moral hazard problem may be solved by adopting piece-rate or share-rate arrangements, employers can only mitigate the second problem by distinguishing the workers through their characteristics. With this process, the workers with more experience and exposure in the market will be preferred. Consequently, the supply of workers who do not have these qualities, such as the women, may be reduced, and their wages may be lower.
Asymmetric information, as the adjective indicates, refers to situations in which some worker in a transaction possesses information which employers involved in the same trade do not. This rather self-evident assumption has, nevertheless, revolutionized modern economic thought since the 1970s. Take, for example, one major result in the economics literature, the first fundamental theorem of welfare economics and the Modigliani-Miller theorem. The first welfare theorem states that in a competitive economy with no unintended consequences, wages would adjust so that the allocation of resources would be optimal in the sense where nobody is made worse-off. A key assumption for the theorem to hold is that the characteristics of all workers in the country of origin should be equally observed by all employers. When such assumption fails to hold, i.e., when information is asymmetric, wages are distorted to account for the uncertainty and do not achieve optimality in the exchange. Standard government interventions, such as regulation of workers to limit unwanted migration, or subsidies to alleviate the effects of adverse consequences, are no more sufficient to restore optimality.
Fortunately, there are solutions to the problem of asymmetric information. Among these solutions, the establishment of labor market systems that increases the access to information is paramount. Giving employers greater access to information directly addresses the problem of asymmetric information. It is nearly impossible to provide every employer with all the information they need to make an informed decision in each instance, but if they can obtain enough information to make an educated decision, overall worker efficiency can be increased, along with aggregate employer satisfaction.
Consider the value of issuing skills certification, such as those offered by the Technical Education and Skills Development Authority (Tesda). An employer without access to any external information would most likely have to rely on the word of the recruiters. Access to this information helps address the problem of asymmetrical information. Employers abroad may be able to check a worker’s certificate on a web site or they could find a list of local workers who may have earned a similar certification. If previous employers are able to post comments on the web site, new employers may be forewarned about an unscrupulous dealer selling lemons. Consumers could even educate themselves regarding basic training and quality assurance provided by Tesda.
However, such solutions may be out of reach to groups of unskilled workers (e.g., domestic helpers) who are nonetheless qualified and motivated to work. Based on available data, the outflow of unskilled workers has increased disproportionately since the 1990s and has proliferated in the Asean region, as well as the rest of the world. Based on 2007 records, the proportion of unskilled labor to total migrants in the world is 72 percent.
In this case, because of the difficulty of collecting information for these workers and its nature of being temporary, various informal (non-market) contractual arrangements have emerged, resulting in greater opportunities for unscrupulous recruiters. Abuses of the overseas Filipino workers continue and are not expected to decrease.
It is then crucial to review our policy on informal and unskilled labor migration. Other than creating a law that makes illegal recruitment a crime and punishable, the Philippine government has actually taken no action on regulating the flow of unskilled workers. In fact, there is an implicit policy of promoting it because of potential remittances that have been the source of much of the country’s foreign reserves. The migration of unskilled labor rightly or wrongly remains one of the best options of most poor workers to move out of poverty. Indeed, despite its dangers and instability, unskilled labor migration has greater impact than skilled labor on efficiency and distribution. It is then prudent on our part to keep this option available.
However, because of the current protectionist and discriminatory policy of the United States and other developed countries, a clamp on skilled and, more particularly, unskilled labor is expected. The challenge is to try to regulate these flows without necessarily discouraging labor mobility. This also provides us an opportunity to consider our domestic labor policy and to expand the job opportunities here since much of unskilled labor migration may remain illegal and socially inefficient. More important, we will need all our diplomatic skills to get the support of the receiving nations in keeping this flow legitimate and ensuring the safety of our workers.
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Leonardo Lanzona Jr. is a professor of Economics at the Ateneo de Manila University and a senior fellow of Eagle Watch, the school’s macroeconomic research and forecasting unit.