LABOR-MARKET institutions, which refer to all labor-market policies and regulations, influence economic dynamism by their impact on the supply of a key factor—skilled workers—to new and expanding companies, and the shedding of workers from declining and failing firms. Growth-favoring labor-market institutions include portable pension plans and other job-tenure rights, health insurance that is not tied to the current employer, efficient collective wage-setting, and public-income insurance systems that encourage mobility and risk-taking. All these are measures of worker protection that fundamentally require government resources.
If imposed on the market, however, these measures can impede the workings of a deregulated labor market. Depending on the approach, labor-market institutions can either advance or impede this restructuring that is expected from economic growth. Overly stringent regulations tend to create a system in which a large share of economic activity occurs in small firms without the ability to grow.
There are several advantages in having the market, by itself, determine the labor-market outcomes. First, labor markets can presumably be organized to promote (potential) high-growth firms, especially through decentralized and individualized wage-setting, portable job-tenure rights, and insurance systems that encourage mobility and risk-taking. Second, high-growth firms are allowed to freely make decisions to create new jobs and induce economic growth. And third, continuous transformation and massive are pervasive characteristics of modern market economies.
There are disadvantages, as well. First, the deregulation of labor markets also has a negative side: It promotes insecurity and may lower commitment to both employers and workers, which can harm efficiency. Second, deregulation has to be applied to the whole market. Deregulation of temporary contracts and staffing agencies cannot substitute for the already existing regulation of permanent contracts that affect long-term commitments. Creating exemptions to microenterprises as a cover for deregulation will not be sufficient to offset the effects of current regulations. Third, labor markets cannot be deregulated in isolation. Appropriate tax- and competition-policy measures can be justified and are also called for, especially in making sure that every member of society benefits from the economic development.
In the Philippines, for instance, employment in the formal sectors has been observed to put the young and inexperienced at a disadvantage, as firms would prefer the more educated and older workers. Based on last year’s labor-force survey, the unemployment rate of those belonging to the 15-to-19 and 20-to-24 age groups were 14.5 percent and 17.1 percent, respectively. These rates are at least twice the national unemployment rate of 7.1 percent. More important, this implies that a significant proportion of young people have decided to participate in the labor market and quit schooling. Hence, the institution of the Kindergarten to Grade 12 program and other school reforms aimed at creating a more productive workforce will not work for students who may have already decided to work even before completing their education. In effect, school reforms and subsidies are worthless if a substantial number of students are no longer interested in schooling for some reason or another.
Thus, apart from the anticipated increase in labor supply, the formation of human capital is weakened as young people decide to leave school early. The coordination of markets and institutions are, then, crucial in encouraging the constant renewal and growth of the human capital of the labor force.
In this situation, the government should offer tax incentives to encourage firms to give scholarships for short-term classroom training and on-site apprenticeships, particularly for unemployed young people. Scholarship stipends can also be awarded, but should be set low enough to avoid discouraging the recipients from searching for jobs.
For their part, the markets should create jobs that allow young people to work and attend school at the same time. That would offset the pressure to leave school immediately in bad times to compensate for a decline in household income, and in good times to take advantage of a booming labor market. It would also be an effective way for firms to recruit highly qualified young people for potential full-time employment. To accomplish this, however, legal or regulatory changes might be necessary to allow special contracts for young people who attend school—featuring flexible hours, below minimum wages and greater ease of firing or quitting. The responsibility of protecting workers should not rest on the firms alone, but, more appropriately, belongs to state institutions.
Key labor-market institutions and the policies that shape them, thus, affect the restructuring that markets create. Unfortunately, because of the mandate to protect workers, the institutions and the country’s laws are often intransigent and unresponsive to various market conditions, which are themselves products of economic growth. In order to sustain growth and to maximize social welfare, these institutions should work alongside market forces, while providing various innovative alternatives to protect workers.
****
MEMBERS of the Philippine Economic Society are invited to attend its annual general assembly at the Hotel Intercontinental Manila in Makati City on November 14. The theme of this conference is “Forging Ahead: The Philippines as a Developed Economy in 2050.”
Leonardo A. Lanzona Jr., PhD, is the director of the Ateneo Center for Economic Research and Development and a senior fellow of Eagle Watch, the school’s macroeconomic research and forecasting unit.