Leonardo A. Lanzona, Jr.

April 28, 2008

Drake Room
Discovery Center

Final Version 4/28/2008

 Provide a brief review of the literature
 Assess empirically the impact of flexible
contracts on unemployment
 Consider possible policy directions in light of
the observed relationships

Final Version 4/28/2008

 Review of Literature
 Perverse Relationships
 Consequences of the Reduction of Dismissal Costs
 General Assessment
 Empirical Analysis
 Demand for Flexible Contracts
 Supply of Workers in Flexible Arrangements
 Conclusion
 Major constraint: availability of data

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis
 Main Thesis of the Paper: To the extent that other Conclusion
alternatives, such as work in the informal sector or
abroad, exist, workers belonging to a particular class of
skills are not likely to accept offers below their personal
valuation of their productivity.
 Consequences of Flexible Contracts, given a relatively
younger work force, are the following:
 Adverse Selection: The pool of workers may be of lower quality
as the more productive will look for better options abroad or
in the informal sector. Employers on the other hand are not
willing to hire these workers at higher wages.
 Violation of Coase Theory: Notwithstanding the distribution of
property rights, bargaining would produce an optimal
allocation of resources as long as transaction costs are
insignificant. However, given the privilege to hire temporary
workers, labor costs, including bargaining costs, will be lower.

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis

 Observed negative correlation between Conclusion

flexible contracts and employment:

 Leading to a higher turnover of workers, as more
workers are dismissed. Firms seem to indicate
that workers in flexible contracts are more
productive.
 Causing an artificial tightness in the entry level
jobs, leading to greater unemployment
 More workers search for better high-paying options
but firms only offer the flexible contracts.
 Workers with more experience in flexible contracts
are able to obtain employment more than other
workers with lesser experience in the labor market.
Final Version 4/28/2008
 Review of
Literature

Empirical
Analysis

 However, employment is observed to Conclusion

increase if the following conditions are

satisfied:
 The share of long-term unemployment is reduced
 More entries than exits of workers are realized
by the firms
 More private sector investments are formed,
leading to more hired workers
 An increase in the size of the formal sector

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis
 Flexible contracts are more suitable in economies where a Conclusion
high level of competition is involved. Levels of
development may not be the crucial factor as some
developing countries seem to benefit flexible contracts
 Flexible contracts should be matched by other forms of
deregulations, such in the product and the financial
markets, since these will induce the firms to expand their
scale of production. To some extent flexibility in the
labor market eases the costs of deregulation.
 Flexible arrangements by themselves are not substitutes
for greater liberalization in the other markets.
Imperfections in the other markets can hinder the
expected outcomes of flexible arrangements.
 In the presence of imperfect markets and asymmetric
information, labor markets institutions can be used to
address the issues of conflict between employers and
workers.

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis

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

1998 2000

Type of Workers 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

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis

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

Manufacturing Construction Wholesale & Retail Transportation, Financial &

Trade Storage & Business
Communication 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).

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis
 Factors causing a higher demand for flexible Conclusion
contracts (Bitonio, 2004)
 The uncertainties and the need to respond
immediately to various forms of dislocations brought
about by changing external market conditions were
cited as the key reason for the use of casual workers.
 The importance of external conditions suggests that
the casual workers were meant primarily to fill in
temporary vacancies that occur during the periods of
high demand.
 In the case of part-time, contractual, and agency-
hired workers, firms are looking mainly for their
specialized skills in highly specific jobs.
 The need to train non-regular workers for more
permanent positions and the quality of the work they
bring in were noted as the least important reasons for
employing non-regular workers.

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis
Table 3. Percent Share OF Non-Regular Workers to Total Non-Agricultural Establishments Employment
by Ownership, Market Type, Market Reach and Unionism, 2003
Conclusion

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).

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis
 Data from PLFFS suggests that indeed the firms are Conclusion
able to limit their costs substantially (Bitonio, 2004).
 Across various firms surveyed, non-regular workers are
paid lower wages than regular workers even if they
perform the same or similar work. Higher payments are
found only in two to five percent of firms. Lower pay is
especially noticeable for casual, part-time and
contractual workers.
 In the case of benefits other than direct wages, non-
regular workers typically received lower than regular
workers. Only 60% of firms pay their non-regular workers
thirteenth month pay, compared to 92.8% for regular
workers, although this benefit is statutory.
 In cases where benefits are provided, non-regular
workers also receive lower medical benefits,
employment accident and disease benefits, maternity,
paternity leave, transport allowance or assistance, and
meal allowance or assistance.

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis

Table 4. Number of Workers Employed in Specific Categories, Survey Years (In Thousands) Conclusion
INDICATOR 1991a 1992 1993 1994 1995 1996 1997 2003 2004

EMPLOYMENT OF SPECIFIC GROUPS

OF WORKERS

(Establishments employing 10 and over)

b
Total Establishment Employment 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
a
Notes: Excludes Agriculture, Forestry and Fishery
b
Employment based on the Survey Conducted, excludes agency-hired workers

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

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis

Conclusion

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

Employment
40.00
30.00
20.00
10.00
0.00
1991 1992 1993 1994 1995 1996 1997 2003 2004
Years

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis

Conclusion
Figure 2. Percentage of Specific Non-regular Workers to Total
Establishment Employment , Selected Years
16
14
12
Piece-rated Workers
10
Task or "Pakyao" Workers
8
6 Commission Workers

4 Part-time Workers
2 Casual Workers
0 Contractual Workers
1991 1992 1993 1994 1995 1996 1997 2003 2004
Years

Final Version 4/28/2008

 Review of
Literature

Empirical
Table 5. Establishment Employment by Industry and Type of Worker, 2003 (in
Analysis
Thousands)

Total Total Type of Workers Conclusion

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.

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis

Figure 3. Comparison of Total Employment and Total Establishment Conclusion

Employment, Selected Years
35,000
30,000
25,000
20,000
No. of workers
15,000
10,000 Total Employed Workers
5,000
Total Establishment Workers
0

Years

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.

Final Version 4/28/2008

 The failure of the policy to deliver its promise—no positive
effect on employment, leading to inefficiency in the labor
market
 Effects of adverse selection due to the policies:
 The negative impact on employment
 Because of the ease to set up contracts, the 20 percent engaged in
formal establishments has driven out of the market the more productive
workers who are seeking tenure
 The number of dismissals are presumably greater, thereby raising the
number of the unemployed.
 The consequence is a set of distorted incentives. People
who are more productive and motivated will not be able to
find work, making investment in human capital
unprofitable. The labor force surveys indicate that the
college educated persons have a lower probability of
landing a job.

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis

Conclusion

Figure 4. Unemployment and Underemployment Rates in the Philippines,

1991-2005
25
20
15
10
Unemployment Rate
5
Underemployment Rates
0

Years

Final Version 4/28/2008

 Review of
Literature

Empirical
Table 6. Relationship between average number of Non -regular Workers, Unemployment and
Analysis
Underemployment, 2004

Non-regular Workersa Unemployment Underemployment

Conclusion
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

a
Notes: Average 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

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis

Conclusion
Figure 5. Non-regular Workers vs. Unemployment and Underemployment
Regional Data (2004)
30
20
10
0

0 10000 20000 30000 40000

Non-regular Workers

Unemployment Underemployment
Fitted values
Fitted values indicate relationship between Non-regular workers and unemployment

Final Version 4/28/2008

 Bootstrap method tests the stability of the correlation:
This is done by considering different sub-samples of a
given sample, testing the significance of each of the sub-
sample correlations, and then estimating the significance
of the average correlation obtained from the whole
sample using the observed sub-sample variances
 Results:
unemp  0.171  1.361lnnreg , adj-R2  0.34, n  17
(0.03) (1.96)*

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.
 Review of
Literature

Empirical
Analysis

Conclusion
Fig.6. Number of Displaced Workers due to Economic Reasons
90000
80000
70000
All Industries
60000 Agriculture, Forestry and Fishing
50000 Mining and Quarrying
40000 Manufacturing
30000 Electricity, Gas and Water

20000 Construction

10000 Services

0
1995 1996 1997 1998 1999 2000 2001 2002 2003

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis
 Market imperfections Conclusion
 Because of the lack of investments, the employment has not
increased despite the lower labor costs that have resulted
from the contractualization. Given the country’s large
population, the fast-growing businesses in the service sector do
not need to rapidly increase investment to enjoy rising profits
(Bocchi, 2007).
 The economy is able to achieve higher growth because of its
least protected sectors - the informal labor market and the
non-capital-intensive activities.
 Furthermore, the burgeoning remittances due to massive labor
migration stimulate consumption-led-growth while a few non-
capital-intensive manufactures and services boost exports.
 The economic system is in equilibrium at a low-level of capital
stock, where all economic agents have no incentive to
unilaterally increase investment, and the dismissed workers
are often the carrying the costs of the growth. As a
consequence, growth is slower and less employment is
achieved

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis

Conclusion
Year Average percentage of the Labor Average percentage of the Labor Average Weeks spent Looking for
Force who looked for work during Force Available for Work during work
the past week the past week

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

More search hours…on the average!

Final Version 4/28/2008

 Same as the proposed reasons for the
observed decreases in labor force
participation rates: Increased resources to
delay formal participation in the labor
markets.
 Remittances from other family members
 Household Involvement in the informal sector
 Aldaba et. al. (2006) noted
 Families as a whole are sub-contracted in the
informal sector
 Family members are complementary, though not
substitutable
 Incomes are shared in the family
 The latest LFS noted the increased proportion of
unpaid family members to the total employment
 Further Evidence of Negative Relationships
between Contractualization and Employment

Fig. 8. Worker Availability and Total Hours of Work

1997-2003
.1 2

41 4 0 .5
.1 1
P e rc e n ta g e

H o u rs
40
.1

3 9 .5
.0 9

39
.0 8

1997 1998 1999 2000 2001 2002 2003

Year
Availabillity for work Total hours of work

Source: Labor Force Survey, National Statistics Office

 Review of
Literature

Empirical
Analysis

 As an increasing number of scholars have come Conclusion

to see, the evidence for any causal link between

wage flexibility and unemployment is thin. This
paper contributes to the debate by presenting a
few trends in employment and flexible contracts
and finds the association posited by the
conventional view to fail in very simple tests of
association.
 An alternative hypothesis, which specifies that
high flexibility in various regions correspondingly
increases unemployment rates, seems to fit the
evidence more satisfactorily.

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis
 First, unemployment has nothing to do with the Conclusion
duration of contracts. Greater investments are
needed from the firms especially in the training
of workers and in the formation of labor-inducing
physical capital.
 To accelerate economic growth, and increase job
creation, local firms must be induced to invest
further. To do this, rent seeking by the élites that
exercise political and economic power - or “élite
capture” - must be addressed.
 While it is necessary to improve the investment
climate and competitiveness, the crucial steps in
attracting investment and creating more local jobs
are in terms of liberalizing and reforming the
sectors dominated by rent-seeking corporate
conglomerates.

Final Version 4/28/2008

 Review of
Literature

Empirical
Analysis

Conclusion
 Finally, institutions that allow greater
participation of the workers in policy making
need to be strengthened.
 As shown from the contractualization reform
experience, no policy measure that seeks to
increase employment can succeed without first
determining how workers will react to the policy.
 The formation of institutions may certainly cause
certain setbacks in the effort to increase the
economic growth of the nation. But one thing is
certain: these institutions will bring about greater
welfare
 Labor unions need to be strengthened.

Final Version 4/28/2008

 Thank you!

Final Version 4/28/2008