Crossroads (Toward Philippine economic and social progress)
Philippine Star, 25 September 2013


Some legislators and labor advocates think that all it takes to improve everybody’s wages is for the government to step in and pass a law that raises pay. Thus, we get crazy ideas such as the 14th month pay proposal, filed in the Senate as a bill for adoption.

Bad idea: 14th month legislated pay. When the bill was filed, the Secretary of Labor and Employment, Rosalinda Baldoz, immediately opposed it. She is reported to have said the following:

“A 14th month pay would bring more harm than good to workers, particularly in small and medium enterprises. While everybody would like additional benefits, it is a matter of how you can give it.”

The Labor secretary further said: “99.6 percent of commercial establishments nationwide are considered small and medium enterprises employing a little over 10 workers and could not afford a 14th month pay. Affordability is the issue. A 14th month pay could bring additional cost for employers and lead to closures of many commercial establishments and mass displacement of thousands of workers.”

Ideas like these – forced pay being required of employers – are deleterious to labor who are outside the system of regular employment. They add to the cost of labor without creating any new productivity to the enterprises. They reward employees for being employed and not for their additional contributions to the firm. They lead to the exclusion of those left out in the system of beneficiaries.

To enterprises that can afford to pay the laborer, such impositions simply add new burdens but they take away the incentive to reward employees for their productivity. In the presence of competition from other countries, such additional burdens represent a turnoff to investors. We should attract more investments, not provide disincentives that make them turn to other countries.

(Incidentally, we have also some of the most restrictive rules regarding the treatment of foreign direct investment in the Philippine market compared to other countries in the ASEAN.)

Our labor market policies have acted to hinder the growth of more employment because we have rules unique to our system which prevent existing employers from hiring more people in their enterprises and which discourage new investments in more employment using activities.

Should we adopt these types of additional impositions in labor rules, we would simply sabotage the move toward the resurgent economic prospects that we are now accustomed to hearing about.

13th month pay: an old, good idea turned into crazy entitlement and additional labor cost. Incidentally, the history of the 13th month pay policy is worth remembering. It depicts a palliative and temporary policy that was turned into a major wage entitlement – a permanent cost to the hiring of the regular payroll of the firm. It is a disguised addition to the minimum wage.

This provision of the law partly explains why our economy has been unable to integrate many laborers into the regular work force of companies, why many workers are hired on temporary basis only and why labor contracting has become a major industry that has veered away from the direct hiring of labor in traditional industrial and commercial establishments.

As a result, it has worked against the interest of most workers who are not part of the regular employment stream of companies in the country. It has benefited only those workers who are well entrenched as regular employees.

The 13th month pay is an anachronism. It was initially a temporary measure to alleviate the large rises in prices during the energy crisis years of the 1970s. It was patterned after the practice of private companies to give a performance bonus for workers at the end of the year. Within the public sector, it was a means to redress the low pay of workers, especially among the government financial institutions.

Once it became part of the legal books, the Labor department insisted on making it a more permanent addition to the wage level of the regular employee. Eventually, the 13th month pay became an entitlement in the form of postponed income paid at the end of the year but with no connection with employee performance or productivity.

Under this set-up, the 13th month pay is nothing more than an additional impost on the wages of regular employees without reference to productivity performance.

Need to reward worker productivity with greater pay. The system that we need to promote in the area of labor market policy is to bring productivity in the equation for determining wage increases. Only when productivity is part of the consideration for wage adjustment will it be possible to get wages to rise on the basis of the laborer’s own efforts and for businesses also to experience progress.

When we have minimum wages, the “minimum” should be inclusive in reference to the needs of the people seeking employment rather than set them on the basis of standards defined for those already employed. By doing so, the state will make it possible to raise the level of employment in the formal sectors of commerce and industry and will allow more unemployed and underemployed to move into the organized sector of the economy. Presently, most of the unemployed and underemployed are absorbed into the unorganized sector of the economy where incomes and wages are even much lower than the minimum wage.

The 13th month pay could have served as a pathway for raising productivity if the formula for its grant had been linked to productivity contributions of the laborer within the firm and not forced on establishments as a catch-all formula for an additional wage payment.

Be that as it may. We may decide to live with the 13th month pay as presently configured as an addition to the wage bill for all regularly employed workers. Henceforth, however, new adjustments on labor market issues with respect to wages should be linked mainly with productivity.

This is the new ethos required for us to be a viable contributor to the further growth of the ASEAN market. This is of course a topic requiring further explanation.