Labor Econ 12: Wallace, Lenin, Stalin, Mao

No, no, no. Peter Wallace does not advocate the same things as Vladimir Lenin, Joseph Stalin and Mao Tse Tung. Peter of the Wallace Business Forum, is an Australian businessman and consultant who has lived in the Philippines for nearly four decades now, has a Filipino wife and kids, and advocates market-oriented reforms in the economy. 

I did not feel like writing another paper on Labor Day yesterday as I have written several papers on labor economics already. So I am reposting Peter's article in the Inquirer today. I share his ideas on this subject.

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Like It Is

May Day

By Peter Wallace
Philippine Daily Inquirer

7:57 pm | Wednesday, May 1st, 2013

The trouble I find in writing a column is that I tend to repeat myself—because the things I complain about are still there, or worse (in my biased view), are still there after I’ve offered a solution.

So here I go again for my Labor Day piece. Let me start with the one I think most needs to be changed: job security. And let me do so by emphasizing the repetitiveness of what I’ve said before by quoting what I’ve said before:

“The security of tenure is probably one of the worst pro-labor laws you can imagine. If there’s one thing it’s not, it’s security of tenure. It deters, instead of [encourages], job creation. You think twice, thrice before hiring anyone because of the huge cost and difficulty of terminating. Or you hire for five months, and then kick the employee out in the most hurtful fashion.

“If a job is necessary, when you fire someone, you just hire someone in his place. There’s no reduction in the available job statistics. Someone lost, someone else gained. The ‘loser’ works harder next time to ensure he retains the job, the ‘winner’ works harder to ensure he keeps it. Productivity goes up, cost goes down.”

This is so blindingly obvious to me that I can’t for the life of me see why it hasn’t been changed. Only the simplest of minds would think protecting an employee regardless of performance or corporate need is desirable. Maybe a century ago, when you didn’t have to compete with the world, may such a concept have been tenable, but not today. Today, in the global community, the Philippines ranks a miserable 65th among 144 countries. (Mind you, it’s an improvement from 85th in 2010, but the Philippines must aspire to be in the top 25 percent of economies surveyed.)

The next thing is minimum wage, and here’s what I said before, too, on it:

Labor groups argue for higher wages on very reasonable grounds that P456 ($11.12) per day is not a decent living wage. I agree. But zero, which is what close to 3 million Filipinos (or 10.1 million—a more realistic and, sadly, more believable figure, based on SWS’ latest survey) get is even less acceptable. They get zero because they have no jobs. They have no jobs because businessmen aren’t investing here. Foreign businessmen aren’t investing here because they can get cheaper labor in China, Vietnam and Cambodia. Even in Thailand and Indonesia.

Our daily minimum wage is $11; it’s $9.75 in Thailand, $8 in China, $5.30 in Indonesia, and $3.20 in Vietnam. The Philippines gives twice or thrice more than Indonesia and Vietnam, respectively.

Now look at the foreign direct investments over the past six years: China, $1,047 billion; Indonesia, $58 billion; Thailand, $51 billion; Vietnam, $41.7 billion; and the Philippines, $13.6 billion.

Do you see the link? High minimum wage isn’t the only factor that is driving foreign investors away from the Philippines, although all surveys and anecdotal discussions indicate it’s a major one. Do you want a low-paying job or a no-paying no-job?

Instead of getting P456 in daily wage, around 10.1 million Filipinos who want a job get nothing. In the informal sector in the provinces, a daily wage of P230-P280 is common, and people there somehow live on that. Now I’m not suggesting that’s an acceptable wage; it’s not. But what I am saying is that people can survive on far less than P456. But they can’t survive on nothing.

Don’t get me wrong: I’m very supportive of labor, I want everyone to have a decent, well-paying job. I believe that the two issues I mentioned are the reasons people don’t have decent, well-paying jobs because they cause investors, the ones who provide jobs, to look elsewhere, to where they are not constrained like this.

Globalization has changed the game, and we’d better learn how to play it to win. What high wages and restrictive conditions also do is encourage many businessmen to work outside the system.

It was good that the law was changed to allow night-time work for women, but take it further. Allow flexible working hours as long as these total no more than 40 in a week. The world is changing, and we must, too.

If the labor unions truly cared for workers, they’d be arguing on behalf of these people. Arguing, not for uncompetitively high wage rates, but that all companies, formal and informal, pay the SSS, PhilHealth and Home Development (Pag-Ibig) contributions that every Filipino should be given….

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What caught my attention in the Labor Day rallies yesterday was this photo, posted by several friends in facebook.

Of course it is horrible to see photos of Stalin and Mao in a labor demonstration. But the good thing is that at least their believers are getting more transparent in their advocacies, that they express their pinions and ideological leaning via public demonstration and not via armed violence. 

Karl Marx and Friedrich Engels  invented a rigorous critique of capitalism then. Vladimir I. Lenin invented the idea of a revolutionary party to capture state power, and led the Russian Bolshevik revolution. Stalin succeeded Lenin and invented dictatorship of the (Russian) dictators. Mao invented the idea of peasant revolution, led the Chinese communist revolution and the succeeding dictatorship and massacres for nearly three decades. Without revisionism by Deng Xiaoping and succeeding leaders, China would be a bigger version of North Korea by now -- destitute, terribly poor and isolated.

My usual advice to labor activists and their leaders is simple: Get out being a worker. Be an artist like Gary Granada, be a taxi or jeepney driver, put up a barber shop or barbeque stall or a carinderia or sari sari store, etc etc. No one puts a gun on people to become employees forever.

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See also:

Labor Econ 9: On 4-months Maternity Leave, June 14, 2012

Fat-Free Econ 38: Jobless Growth vs. Jobless Non-Growth, February 12, 2013 

Labor Econ 10: Voluntary and Involuntary Unemployment, February 18, 2013 

Labor Econ 11: Employees Forever vs. Entrepreneurship, April 27, 2013

Labor Econ 9: On 4-months Maternity Leave

Many politicians and legislators want to impose various mandatory price discounts by private manufacturers and sellers to certain sectors, mandatory benefits by employers to their employees. The politicians get the political credit, at no cost to them. Such is the case for drug price control, senior citizens' discount, persons with disabilities discount. And now, a proposal to make the paid maternity leave raise from two to four months. See this news below.

http://www.interaksyon.com/article/33757/video-4-month-maternity-leave-proposed-in-congress?fb_comment_id=fbc_389859737726687_4429087_390430657669595

VIDEO: 4-month maternity leave proposed in Congress

04-Jun-12, 1:30 PM | News5

MANILA, Philippines - From 60 days of maternity leave, a bill filed by the mother-son tandem of Representatives Gloria Macapagal-Arroyo (2nd District, Pampanga) and Diosdado Macapagal-Arroyo (2nd District, Camarines Sur) would extend the period to 120 days.

House Bill 6128 seeks to give mothers more time to breastfeed their children. The United Nations Children's Fund (UNICEF) and World Health Organization (WHO) say it would be ideal if mothers could breastfeed their babies for at least six months after birth.

"This will give mother and child quality time for bonding while at the same time ensuring the child's proper growth and development," the Arroyos said....

This is another idiotic bill by the mother-son tandem in Congress. If this becomes a law, many companies will adjust, like paying women lower pay in anticipation of prolonged paid leaves, or they will hesitate hiring plenty of women. And the women themselves, the supposed beneficiary of this measure, will be disadvantaged. It is not legislators Gloria and Dato Arroyo who will pay for the extra 2 months of paid maternity leave, companies will.

Let the companies and employers decide the kind of benefit packages they give to their employees, men and women alike, government should get out. Some rich companies will give four or six months paid maternity leave, some struggling companies can give two or three months paid leaves. Some companies will even give paid paternity leaves for their male employees while most companies don't.

Government should step out of making these mandatory benefits. Allow them to give benefit packages based on their income and profitability. Struggling companies should not be arm-twisted by the government to give certain packages that can drive these firms to lay off workers, if not move towards bankruptcy.

A company hiring people and giving them stable jobs is a benefit to workers already. Companies are also scared of losing their hard-working personnel, so they offer various benefits other than those mandated by various labor laws, to keep these hard working and efficient staff. Now if workers and employees are not happy with their current employers, then they can consider getting out and become self-employed with some micro- or small-scale entrepreneurship. When their enterprise has improved, they can start hiring other people and give their workers certain benefits that they can afford.

When the employers or employees violate the stipulated contract between them, that is where government via DOLE can come in, to enforce contracts, to promulgate the rule of law.

A lady living in Vancouver, Canada, also replied to this news report saying that in Canada, maternity leave is one year and they get full benefits. That they pay high taxes but they can see where the money goes, that they have free medical care, roads are well maintained, school system is not bad.

Cool. Things are nice and well in Canada, it should be attracting hundreds of thousands, if not millions, of migrants each year, and its natural population growth is also high and not suffering from greying population, there is baby boom as mothers can easily produce more offspring with lots of subsidies and support from the government.

But I think this is not happening. While the government gives lots of welfare and subsidies, the government also takes a lot from the people, which makes life somehow hard for them.

Many governments in the developed world also make it difficult and costly for couples and households to get a nanny for their kids with oodles of regulations and restrictions. This is what my German friend told me. He can afford to pay the minimum wage for a nanny, even higher. But then he also has to pay extra -- unemployment and social security insurance, health insurance, pension contribution, etc., so that it becomes very expensive to hire a nanny.

The lady from Canada said that while the CIC imposes various requirements to protect the rights of the nannies, it is the Philippine government through the POEA that makes it almost impossible -- via red tape and certain bureaucracies --  for a nanny to be able to work in  Canada.

I think she is right here. The POEA can be one hell of an intrusive bureaucracy that imposes various restrictions and regulations for prospective employers as if its bureaucrats are the ones to be hired abroad.

On another note, former party-list Congressman, socialist labor leader, a friend in facebook, Rene Magtubo, posted in his facebook wall,

In the old world, poor people work as slaves without pay for their masters in order to eat and to live. Today, in the modern world, slavery is condemned. But yet poor people are enslaved to work in order to eat and to live in a pay dictated by their employers. Is there a difference?

I replied,  Get out being an employee. Be self employed. The carinderia owners, tricycle operator-drivers, palengke vendors, they have no employers but themselves.

While it is easy to blame and attack the capitalists and the entrepreneurs, it is hard to become one. To be an entrepreneur, one has to deal with (a) suppliers of raw materials/intermediate goods, (b) consumers and clients, (c) creditors or banks, (d) office/shop rental, electricity, water, (e) employees, (f) competitors, current and future, (g) national government bureaucracies, (h) local government bureaucracies. Each year, sometimes each month or each day.

To be an employee, one has to comply only with the demands or requirements of your employer or boss and that's it, get the salary  and other benefits mandated by various labor laws.

That is why to be an entrepreneur is not for everyone. And corporate expansion, or corporate bankruptcy, is a reality for all. There is only one institution that does not go bankrupt -- government. Administrations and political parties can lose or decline, but government and its various bureaucracies can never go bankrupt. And that is how populist politicians in government thrive, like the Arroyo mother-son tandem proposing idiotic bills.

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See also:
Labor Econ 4: Minimum Wage Law is Wrong, July 05, 2011

Labor Econ 5: On Extending Minimum Wage Law Abroad, July 09, 2011

Labor Econ 6: Labor Rights and Employee Forever, May 05, 2012

Labor Econ 7: Unemployment in Advance Economies, May 06, 2012

Labor Econ 8: SWS on Unemployment Survey, June 08, 2012

Labor Econ 7: Unemployment in Advance Economies

I saw this chart in a facebook wall of one of my friends there. Interesting data on joblessness among some European youth, data as of yesterday, May 04, 2012.

The PIIGS (Portugal, Italy, Ireland, Greece and Spain), especially G and S, are leading the way. More than half of Greek and Spanish youth in the labor force do not have a job.

Believers of big and welfarist governments can say that "At least the government is taking care of these unemployed youth". Assuming that this is true, that all of those unemployed youth get some form of allowance from the government, that would mean two things:

One, those who have work are terribly taxed so that the government will have more resources to finance such huge unemployment allowance, plus the salaries and other benefits of government personnel and politicians doing such massive income redistribution.

Two, huge waste in human resources of an economy as these youth are not exactly "unskilled" or a "burden" to society. If a set up can be arranged so that only the lazy, those who have zero ambition in life, will have no work, then many of these youth can have jobs and productively contribute to society. Getting unemployment allowance from the government, assuming there is enough fund to do this, is not exactly a glamorous way to live, and I doubt that many young people would wish that kind of life. Majority of them would want to be productive, to be hired somehow so that they can show their talent and industriousness.

Here's another set of data that I got from the IMF's World Economic Outlook, April 2012. But this refers to overall unemployment for all ages, not just the youth.

Notice that the five developed economies of Asia -- Japan, Taiwan, Hong Kong, Korea and Singapore -- have low unemployment rates compared to their European and North American counterparts.

One explanation would be that entrepreneurship and business regulations in these Asian economies are not as strict and rigid as those in Europe and N. America.

For many Asian emerging economies, unemployment rate is mild. Pakistan and the Philippines are more of "outliers".

High unemployment rate means the demand for labor (by employers) is a lot smaller than the supply of labor, all other things being equal. It is possible that employers have high demand for workers but people want their salaries and benefits to be higher than what the employers would offer. So some people would prefer to be jobless -- and get some subsidies from the government or family members -- than have a work.

But as I noted in an earlier article, Labor Econ 6: Labor Rights and Employee Forever, May 05, 2012, if labor laws are many and too rigid, employers would rather hire few people.

Labor Econ 6: Labor Rights and Employee Forever

This is my article today in the online magazine,
http://www.thelobbyist.biz/perspectives/less-gorvernment/1305-labor-rights-and-employee-forever.
Below the article is a long comment from a friend, Arcy Garcia, a former buddy in BISIG in the late 80s when I was still a socialist. Then my short reply to him.
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Labor rights, like human rights, is an important concept that has both philosophical, Constitutional and legal basis. But like any other entitlements, rights are always coupled with responsibilities. Otherwise, such rights can be abused.

Every International Labor Day (May 1) each year is marked by rallies and demonstrations by militant labor unions and their allies from various sectors, asking for various demands from the government. Foremost of such demands is an across-the-board hike in minimum wage nationwide.

Normally, such demand should be raised at the negotiating table between a labor union or employees organization, and the management of private enterprises, not in the streets. The people who hired the workers – and turned down other job applicants – are the managers and owners of private enterprises, not the government or media or other NGOs.

Militant workers’ groups though argue that not all workers are organized and have a labor union to represent them in collective bargaining with management. Or they may have one but they are not skilled or trained enough to negotiate fairly with management, so they keep receiving low salaries. Thus, they want the government – via Congress or the Department of Labor -- to issue a law or Administrative Order that will force and coerce private enterprises to raise the minimum wage to a level that is demanded by the militant labor groups. In addition, the articulate labor leaders also want government to mandate and coerce the private employers to give various new or higher allowances and mandatory contributions for the social security of the workers.

These labor groups want rigid labor laws, or inflexible multiple laws that attempt to protect workers against possible "capitalist exploitation". Since workers do not own the means of production but only their labor and talent, and given the difficulty of workers to find a new or alternative job, then they are subject to capitalist exploitation and must be protected by the state.

Among the rigid labor laws that are generally applied in many countries are:

(a) High minimum wage, even the most unskilled workers should receive this salary.
(b) Security of tenure, protection from arbitrary dismissal and lay-off, even if some employees are displaying inefficiency or laziness and declining productivity, or even if the company is losing money.
(c) Long mandatory leaves with pay (vacation leave, maternity leave, sick leave, etc.); private health insurance on top of government-run health insurance.
(d) Higher employers’ contribution on certain government-owned corporations and financial institutions (SSS, PhilHealth, Pag-IBIG, etc.).
(e) High separation pay and retirement benefits, and so on.

In short, a policy of "expensive to hire and retire, difficult to fire."

These are indeed important and wonderful protection of workers. But those who have no jobs, or those who work in the informal sector, are not covered by these rigid labor laws.

A common result of this situation is high unemployment and underemployment rates. There are several alternatives for some employers, among them:

1. Instead of hiring five workers, a company would just hire one, two or three people, train and equip them so they can do the work of five people.

2. Hire some people on contractual or temporary, short-term (say five months) basis, just a month or few weeks before a period of mandatory regularization of workers. Or hire trainees and part-time students.

3. A company will close its office in a particular city and move to another city, or another country, where the cost of production and labor is lower, all other things being equal.

4. Use robots and machines for certain tasks that were previously done by people.

Many people do not consider this as result of rigid labor laws, but as additional reason to make the laws become even more rigid and more "pro-labor". That is, since unemployment is already high, the more that the government should protect workers from being laid off.

Another impact of "expensive to hire, difficult to fire" policy is that many employees are encouraged to become "employee forever" as their entrepreneurial spirit is discouraged. If the laws are stacked against being an entrepreneur and job creator, and in favor of employees and job seekers, why aspire to be an employer? Why not become an employee forever, get promoted to senior levels and enjoy the benefits of various "pro-labor" policies.

Better yet, become a politician or appointed government bureaucrat, and be the regulator of those businessmen, give them a hard time everything they seek business permit application or renewal, possibly extort some money or personal favour from them before they give their signatures and permission as regulators.

As of the latest labor force survey in the Philippines, January 2012, some 2.9 million Filipinos have no jobs, plus 7.0 million of those who have work are looking for additional work (the “underemployed”), mainly to augment their low income. Meaning almost 10 million Filipinos are either unemployed or underemployed, this is a big number.

Strictly speaking, employment is not a right. It is a privilege. Only those who have some ambition, are willing to endure some hard work, and continue to learn new skills, will be able to find work or be able to employ themselves, mainly as micro- or small entrepreneurs. There are those who do not want to work, or some work little then complain a lot, they later resign or are fired from work. Thus, employment is a privilege, it is not an entitlement or a right.

It is important therefore, for the government, national and local, to liberalize, not choke, the labor environment so that more private entrepreneurship and job creation will be encouraged. While it is desirable to get a high-paying and secure jobs, such may not be easily available, while "low-paying", unsecured jobs may not be glamorous but are easy to find.

The “easy to hire, easy to fire” policy may look heartless, but sometimes it is better in encouraging job creation than the “difficult to hire, difficult to fire” policy. If entrepreneurs will have a hard time firing their lazy and unskilled workers, they would rather hire very few people only and leave many job-seekers to remain unemployed. In a competitive business environment, employers will be forced to give good pay and various benefits to their efficient and hard-working employees so that the latter will not leave them to work in other companies or to become start-up entrepreneurs themselves. And those employees who would otherwise are lazy, will be forced to do their work well so that they will not be fired easily.

Labor laws that workers demand to protect themselves from "capitalist exploitation" will be the same laws that will prevent them and their children from being easily hired someday, or will hound and prevent them to become start up entrepreneurs and job creators someday.

Labor Econ 4: Minimum Wage Law is Wrong

Setting government-mandated minimum wage law is wrong because it only protects those who have jobs already while discouraging the hiring of the jobless who have less skill, or have little or no job experience yet.

That regulation is supposed to protect workers from "capitalist exploitation", thus, even the unskilled or the young and unexperienced should be given the minimum wage by their employers. When faced with a higher labor cost, plus other labor regulations that make it difficult for employers to fire even lazy workers, the tendency of employers is to hire as few workers as possible, then let those who are hired to work as fast and as productive as possible.

The Economist released a good chart the other day, "Youth Unemployment: the outsiders" in its July 5th 2011 issue, Daily Chart.

The Economist gave this observation on this graph:

OF THE many gloomy indicators generated by the financial crisis in the rich world, the sharp rise in youth unemployment is perhaps the most dispiriting. Countries that entered the crisis with this problem already entrenched, such as Spain, have fared the worst. Their labour markets tend to be characterised by privileged cliques of workers with high levels of job protection, and indignados who are outside the system, banging on the window in the hope of being let in.

It should be a terrible condition for many young, fresh graduates in universities (or university drop outs) in Spain, Croatia and Greece, to find a job.

I concur with the description by the magazine above about youth unemployment. I developed this graph today to help explain the phenomenon.

If there is no government-imposed minimum wage law, then even the most unskilled, those with zero job experience, can easily find a job as there will be takers for them at a lower pay. There is a market for everyone, both job-seekers and job creators. The result is a wide range of wages (the "equilibirum point" or intersection between supply and demand) among different workers and employers, for the same job category, say house construction workers or bus drivers, etc.

Enter the nanny state and imposes a minimum wage law, whether at the national or regional/provincial level. A minimum wage is the "floor wage" that even the most unskilled job seeker should be entitled to receive. The tendency of employers then is not to hire the unskilled, the little or zero experience young job applicants. There are also additional costs in training them before assigning them in actual work. What results is a hollow space below the minimum wage curve or line. It represents the level of unemployment in the economy.

So the higher the mandatory or minimum wage, plus other rigid labor regulations, the higher will be the unemployment rate.

The implication is simple: governments should abolish their minimum wage laws and regulations.

Allow the employers and potential employees to craft their own employment contracts. Employment is a private contract between the two, and government has little role in such contract. Only when one party will breach their private contract (the employer does not give the stipulated salary rate, other benefits; or the employee is lazy and insist that he should be entitled to so many separation benefits before he should be fired; many other cases) will government comes in. To enforce the rule of law, the law or contract between the employer and employee/s.
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See also:

Labor Econ 1: What Determines Wage? May 26, 2006

Labor Econ 2: Labor Laws and Employee Forever, May 04, 2010

Labor Econ 3: Wages and Marginal Product of Labor, April 18, 2011

Labor Econ 3: Wages and Marginal Product of Labor

(This is my article today in thelobbyist.biz,

http://www.thelobbyist.biz/perspectives/less-gorvernment/655-wages-and-marginal-product-of-labor)

With the continued rise in the prices of oil, fare, electricity, food, other products and services, there is the usual clamor for a government-imposed wage hike across sectors. And the government announcement should preferably be done on Labor Day or two weeks from now.

This logic is faulty for two important reasons. One, employment in the private sector is a contract (wages, social security benefits, bonuses, leave with pay, etc.) between employers and employees, government is outside of this contract and thus, government imposition of wage hike is a distortion of this private contract. And two, wage is not a function of the changes in prices (increase or decrease) of oil, electricity, food and other goods and services; wage is a function of the productivity of labor in each firm, in each sector.

Consider this illustration and two graphs. A firm producing chairs, is deciding how many workers it should hire. Just 1, or 2, or 6 or more? There are fixed costs in the firm like office rental, average electricity bill, etc. The variable costs include number of workers (more workers, more costs, but hoping that it will also result in more sales and more profit).

The marginal product (or extra output) of each laborer is derived by deducting total output of say, 3 workers, with the output of 2 workers, and so on.

This illustration is suggesting that the firm should have only 3 or 4 employees, not 5 or 6 as the marginal product (MP) or extra output of the 5th and 6th workers are already low, if not zero. The MP curve (lower graph) is showing that a firm can make maximum profit with just 2 workers, but hiring a 3rd and possibly, 4th worker, can still increase the firm’s total product and hence, total revenues.

And that is how firms decide in how many workers to hire at what salary for each worker. The more skilled the worker, the higher is the wage plus other benefits.

If there is a pressure from the workers themselves, say through their labor union, to demand higher pay due to the rise in the prices of oil, electricity, food and other commodities, the employers and management may grant the wage hike demand, but that MP of each worker is also expected to rise. Thus, instead of producing an average of 8 chairs per day, workers will be expected to produce 9 or more chairs per day, through better tools and continuing training and skills improvement.

The more that people will think that the solution to economic problems is politics, the more politics and politician interventions they will get, and it will be counter-productive.

Wage and related benefits are mainly a function of, or determined by, labor productivity, not by the price of oil and other commodities nor by the number of children and dependents that a worker has.

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See also:

Labor Econ 1: What Determines Wage? May 26, 2006

Labor Econ 2: Labor Laws and Employee Forever, May 04, 2010

Labor Econ 2: Labor Laws and Employee Forever

May 1 every year is the International Labor Day. Workers in the country and around the world were demanding for higher government-mandated wages, stricter rules against work lay-off and retrenchment, and so on.

Rigid labor laws, or laws that overly protect workers against possible "capitalist exploitation" is rooted in the socialist thinking and philosophy. Since workers do not own the means of production but only their labor and talent, then they are subject to capitalist exploitation and must be protected by the state.

Among the rigid labor laws applied in many countries, in highly welfarist European countries especially, are (a) high minimum wages (even the most unskilled workers should receive this salary); (b) security of tenure, protection from dismissal and lay-off (even if the employee is displaying laziness and declining productivity, or even if the company is losing money); (c) long mandatory leaves with pay (vacation leave, maternity leave, sick leave, etc.); (d) expensive separation pay and retirement benefits; and (e) very high taxes, both personal and corporate income taxes, partly to pay for generous unemployment allowances for the jobless. In short, a policy of "expensive to hire and retire, difficult to fire."

One result of rigid labor laws of a country is high unemployment and high underemployment rates. Many people do not consider this as result of rigid labor laws, but as additional reason to make the laws become even more rigid and more "pro-labor". That is, since unemployment is already high, the more that the government should protect workers from being laid off.

Looking at the other side of the issue, however, people will realize that unemployment is high in a particular country because many employers and businessmen would rather (a) put up their plants and offices in other countries where labor laws are more liberal; (b) hire temporary and contractual workers or job trainees than hire regular, full-time employees, or (c) use robots and machines to do the tasks previously done by people.

Another impact of "expensive to hire, difficult to fire" policy is that many employees are encouraged to become "employee forever" as their entrepreneurial spirit is discouraged. If the laws are stacked against being a businessman and entrepreneur, and in favor of employees, why aspire to be an employer? Why not become an employee forever, get promoted to senior levels and enjoy the benefits of "pro-labor" leaves-with-pay, and generous separation and retirement benefits? Better yet, become a politician or appointed government bureaucrat, and be the regulator of those businessmen, extort some money or personal favour so that you will give your signature and permission as a regulator.

As of the latest labor force survey in the Philippines this year, some 2.8 million Filipinos have no jobs, plus 7.1 million of those who have work are looking for additional work (the “underemployed”), mainly to augment their low income. Meaning almost 10 million Filipinos are either unemployed or underemployed, this is a big number.

Employment is not a right. It is a privilege. Only those who have some ambition, are willing to endure some hard work, and continue to learn new skills, will be able to find work or be able to employ themselves, mainly as micro- or small entrepreneurs.

It is important, therefore, for the government – national and local – to liberalize, not choke, the labor environment so that more private entrepreneurship and job creation will be encouraged. While it is desirable to get a high-paying, well-protected jobs, such may not be easily available, while "low-paying", unsecured jobs may not be glamorous but are easy to find.

The “easy to hire, easy to fire” policy may look heartless, but sometimes it is better in encouraging job creation than the “difficult to hire, difficult to fire” policy. If entrepreneurs will have a hard time firing their lazy and unskilled workers, they would rather hire very few people only and leave many job-seekers to remain unemployed. In a competitive business environment, employers will be forced to give good pay and various benefits to their efficient and hard-working employees so that the latter will not leave them to work in other companies or to become start-up entrepreneurs themselves. And those employees who would otherwise are lazy, will be forced to do their work well so that they will not be fired easily.

Labor laws meant to protect workers from "labor exploitation of capitalism" will be the same laws that will prevent them and their children from being easily hired, the same laws that will restrict them to become independent entrepreneurs and businessmen/women in the future.

* See also Labor Econ 1: What Determines Wage? May 26, 2006

Labor Econ 1: What Determines Wage?

The determinants of labor supply and demand:

1. Labor supply: mainly determined by population growth and migration; also, the skills and education level of education of the workforce.

2. Labor demand: mainly determined by the size and growth of the economy. More economic growth, more business activities, more jobs created.

3. Equilibrium wage: the level of wage where supply meets demand in a given skills level. Thus, you can have numerous and endless equilibrium wages for numerous type of labor supplied and demanded: for domestic helpers (rich, middle class, poor households), construction workers, agricultural workers, aquaculture workers, hotel and restaurant workers, transpo workers (airlines, shipping lines, bus lines, taxi lines, vans, etc.), scientists, engineers, chemists, lawyers, economists, etc.

What determines wage increase?

3 main schools of thought:

1. Wage is a function of cost of living of a family: A family of six would need Pesos xxx per month; hence, this should be the minimum wage. The minimum wage is the level that even the most unskilled worker must receive.

2. Wage is a function of increase in price of commodities (inflation rate): The consumer price index (CPI) has moved up from xx to yy points over the last nn years; hence, wages must increase by a proportionate rate, if not higher.

3. Wage is a function of productivity: Whether the worker is single or has 10 children, or inflation rate has increased by 1% or 20% per year on average, if productivity has not increased, wages cannot increase. Otherwise, the company will close shop and workers will be jobless.

The philosophy of government setting minimum wage and the succeeding legislation and tripartite contracts are supposed to protect workers from underpayment and exploitation by their employers. The goal of worker protection is good and laudable, except that the means, minimum wage-setting by government, depresses the dynamism of the labor market.

Setting a government-mandated minimum wage way above the expected productivity of unskilled people, if strictly and rigidly implemented, will result in those unskilled people being hired by no one except the charity-oriented organizations and individuals. If the number of the unskilled people are much plentier than what charity people and organizations can absorb and employ, then the rest of those unskilled people will go hungry. In short, minimum wage and related laws protect only those who already have jobs, but discriminate the unskilled who are not employed yet.

That minimum wage should be xxx $ (or Pesos or other currencies) per hour, per day, per month, because that is what a family of five members (couple + 3 children) will need to live decently, regardless of the skills of the worker, will again work against the unskilled. There will be temptation and incentives for employers to hire only unmarried people, or married but have no kids yet (or have only 1 or 2 kids) so that the “needs of family of five” argument will not apply to the workers in negotiating for wage adjustments. And those unskilled workers who have plenty of children will be condemned to perennial joblessness, perpetuating further that family’s poverty.

Indexing wages to inflation rate is also inadvisable. Inflation rate can climb fast for a hundred reasons, like high interest rates due to government over-borrowing to finance the budget deficit; damage to crops due to strong typhoons, hurricanes, floods, or volcanic eruption; supply disruption due to damage to roads and bridges from the food- and other commodities-producing provinces because of earthquake, sabotage, fire; hike in transportation cost due to world oil price increases, and so on.

If wages will be forced by government or by strong labor federations to be adjusted upwards because any or all of the above happened, and there is no corresponding increase in overall firm productivity, or increase in the firm’s revenues, then that company will be forced to either lay off some workers, or just close shop, even temporarily.

Wage is a function of, is determined by, a worker’s skills and productivity. It is not a function of the number of children that a worker has, nor is it a function of the change in consumer prices (or inflation rate). Because if this were so, then workers can have 4, 8, a dozen children, and pressure the state to pressure the businessmen and employers to increase their pay because their needs to live decently, from food to clothing to medicines, have increased. In a situation of many poor economies like the Philippines where labor supply always exceeds labor demand every year because of fast population growth, the army of the unemployed will keep increasing and poverty incidence will keep expanding.

Many people, especially ordinary employees, aspire to become start-up entrepreneurs someday. In fact, people should not aspire to become “ordinary employee forever”. Unless their company or organization keeps expanding so that they are assured of continued career mobility until they retire, workers should dream of becoming “their own boss” someday. This will put them on the same situation as their former employers, and this will temper them from making unreasonable demands that are beyond the capacity of employers to be granted. Conversely, if employers know that their current hard-working employees will leave them soon to put up their own start-up enterprises, they will be forced to give good pay and benefits to encourage said self-driven employees to stay in their companies.