BMSH2007

Application of Demand and Supply Analysis (Part 1)

I. Philippine Labor Market (McEachern & Burrow, 2017)

Developing countries, like the Philippines, have relatively less human and physical capital. The quality of
labor (skill, experience, and education of workers) is a vital source of productivity. There should be growth
in labor productivity to increase the standard of living.

Labor supply (labor force) is the portion of the population who are 15 years old and over willing and able
to work, which include (1) those who are actively seeking work but have not found work and (2) those
who are employed. It is important to look at the age distribution of the population, seeing how much is
made up of the age group that could join the labor supply and contributes to income generation and goods
production. The value of the country's gross domestic product (GDP) is determined by the labor supply's
contribution to the production of products and services. (Dinio & Villasis, 2017)

Gross Domestic Product (GDP) refers to the total monetary or market value of all finished goods and
services produced within a country's borders in a specific period (Fernando, 2020). In 2015, the Philippine
output per capita estimated at US$ 2,635.04, maintaining the upward trend of the output per capita.
Output per capita, the real GDP divided by the population, refers to how much the economy produces on
average per resident.

Underemployed are workers who are highly skilled but working in low-paying or low-skill jobs and part-
time workers who would prefer to be full-time (Chen, 2020). Full employment occurs when the economy
has relatively low unemployment. Unemployed refers to people who have no jobs and are looking for
work. There are four (4) types of unemployment:
1. Frictional Unemployment is created during the time required to bring together labor suppliers and
demanders. This employment does not last long, resulting in a better match-up between employees
and jobs.
2. Structural Unemployment occurs when job seekers do not have the skills demanded; posing more
problems than frictional unemployment since the unemployed may need retraining to develop the
skills required.
3. Seasonal Unemployment occurs when unemployment is due to seasonal changes in labor demand
during the year.
4. Cyclical Unemployment occurs when there is an increase in unemployment due to the recession phase
in the business cycle, although it decreases during the expansion phase.

There are significant occurrences of labor migration of Filipinos since there are a lot of overseas Filipino
workers (OFWs) (Tullao Jr., 2016).

Minimum wage refers to the lowest allowed wage paid to workers under the legislation and government
policies (Viray Jr. & Avila-Bato, 2018). The government's mandated minimum wage rates in the country
depend on the cost of living in the specific region or sector. The setting of such rates is to protect workers
from being underpaid by their employers and to give a guarantee of a sufficient income meeting their
basic needs. Issues about the minimum wage are connected with the unemployment problem – the wage
inadequacy problem worsens as the unemployment rate gets higher. In the long run, creating more jobs
shall encourage people to readily look for employment and demand higher wages. (Dinio & Villasis, 2017)

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Figure 4.1 Labor Market Equilibrium in a Competitive Market with a Minimum Wage

Labor demand is similar to product demand and follows the law of demand. When wage increases, the
number of laborers decreases as employers hire more employees when wages go down. Labor supply
follows the law of supply – when wage increases, the labor supply also increases, and vice versa. Market-
clearing is the equilibrium point where labor demand and supply meet at a certain wage and quantity of
labor. A competitive equilibrium could lead to efficient resource allocation. As illustrated in Figure 4.1, in
a perfectly competitive market, full employment with a free market wage (at market-clearing) happens
as businesses and employees freely enter and exit the market leading to an efficient equilibrium allocation
of workers to businesses. The labor shortage is below market-clearing, and labor surplus is above market-
clearing. Furthermore, when there is a mandated minimum wage, employees are willing to supply 20,000
labor hours while the labor demand is only 10,000 hours. Thus, the labor market is not in equilibrium. The
amount of hired labor in the market lessens. More people are looking for a job. However, they cannot
find one, creating unemployment. Also, people may want to have a job with mandated minimum wage,
however unable to find a job due to limited labor demand. (Viray Jr. & Avila-Bato, 2018)

There are wage differences across labor markets due to the differences in labor demand and supply. With
little or no workforce reduction, the minimum wage increases the income of the poorest workers.
However, if the minimum wage is above the free market wage, employers change the job specifications
such as work schedule, work location, and duties, among others. Employers may also decrease the
number of laborers to be hired.

II. Philippine Peso and Foreign Currencies (Dinio & Villasis, 2017)

The exchange rate refers to the value of a nation's currency versus the currency of another nation or
economic zone (Chen, 2020). For instance, if another currency (e.g., US Dollars) is in demand, there will
be an increase in the price of such currency, having a higher exchange rate. One shall need more Philippine
peso to buy that other currency. Currency depreciation refers to a fall in the value of a currency in terms
of its exchange rate versus other currencies (Smith, 2021). Currency appreciation refers to an increase in
the value of one currency to another currency (Sharma, 2020). The exchange rate affects the country in
various ways. It affects the supply of OFWs – the higher the value of the foreign currencies in terms of the
Philippine peso, the more Filipinos will want to work abroad (Tullao Jr., 2016). OFWs contribute to
economic growth by sending millions of dollars to their families. The exchange rate also affects the trading

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of the country to foreign countries (importing and exporting) and the willingness of people to travel to
other countries for leisure.

Effects of peso depreciation against US dollars: (Leaño Jr., 2016)

A. Negative effects
1. Peso depreciation (weaker currency) causes imported products and services to be more
expensive. Peso depreciation drives inflation since there is a price increase in imported products,
including crude oil.
2. The government has higher debt servicing. Debt service is the cash that is required to cover the
repayment of interest and principal on a debt for a particular period (Tuovila, 2020). With a
weaker currency, the government needs more cash to pay the debt service in foreign currency.
3. People think it is expensive to visit places abroad since they need more pesos to buy US dollars.
B. Positive effects
1. Exporters and OFWs (together with their dependents) are receiving more pesos for every US
dollar exchanged.
2. Foreign tourists think it is attractive to visit the country since their US dollars can now buy more
pesos.

III. Philippine Housing Shortage and Real Estate Boom (Dinio & Villasis, 2017)

Housing affordability refers to the ability of the household to pay, housing market price, and available
financing schemes. The country has low house affordability due to (1) the rapidly increasing ratio of unit
housing cost to income and (2) having few low-cost alternatives to ownership in the formal market. (Leaño
Jr., 2016)

During the Asian Financial Crisis in the late 1990s, construction hit low levels in the country, with some
high-profile projects being abandoned and real estate companies had to close. There is a low level of
demand for housing, thus decreasing demand for projects. As soon as the Asian countries recovered, the
construction sector started to recover as well. For years, the country is experiencing a boom in the
Business Process Outsourcing (BPO) sector. There is a growing demand for commercial spaces to
accommodate the growing sector, as well as an increase in demand for residential spaces. Families of
OFWs contributed to the demand for real estate.

There are financial institutions that people may borrow money from. However, there is a long process for
real estate loans. Renting with a monthly payment scheme is an option for those who cannot afford to
buy a house. Rent control is an intervention process that corresponds to the setting of the price ceiling
on rent. The issue of unaffordable decent housing affects the poor the most. The poor are unable to afford
decent housing due to not having formal employment and paying capacity. This then leads them to squat
on another one's land.

The National Shelter Program of the government provides housing for informal settlers and other families
who do not have enough income to buy or rent houses with rates in the prevailing market. Socialized
housing units can be bought with Php 2,302 monthly amortization. Also, the Pag-IBIG Fund (Home
Development Mutual Fund), the government-owned and subsidized housing loan provider, has a fixed
rate of 4.5% for 30 years for the socialized housing units. Although such units are located far from places
where employees work. (Leaño Jr., 2016)

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References:
Chen, J. (2020, November 20). Underemployment. Investopedia.
https://www.investopedia.com/terms/u/underemployment.asp.
Chen, J. (2020, January 31). Exchange rate definition. Investopedia.
https://www.investopedia.com/terms/e/exchangerate.asp.
Dinio, R. P., & Villasis, G. A. (2017). Applied Economics (1st ed.). Rex Book Store, Inc.
Fernando, J. (2020, November 13). Gross domestic product (GDP). Investopedia.
https://www.investopedia.com/terms/g/gdp.asp.
Leaño, R. D. (2016). Applied Economics for senior high school. Mindshapers Co., Inc.
McEachern, W. A., & Burrow, J. L. (2017). Applied Economics: An introduction (Philippine ed.). Abiva
Publishing House, Inc.
Sharma, R. (2020, November 28). Currency appreciation definition. Investopedia.
https://www.investopedia.com/terms/c/currency-appreciation.asp.
Smith, T. (2021, January 26). What is currency depreciation? Investopedia.
https://www.investopedia.com/terms/c/currency-
depreciation.asp#:~:text=Currency%20depreciation%20is%20a%20fall%20in%20the%20value,its%
20products%20and%20services%20become%20cheaper%20to%20buy.
Tullao, T. S. (2016). Applied Economics for a progressive Philippines. The Phoenix Publishing House, Inc.
Tuovila, A. (2020, October 18). Debt service. Investopedia.
https://www.investopedia.com/terms/d/debtservice.asp.
Viray, E. B., & Avila-Bato, J. (2018). Applied Economics. Anvil Publishing, Inc.

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