CHAPTER 7

Unemployment, Labor Laws,

and Economic Policies
in the Philippines
JESUS FELIPE AND LEONARDO LANZONA, JR.

7.1 Introduction

U
nemployment and underemployment are the Philippines’ most
important problems and the key indicators of the weaknesses of the
economy. Today, around 4 million workers (about 12% of the labor
force) are unemployed and another 5 million (around 17% of those employed)
are underemployed. This Reserve Army of workers is a reflection of what
happens in the economy, particularly because of its incapacity to provide jobs
(especially in the formal sector) to its growing labor force. The social costs of
this mass unemployment range from income losses to severe social and
psychological problems resulting from not having a job and feeling insecure
about the future. Overall, it causes a massive social inefficiency.
This chapter is a comprehensive stocktaking of the data and literature on
Philippine labor markets. The exercise covers labor market trends and outcomes,
as well as labor market policies and key issues affecting the labor market. The
main question behind the exercise is whether the supposed rigidity of the
Philippine labor market is the cause of unemployment, and whether such
rigidity is preventing the creation of employment. Hence, the question of labor
market reforms has been put on the table by different sectors: could reforms of

Jesus Felipe, Economics and Research Department, Asian Development Bank; Leonardo
Lanzona, Jr., Economics Department, Ateneo de Manila University. The authors thank
participants at the workshop, Employment Creation, Labor Markets, and Growth in the
Philippines (19 May 2005, Manila) for their comments and suggestions on an earlier draft of
the chapter. They also thank Rana Hasan for useful discussions on labor market issues.

J. Felipe et al. (eds.), Labor Markets in Asia

© Asian Development Bank 2006
 368
Jesus Felipe and Leonardo Lanzona, Jr.

the labor market help spur growth? The reality is that, except in a few cases,
governments do intervene in the labor market to achieve some balance between
the objectives of fairness, efficiency, and risk allocation. In practice, however,
labor market reforms tend to be an effort to reduce government intervention.
Labor markets are often not competitive because of the uneven market power
between the two main participants, workers and employers, resulting from the
imperfect mobility of workers, insufficient information, or discrimination. These
imperfections lead to unfair and inefficient outcomes in the form of immobile,
underpaid workers, hazardous working conditions, or discrimination against
certain groups of workers (e.g., women) with a weak bargaining position.
Likewise, private markets, left to themselves, do a poor job of protecting
unemployed workers. Governments typically intervene to correct these failures.
However, a problem may arise. Poorly designed government intervention, which
ends up giving excessive protection to a minority of formal sector insiders, for
example, can potentially make things worse. Indeed, excessive protection of
workers (e.g., through extremely costly and cumbersome dismissal clauses)
can make employers reluctant to hire new workers, effectively pushing these
workers into the informal sector or into open unemployment.
In the 1980s, the Philippines undertook a series of policy reforms and
structural adjustment programs. An expected, though indirect, effect was to
expand employment. After decades of protectionism, the country opened itself
to the world market, engaging in globalization with a commitment to free
markets. However, despite some notable growth in the mid-1990s, the average
growth rate of the country has been lackluster. The reasons behind this lack of
growth and generally poor performance of the economy, especially vis-à-vis
other East Asian and Southeast Asian economies, have been explored at length
(Balisacan and Hill 2003; ADB 2004, pp. 88–93; ADB 2005a, pp. 109–113).
One of the most important results of this poor performance has been the increase
in unemployment and underemployment, and a general feeling that the country
cannot provide jobs to its growing labor force.
While the Philippine Government claims that the fight against
unemployment is a top priority, its actions do not seem to support this alleged
concern. Price stability and fiscal austerity, not sustained attempts to create
jobs and reduce unemployment, are the two top priorities. In 2004, when the
Government unveiled its Medium Term Philippine Development Plan (MTPDP)
for 2004–2010, the administration openly acknowledged the unemployment
problem and set the target of creating about 1.5 million jobs a year between
2004 and 2010, i.e., a total of about 10 million jobs (60% in the services sector)
(MTPDP 2004–2010, Introduction, Table D).1 The MTPDP 2004–2010
emphasizes the acceleration of economic growth, job creation, energy sector
reform, support of social justice and basic needs, provision of education and
better opportunities for young people, and good governance and anti-corruption