As the Philippines rebounds from the pandemic, strengthening labor market programs will be critical to help workers and enterprises make the transition.
Prior to the COVID-19 pandemic, the Philippines was experiencing its longest ever economic and job expansion. There was remarkable growth in wage and salary employment (a measure of modern employment), growing at an average of 4.6% annually from 2015 to 2019.
This rapid expansion in modern employment was strong enough to pull workers away from the informal sector in such big numbers that total informal employment was shrinking for the first time ever in the Philippines.
Unfortunately, the pandemic reversed some of these gains, wiping out 1.7 million wage and salary jobs in the 12 months to January 2021. In contrast, employment in the informal sector rose by about 435,000. The pandemic could create long lasting effects on employment. Put simply, this temporary large shock to the economy might produce a persistently lower employment rate even after the economy has started to grow again. This phenomenon is known as hysteresis in employment.
There are three transmission channels of the pandemic on modern employment. First, there will be a higher number of jobseekers, including people who lost their jobs, school dropouts and new labor market entrants. The longer laid-off workers and new labor market entrants remain unemployed, the more likely they become less employable in the future because of lost skills.
Second, the pandemic has triggered a large re-allocation of jobs across sectors. While job losses have occurred across most sectors, the hardest-hit sectors are those dependent on personal contact, such as accommodation, food services, transportation, and recreational services. In contrast, the sectors that recover quickly and present positive job growth are those that tend to absorb lower shares of labor such as communications and technology and several higher-skilled services sectors.
While a share of these jobs will return as the economy bounces back, we expect this change in the employment composition to persist in the medium to long term. This divergence will increase skills mismatches in the labor market, as workers do not transition easily between sectors given differences in required skills and experiences.
Third, companies are modifying their business models to rely more on technology, thereby reshaping their workforces and the types of skills demanded by employers. Digital transformation and remote working will transform jobs, facilities, processes, and skills needs, including skills required for higher value-added services. These will further exacerbate the skills mismatch in the labor market.
What are the policy lessons for employment? The early evidence from other countries suggests that policies should support workers’ labor market transitions as well as enterprises. Below we discuss five global best practices for addressing hysteresis in employment.
Wage subsidies. This has proven to be the single most effective tool for saving jobs. It does this by keeping workers attached to their employers during periods of lockdown and slow recovery in business activities. The Philippines’ wage subsidy program of P46 billion in 2020 was well-designed and successfully implemented with 3.1 million workers receiving subsidies. The government is planning for a second round of wage subsidies this time targeted to workers in specific sectors.
Hiring subsidies. As the economic recovery takes hold, governments will phase out wage subsidies and some are considering replacing them with hiring subsidies to help facilitate the reallocation of displaced workers into new jobs.
Workplace skills funding schemes. Countries that have successfully upgraded workers’ skills have done so through industry and employer-led skills training schemes. Skillnet Ireland provides networks of employers with annual matching grants to fund their short-term training of workers. Employers from a sector or locality formalize a network of at least 30 enterprises.
The network is responsible for designing and implementing the training program. In 2013, ADB assisted the Philippines’ Department of Tourism with piloting a similar scheme with tourism enterprises. Forty-eight grants were provided and over 7,000 tourism employees were trained at a cost of Php8,000. This proved a cost-effective model for reskilling workers. This year, ADB is launching a larger pilot for funding enterprise-led skills training programs to assist with reskilling and job transition in tourism, construction, and other selected sectors.
Industry-led apprenticeship programs. In the Philippines, flaws in apprenticeship programs have resulted in an extremely low uptake in apprenticeships creating skills shortages. Drawing on international best practices, apprenticeship reforms should include setting up an apprenticeship council to oversee policy, industry-led development of apprenticeship programs, progressive salary scales, extending apprenticeships from 6 months to 2–4 years, and extending apprenticeship programs to modern services like legal, finance and communication occupations.
Unemployment insurance. The Philippines’ unemployment insurance scheme offers limited coverage. Adequate unemployment insurance provides workers with income stability and helps them transition to new jobs. A good example is Malaysia’s program, which uses a national pooled insurance fund in which both employers and employees make monthly contributions. The government provides funding if there is a financing gap and workers quality only if involuntarily unemployed. In Chile, another good example, employers and employees make monthly contributions to an account in the name of the employee. This is complemented by the Solidarity Unemployment Fund, which employees can access only after depleting their individual savings accounts. The Chilean scheme does not create contingent fiscal liabilities.
Workers in the Philippines will be facing a challenging next few years as the country rebounds from the pandemic. Further strengthening of active labor market programs will be critical for helping workers and enterprises to make this transition.