Patse-patse na, pitsi-pitsi pa (and a way forward)

An important task of national leadership is to highlight information that would otherwise be ignored or set aside. Sometimes this can be as vital as telling the public that it is possible to sterilize their face masks with kerosene. At other times it is to place items on the national agenda that were previously thought to be too contentious or difficult to implement but which new circumstances have made urgent.

Unemployment insurance is one such item.

To be honest, I did not expect to write on this topic — at least not this soon. But I caught Vice-President Leni Robredo’s televised address on Aug. 24 and was pleased to hear that among her suggestions to address the current health-cum-economic crisis was to institute an unemployment insurance system. She also pointed to the fact that a bill towards that end (HB 7208) had already been filed by Marikina Rep. Stella Quimbo. (Call me biased: but with two eminent alumnae of the UP School of Economics behind it, the idea cannot be ignored.)

Far from being a nefarious Opposition Idea, unemployment insurance (UI) is in fact buried somewhere in the government’s 2017-2022 Philippine Development Plan (p. 158), which calls for an “unemployment protection system possibly in the form of unemployment insurance.” (Medyo nag-hesitate pa nang slight. [They hesitated slightly.]) Given the kilometric laundry-list that constitutes the government’s “priorities” however, this proposal would likely have been left to shrivel and die if the vice-president and the Marikina representative had not picked up on the matter — and the pandemic had not happened.

The pandemic has shown up the shortcomings of the country’s social protection system. At the height of the lockdown in April, more than 7.2 million workers were unemployed. Though this has come down somewhat to 4.6 million by July, the number is still 88% more than the unemployed in the same period last year.

The government response has been disjointed and patchy, to say the least. The Social Security System (SSS), the institution that comes closest to providing any formal unemployment benefits at all, gave a whopping one-time maximum grant of ₱20,000 each (i.e., ₱10,000 tops for two months) to an equally-whopping 60,000 members — a joke in the face of the millions who became unemployed. But one must remember this system itself was always far from being comprehensive: SSS membership even today covers less than one-fourth of all private sector wage- and salary-earners. The nonexistence of any formal unemployment insurance system has led instead to the exigency — some would say the excuse — of assistance having to be coursed in multiple forms through different channels. Hence we have cash assistance to formal workers through the Department of Labor and Employment (DoLE; ₱3.2 billion); SSS subsidy to small-business owners based on employment (₱51 billion); cash assistance from DoLE for overseas Filipino workers (OFWs; ₱1.5 billion); various loan programs and credit guarantees to small businesses (₱120 billion); support coursed through local governments (₱36 billion); training programs and livelihood kits through the Department of Trade and Industry (DTI; ₱1.2 billion); and of course the ₱250-billion biggie: the subsidy program distributed through the Department of Social Welfare and Development (DSWD) to low-income families.

There is not even a pretense that any of these programs would systematically cover the majority of their intended beneficiaries. Nor that the amounts given are sufficient for the scale of the problem and the urgency of need. Still, billions are given willy-nilly by agencies to this or that sector, following one or the other set of priorities or procedures, at times conflicting, at times overlapping, but never really quite scrutable with respect to how well they achieve their overall goals. Rep. Quimbo’s bill — which is well argued and worth reading* — describes the system as “fragmented,” “non-inclusive,” and “limited.” Or we might simply say: patse-patse na, pitsi-pitsi pa (not just patchy, but skimpy).

How differently (and transparently) things might have gone if a comprehensive UI system had been in place instead. One must proceed from the presumption that the vast majority of the formally employed will have been covered (oh, and please do away with silly multiple IDs; just have a single and portable national ID). In any case, because it promises more proximate benefits than just distant retirement pensions (which is what SSS and GSIS — Government Service Insurance System — mainly offer today), a UI scheme would likely induce a stronger motive and pressure for membership, especially among “endo” workers who today are beyond the pale of the formal system. With UI, workers, once laid off, would simply file unemployment claims for predictable benefits that were theirs by right and by statute. This typically entails being paid at least half — in Stella Quimbo’s bill it is 80% — of one’s previous salary for three months.

The principal impact of such a social protection system is to eliminate rationing: no more lucky 60,000, no more favoritism, and no more cruel lottery of the devil-catch-the-hindmost until the budget runs out. If the crisis was more severe and lasted longer than anticipated, the government could simply pass a law topping up or extending unemployment benefits beyond what was normally stipulated. The US, for example, topped up its usual unemployment benefits by $600 a week and extended the payout for an additional three months owing to the pandemic. What is crucial, however, is that the same distribution system is used without arbitrarily changing the list of beneficiaries and by applying uniform criteria. In this way one minimizes arbitrariness and the dissipation of resources.

To be sure, even a UI system would not cover everyone — it is mainly a safeguard against income insecurity for the benefit of wage and salary workers, who in any case now make up almost 60% of total employment. But UI would not cover the informally employed; nor overseas workers; nor the self-employed, who must opt in and pay their share. UI is also not a substitute for the system of direct transfers for poverty-alleviation such as the 4Ps; or loans for returning OFWs to start businesses; or emergency employment for farmers in a province hit by a drought. Such programs exist for other objectives, or for other beneficiaries. Improving income security for the vulnerable and the middle classes — which is what UI does — is not the same as alleviating poverty for the bottom-30%. Tinbergen’s iron rule prevails as always: thou shalt have at least the same number of instruments as you have objectives; only fools think they can kill two birds with one stone.

A UI system must instead be viewed as part of a broader spectrum of programs that address the heterogeneous needs of an increasingly differentiated Philippine society. Implied here is the need to move beyond a simple rich-poor dichotomy and, at a minimum, to distinguish between the poor, the vulnerable, the middle class, and the rich. While society is obliged to help all classes thrive, the extent and form of its support must differ for each.

In its normal functioning and short of a deep recession, UI is sustained by mandatory contributions (i.e., payroll taxes) shared between employers, employees, and the government. Much like a paluwagan, funds are shared and risks are pooled: since not everyone is likely to be simultaneously unemployed, those who are out of work at any one time can be supported by the cumulative past contributions of those who remained employed (i.e., plus of course employers’ contributions, government subsidies, and earnings from system investments). Given the actuarial risk that one could be laid off at some point, it makes sense for an employed worker to pay a premium (say, 1.5% of salary) for compensation benefits in the off-chance she loses her job.

A payroll tax obviously cannot be imposed on the very poor — many of whom (e.g., small farmers and fishers, informal workers) are outside the formal employment system anyway — so such a program obviously makes sense only when applied to the vulnerable, the middle, and the upper classes who can afford it. It is not meant primarily as a poverty-alleviation measure. It would be wrong to think, however, that this makes the matter any less relevant or urgent.

First, it was already a fact — at least until this crisis — that the vulnerable and the middle classes made up the majority of the population. In practice, therefore, income security was and will remain a major problem for most of society. Indeed, the current pandemic shows that the failure to provide social protection in this form is what can pull back many into the ranks of the poor. Second, the fact that some classes in society can pool risks and pay part of their way towards their own income-security relieves the government of some of the burden of direct provision. This then allows the government to focus more of its resources where these are more urgently needed, i.e., direct poverty-alleviation and overall social and human development (e.g., improving the quality of public education, raising the standards of healthcare, providing better infrastructure, etc.). Third, a comprehensive UI system can mitigate economic fluctuations — as it could have done in the current recession — by automatically maintaining minimal levels of income and consumption when aggregate demand and employment fall off. It is, as old-style Keynesians called it, an “automatic stabilizer.”

Finally, UI can reduce the social costs incurred when firms and industries must restructure to become efficient in the face of changing markets and technology. In most cases, affected firms must reduce or change the composition of their workforce. The current crisis, in particular, will likely entail large changes in the types of viable industries, skill requirements, employment size, and work-arrangements in a future “new normal.” The absence of income-alternatives for current employees, however, increases the social resistance — and the pressure on both government and firms — to preserve employment even in what may likely to be “zombie firms” in the future. Absent UI, the resistance and conflict arising from the employment consequences of such structural changes would be far greater.

With UI, on the other hand, labor mobility is improved and the search for jobs that better match employee characteristics is facilitated. My colleague Ma. Cristina Epetia** has found, for example, that college graduates from poorer families are more likely to end up in jobs that are inferior relative to their educational attainment. An important reason for this mismatch is the lack of financial means to engage in a more thorough job-search — a constraint that unemployment insurance could relieve and from which society as a whole would benefit in terms of both higher productivity and lower poverty.

All the above are arguments meant to show that unemployment insurance brings advantages above all for the employee, but also for the government, the employers, the macroeconomy, and society as a whole. While further public discussion will no doubt produce counter-arguments and require thrashing out many details (for which the proposed Philjobs Act is required reading), the more crucial step is to table an idea that is long overdue.

It would be foolish to wait for the next crisis to act.

* House Bill No. 7028: “An act instituting a national unemployment insurance program for the Philippines and appropriating funds therefor” (Philjobs Act of 2020). Introduced by Rep. Stella A. Quimbo.

** Epetia, Ma. Cristina [2018] “Overeducation among college graduates in the Philippine labor Market.” Ph.D. dissertation submitted to the UP School of Economics.

Emmanuel S. De Dios is professor emeritus at the University of the Philippines School of Economics.