RESTRICTIVE labor market laws prevent micro, small and medium enterprises (MSMEs) from flourishing despite the various fiscal incentive programs the government provides for MSME development, according to a new study by a government think tank.
The Philippine Institute for Development Studies (PIDS) said the fiscal incentives provided by the government to MSMEs to promote inclusive and sustainable growth and job creation have failed to achieve their goals due to existing labor market regulations that emphasize job security instead of worker mobility.
It proposed that aside from giving smaller firms financial incentives, “labor market regulations [should]be relaxed as well, while leaving the current set of regulations on the larger firms.”
In a book titled Unintended Consequences: Folly of Uncritical Thinking released on April 12, PIDS noted that labor regulations regulations have become restrictive for MSMEs, particularly with trade restrictions dismantled and new forms of social protection implemented.
“For instance, it can be argued that high minimum wages, in conjunction with other laws, prevent firms from recouping their investments in training the young and inexperienced,” it said.
PIDS said high minimum wages result in firms not investing enough in on-the-job training for the youth, who end up with inadequate skills formation and who are ultimately unemployable—contributing to the high unemployment rate.
“Today, the Labor Code fails to accommodate the proliferation of a significant number of MSMEs, and the interactions of these regulations with the minimum wages can weaken these smaller firms-at worst, cause them to close shop,” it noted.
PIDS said missed opportunities in creating better and more jobs are observed when labor regulations are inflexible. As a consequence, firms are constrained to circumvent regulations, particularly the larger companies.
PIDS said these companies try to avoid the huge costs involved in hiring workers by investing more in capital or by hiring or subcontracting part-time workers.
“In effect, firms are able to reduce their total labor costs as they would no longer pay for the additional benefits that are offered to the permanent workers.”
“This then leads to an industrial structure that is capital intensive and at the same time concentrated in few firms,” the report added.
Once the incentives become available, smaller firms end up adapting to the system by adopting capital-intensive technologies as well.
“It is ironic that the Labor Code, instead of providing good quality and secure jobs, forces firms to circumvent the laws either by investing more in capital or hiring part-time workers under subcontractors,” PIDS said.