July 24, 2022

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Rising inflation seen deterring employers from hiring more workers

RISING INFLATION may prolong underemployment situation in the Philippines as higher costs deter employers from expanding, economists said.

“High and persistent inflation can reduce consumer demand, leading to less profitable businesses. This can lead to reduced operating hours for these businesses or reduced working hours for their workers, which could lead to affected workers wanting more hours of work,” Geoffrey M. Ducanes, economist at Ateneo de Manila University, said in an e-mail.

According to preliminary data from the Philippine Statistics Authority (PSA), 6.668 million Filipinos were underemployed in May, 4.2% or about 269,000 more than the 6.399 million underemployed in April.

Underemployed persons are those who have expressed a desire to take on either additional work hours, an additional job, or a new job with longer work hours, the PSA said.

“Underemployment will remain especially because of inflation. The workers cannot afford to be unemployed so we expect more employment and greater labor force participation. However, informal jobs may often be the best option for them as the formal firms are unlikely to expand as a result of poor economic prospects both here and abroad,” Director of the Ateneo Center for Economic Research and Development Leonardo A. Lanzona, Jr. said.

“These workers will accept any job available in the absence of better job alternatives. To some extent, employers may also take advantage of this by offering them wages below the expected market rates,” he added in an e-mail.

Senior Economist at the University of Asia and the Pacific Cid L. Terosa said that “underemployment will continue to slide because rising production costs will curtail firms from hiring workers.”

“Consequently, many will opt to take on temporary, transient, or casual jobs to make ends meet. Inflation can (also) impede the growth of consumption spending, which will eventually become a disincentive for firms to produce more and employ people,” Mr. Terosa said in an e-mail.

“High inflation reduces the purchasing power of households. For households whose incomes barely cover their usual expenses, their employed members are likely to want to work more hours to earn the income that would allow them to at least maintain their consumption pre-high inflation,” Mr. Ducanes said.

Mr. Ducanes also said that high inflation could make monetary authorities raise borrowing costs — as already seen in the Bangko Sentral ng Pilipinas’ 75 basis point rate hike to 3.25% — thereby slowing down growth and, possibly, demand for labor.

However, the ASEAN+3 Macroeconomic Research Office (AMRO) said high underemployment is mainly due not to rising inflation but to the economic scarring of the coronavirus disease 2019 (COVID-19) pandemic.

In answer to whether the uptick in inflation exacerbated underemployment, AMRO country economist for the Philippines Heung Chun Tsang said that there is no evidence to suggest it.

“According to the latest figures, the underemployment rate moved around 14-15% in the first five months of this year — 14.9% in January and 14.5% in May. According to the authorities, underemployment rate increased to 15.8% in March due to seasonal factors. Meanwhile, inflation rate increased from 3% in January to 5.4% in May, and increased further to 6.1% in June,” Mr. Tsang said in an e-mail to BusinessWorld, citing data from the PSA.

With the gap in causation, “the high underemployment is mainly due to the scarring effect of the COVID-19 pandemic,” he said.

During AMRO’s 2021 Annual Consultation Report on the Philippines on Wednesday, AMRO said that the most serious impact of the COVID-19 pandemic was on the quality of human capital going forward.

“One of the sectors that was hit badly is the education sector. A lot of schools were closed and, in the case of the Philippines, it was closed for quite a long time. (Students) had to go online and it depends very much on the digital infrastructure to some extent. But not withstanding that, I think there was a lot of scarring in the education sector. Kids fell behind in terms of education,” Hoe Ee Khor, chief economist at AMRO, said during the briefing.

Graduates from 2019 to 2021 are unable to find quality jobs, with the poor in particular settling for insufficient work hours, inadequate security and protection, or skills mismatches, University of the Philippines Professor Emeritus Rene E. Ofreneo said.

Nonetheless, “as to inflation, its immediate impact is to depress the economy, weaken recovery, (and) stop those planning to invest or re-launch business. Hence, it does not take any imagination to conclude that inflation will exacerbate mass underemployment. In fact, we are now, like many countries around the world, in a situation of stagflation — high inflation in a stagnant economy,” he said.

Asked to comment on AMRO’s statements, Mr. Terosa agreed but said that “prolonged inflation will eventually take its toll on unemployment and underemployment.”

In May, the proportion of underemployed persons working less than 40 hours a week was at 9.8%, higher than 8.9% reported last year and 9.2% the previous month, according to the PSA.

On the other hand, the proportion of underemployed persons working at least 40 hours a week stood at 4.7%, higher than 3.4% from a year earlier. — Diego Gabriel C. Robles