Labour market conditions and wage developments

in the aftermath of the pandemic: implications for

monetary policy in the Philippines

Introduction

The Covid-19 pandemic had extensive economic ramifications across economies, and
the Philippines is no exception. The domestic labour market was one of the sectors
that was most affected by the combined health and economic crises that hit the
country. The unemployment rate spiked to a record high in 2020 arising from business
closures and government mandated lockdowns, while the underemployment rate
likewise deteriorated. At the same time, the labour force participation rate (LFPR) and
the number of employed individuals dropped steeply. Nominal wages were stagnant
at the height of the pandemic but began to rise above historical averages two years
post-pandemic. Meanwhile, real wages have declined in the same period as inflation
has been rising since the 2020 pandemic year. The Bangko Sentral ng Pilipinas (BSP)
is mindful that labour market conditions in the wake of the pandemic could have a
domino effect on domestic demand and wage growth, and consequently impact the
inflation outlook.
This paper presents the developments in labour market conditions, wages and
inflation in the Philippines from the onset of the pandemic in the second quarter of
2020 until the aftermath of the pandemic in 2022.1 The current state of domestic
labour market slack based on the deviation of the unemployment rate from the non-
accelerating inflation rate of unemployment (NAIRU) is also briefly presented. The
subsequent sections of this paper discuss the impact of wage adjustments on the
inflation outlook, as well as the link between past inflation and wage growth. This
paper concludes with arguments about why the risk of a price-wage spiral remains
low in the Philippines, along with the BSP’s monetary policy response given the
country’s post-pandemic labour market and wage conditions, and inflation
environment.

Labour market conditions

Two years since the onset of the pandemic, labour market conditions have recovered
as most sectors of the economy reopened in 2022 amid increased vaccination and
the relaxation of containment measures implemented by the government, as well as

1
The timeline of events leading up to the pandemic suggests that April 2020, which represents the
second quarter of 2020, saw the onset of the pandemic in the Philippines. The pre-pandemic period
in this paper refers to data as of January 2020 which represent the first quarter of 2020. The first
confirmed case of a Covid-19 patient in the Philippines was recorded on 30 January 2020. The first
Covid-19 fatality case was recorded on 2 February 2020. The first case of local transmission was
recorded on 7 March 2020. The former president, Rodrigo Duterte, signed Proclamation No 922 on
8 March 2020 declaring a state of public health emergency in the Philippines, after which lockdowns
and community quarantine measures were implemented.

BIS Papers No 142 237

improved business sentiment which led to the reopening of business establishments
and a resurgence in employee hiring. The latest labour market indicators show that
the unemployment rate is now below its pre-pandemic level, while the employment
and labour force participation rates have exceeded pre-pandemic levels. In addition,
underemployment is broadly similar to the pre-pandemic level (Table 1). Overall
employment gains have been consistently recorded in the last several months.
Nevertheless, recovery in employment appears to be uneven across sectors of the
economy.

Key employment indicators Table 1

2020 2021 2022

Rates in % ; levels in millions Jan Jan Jan Apr Jul Oct Nov
Employment rate 94.7 91.2 93.6 94.3 94.8 95.5 95.8
Employed 42.54 41.25 43.27 45.63 47.39 47.11 49.71
Unemployment rate 5.3 8.8 6.4 5.7 5.2 4.5 4.2
Unemployed 2.39 3.96 2.95 2.76 2.60 2.24 2.18
Underemployment rate 14.8 16.0 14.9 14.0 13.8 14.2 14.4
Underemployed 6.3 6.59 6.43 6.40 6.54 6.67 7.16
Labour force participation rate 61.7 60.5 60.5 63.4 65.2 64.2 67.5
People in the labour force 44.93 45.21 46.22 48.39 49.99 49.35 51.88
Source: Philippine Statistics Authority.

Unemployment

Business establishment closures and government mandated lockdowns resulted in a

double-digit unemployment rate in the second quarter of 2020. From 5.3% in January
2020, the unemployment rate rose sharply to 17.6% in April 2020 (Graph 1). In terms
of levels, the number of unemployed people nearly tripled in April 2020 to
approximately 7.2 million, from approximately 2.4 million in the January 2020 pre-
pandemic period. Unemployment remained high for the remainder of 2020, with the
unemployment rate recorded at 10.0% and 8.7% in July 2020 and October 2020,
respectively. With the recovery underway, unemployment has dropped to its lowest
level in November 2022 at 4.2%, largely attributed to the reopening of the economy.

238 BIS Papers No 142

Unemployment rate
April 2005–November 2022 Graph 1
Per cent
20
Apr 2020,
18 17.6

16

14

12

10
Jan 2020,
8 5.3

Source: Philippine Statistics Authority.

Labour force participation

The country’s labour force participation rate2 registered a sharp decline during the
pandemic at 55.7% in April 2020 from 61.7% before the pandemic (Graph 2). The
decline in LFPR shows that a large proportion of the workforce were not actively
seeking work during the pandemic as lockdowns and community quarantine
measures imposed by the government restricted workers’ mobility and therefore their
ability to report for work. Nonetheless, the labour force participation rate has fully
recovered in 2022, surpassing its pre-pandemic level at 67.5% in November 2022.

2
Labour force participation rate is the ratio of the number of people that are either employed and
unemployed over the number of the population aged 15 years and older, excluding overseas Filipino
workers.

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Labour force participation rate
April 2005–November 2022 Graph 2

Per cent
70

68

66
Jan 2020,
64 61.7

62

60

58

56

54 Apr 2020,
55.7
52

50

Source: Philippine Statistics Authority.

Employment

Employment levels have generally rebounded from the pandemic. Two years after the
pandemic, employment gains have been registered across worker classifications
(Graph 3). The quality of jobs has improved, as reflected in the increased employment
of wage and salary workers, although most of the employment gains are from self-
employed workers without any paid employees; and workers without pay in family-
operated farms or businesses. A modest gain in employment has also been recorded
for employers in own-operated farms or businesses. However, there is some
heterogeneity in the pace of recovery of employment across industries and
occupation types. Employment gains were registered in the majority of industries but
were most notable for wholesale and retail trade, and the repair of motor vehicles
(Graph 4). However, industries that are highly reliant on face-to-face interactions such
as transportation and storage have continued to post employment losses to date. By
occupation, employment gains primarily came from services and sales workers, and
elementary occupations (Graph 5).3 All other types of occupations registered
employment gains except for managerial jobs and armed forces occupations.

3
Elementary occupations involve the performance of simple and routine tasks which may require the
use of hand-held tools and considerable physical effort.

240 BIS Papers No 142

Contribution to employment gains vis-a-vis Jan 2020 pre-pandemic period by
class of worker
April 2020, April 2021, April 2022, October 2022 and November 2022 Graph 3

'000s
8,000

6,000

4,000

2,000

-2,000

-4,000

-6,000

-8,000

-10,000
Apr-20 Apr-21 Apr-22 Oct-22 Nov-22
Worked w/o pay in own family-operated farm or
-524 775 577 773 1,726
business
Employer in own-operated farm or business -388 131 153 101 271
Self-employed w/o any paid employee -1,411 1,177 1,441 1,947 2,222
Wage and salaried workers -6,391 -1,357 917 1,743 2,944
Net employment generated -8,713 726 3,088 4,563 7,163

Sources: Philippine Statistics Authority; BSP staff calculations.

Contribution to employment gains vis-a-vis January 2020 pre-pandemic period

by sub-sector
November 2022; in thousands Graph 4

Net employment gains/(losses) in agriculture sector

Agriculture and forestry 1,007
Fishing and aquaculture 9

Net employment gains/(losses) in industry sector

Mining and quarrying 50
Manufacturing 701
Electricity, gas, steam and air conditioning supply 44
Water supply; sewerage, waste management 27
Construction 167

Net employment gains/(losses) in services sector

Wholesale and retail trade; repair of motor vehicles a 2,727
Transportation and storage (48)
Accommodation and food service activities 247
Information and communications 256
Financial and insurance activities 80
Real estate activities 168
Professional, scientific and technical activities 129
Administrative and support service activities 643
Public administration and defence 180
Education 164
Human health and social work activities 175
Arts, entertainment and recreation 145
Other service activities 294

Sources: Philippine Statistics Authority; with BSP staff calculations.

BIS Papers No 142 241

Contribution to employment gains vis-a-vis Jan 2020 pre-pandemic period by
type of occupation
April 2020, April 2021, April 2022, October 2022 and November 2022 Graph 5

'000s
10,000

8,000

6,000

4,000

2,000

-2,000

-4,000

-6,000

-8,000

-10,000
Apr-20 Apr-21 Apr-22 Oct-22 Nov-22
Armed forces occupations -29 -3 -24 -25 -41
Elementary occupations -2,142 817 1,363 1,985 2,525
Plant and machine operators and
-828 -288 272 432 317
assemblers
Craft and related trades workers -1,089 -303 226 282 625
Skilled agricultural and fishery workers -93 488 582 702 575
Service and sales workers -2,230 528 1,149 2,417 2,915
Clerical support workers -678 -146 291 594 1,072
Technicians and associate professionals -293 0 62 100 367
Professionals -488 60 108 1 242
Managers -843 -428 -941 -1,924 -1,434
Net employment generated -8,713 726 3,088 4,563 7,163

Sources: Philippine Statistics Authority; with BSP staff calculations.

Underemployment

The quality of labour of the employed deteriorated during the pandemic as the
underemployment rate4 rose to 18.9% in April 2020 from 14.8% in the pre-pandemic
period (Graph 6). Of the total underemployed, approximately 86% are visibly
underemployed – those who worked for less than 40 hours and wanted additional
hours of work. The underemployment rate validates the decline in mean weekly hours
worked during the same period. The average hours worked by employed individuals
dropped to 35 hours a week in 2020 from a range of 40 to 42 hours prior to the
pandemic (Graph 7). In 2022, the average weekly hours worked bounced back to

4
The underemployment rate is the ratio of the number of employed people who express a desire for
additional hours of work in their current job or an additional job, or to have a new job with longer
working hours.

242 BIS Papers No 142

 approximately 40 hours and the underemployment rate declined considerably to
14.4%. Correspondingly, the share of visible underemployment to total
underemployment decreased to approximately 65% in November 2022 – higher than
approximately 60% in the pre-pandemic period.

Underemployment rate, visible underemployment and invisible

underemployment
January 2019–November 2022 Graph 6

Per cent
25 Visible underemployment
Invisible underemployment
Apr-20,
18.9 Underemployment rate

20
Jan-20,
14.8

15

10

Source: Philippine Statistics Authority.

Average weekly hours of work of employed people

January 2016–November 2022 Graph 7

Hours
44

42

40

38

36

34

Source: Philippine Statistics Authority.

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Labour market slack

There has been a tightening in the labour market as employment conditions have
improved two years after the pandemic. Preliminary estimates on the unemployment
gap, which is the difference between the observed unemployment rate and the
NAIRU,5,6 yielded less labour market slack, which could fuel excessive growth in
wages. Compared with the actual unemployment rate in recent periods, NAIRU
estimates using the Hodrick-Presscott filter and the Kalman filter indicate a negative
unemployment gap in the last five quarters (ie from the third quarter of 2021 to the
third quarter of 2022).7 This suggests that the unemployment rate in the Philippines
has fallen below the NAIRU in recent quarters and thus could exert upward pressure
on inflation (Graphs 8 and 9).

NAIRU estimate using HP filter vs unemployment rate Graph 8

Source: BSP staff calculations.

5
The NAIRU is the rate of unemployment that is consistent with a stable rate of inflation. When the
actual unemployment rate is above the NAIRU, excess capacity exists in the labour market, which
tends to lower wage inflation and consequently inflation. Conversely, when the unemployment rate
is below the NAIRU, there is tightness in the labour market, which causes wages to go up, leading to
higher inflation.
6
V Españo, R Lemence, J Armas and J Tabin, “Estimating a time-varying NAIRU and unemployment
gap: evidence from the Philippines”, forthcoming.
7
Two ways of estimating the NAIRU are used in the study. The first method is the Hodrick-Prescott
(HP) filter, a purely statistical univariate approach which decomposes the unemployment rate into its
trend and cyclical components, with the trend serving as the NAIRU estimates. The second approach
is via the Kalman filter whereby an unobservable state of the system, eg NAIRU, is estimated using
known or observable data, eg the unemployment rate. The advantage of the Kalman filter over the
HP filter is that the former utilises more economic variables such as inflation, supply-side factors and
inflation expectations in the estimation.

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Real-time NAIRU and full history NAIRU vs unemployment rate Graph 9

Source: BSP staff calculations.

Inflation dynamics

The Philippine inflation environment since the pandemic year of 2020 has turned out
to be challenging as global and domestic factors have pushed the average inflation
rate above the 2–4% target band for 2021 and 2022.8 Inflation rose in 2021 as global
demand gradually recovered, pushing international oil prices higher while domestic
prices of agrifood products also increased amid the onset of African swine fever (ASF).
This was magnified by adverse weather conditions and by the rise in global
commodity prices. In 2022, domestic inflation further intensified as the geopolitical
conflict in Ukraine led to higher global commodity prices, while domestic production
shocks (eg avian influenza and typhoons) also contributed to the increase. The
sustained increase in prices led to broadening price pressures with core inflation
averaging near the upper end of the target in 2022 as a result of the spillover of
higher food and energy prices to the services sector. Consequently, wage and
transport fares were adjusted upwards while survey-based inflation expectations also
rose. Looking ahead, staff estimates indicate that the output gap is projected to turn
positive in 2023, largely reflecting the sustained expansion in 2022. This, in turn, could
further support rising inflationary pressures in the near term.

8
Average headline inflation was at 4.5% year on year in 2021 using the 2012-based CPI series. Using
the 2018-based series, headline inflation was 3.9% and 5.8% for 2021 and 2022, respectively.

BIS Papers No 142 245

Wage developments

Developments in minimum wages are monitored closely by the BSP and form part of
the information incorporated in baseline inflation forecasts. Minimum wage
determination in the Philippines is the primary responsibility of the National Wages
and Productivity Commission (NWPC) and the Regional Tripartite Wages and
Productivity Boards (RTWPBs). Minimum wages per region9 are reviewed periodically
given petitions for wage increases and the presence of supervening conditions, such
as extraordinary increases in the prices of petroleum products and basic goods and
services.

Nominal wages

Nominal minimum wages10 grew in 2022 after being stagnant in 2020 and 2021 at
the height of the pandemic. During the pandemic, regional wage boards11 were not
able to start the minimum wage determination process and deferred the approval of
new wage petitions in 2021 as the pandemic disrupted business activities, rendering
firms unable to afford to increase the pay of their workers. Prior to the pandemic,
nominal wage growth was 3.1% on a yearly basis12 but the start of the pandemic
arrested the subsequent approval of new wage orders. In 2022, nominal wage growth
returned to its pre-pandemic trend (Graph 10.A). However, the sharp rise in inflation
in 2022 caused second-round effects, in particular wage hike petitions. By March
2022, the Secretary of the Department of Labor and Employment instructed the
different wage boards to review minimum wages amid elevated prices of oil and other
prime commodities due to rising global oil prices and the ongoing conflict in
Ukraine,13 as well as due to the long lag since the last wage adjustment. By July 2022,
all 17 wage boards had approved new wage increase orders. The average increase in
minimum wages for the 17 regions is 13.1%, higher than the five-year national
average of 5.6%. The higher average increase in 2022 was partly to compensate for
the wage freeze during the pandemic. Minimum wages remain highest in the National
Capital Region and lowest in MIMAROPA14 region (for non-agriculture workers) and
Region VII (for agriculture works and retail/service establishments).15

9
The Philippines is politically divided into 17 regions. Minimum wages in the Philippines are set by
each region’s respective wage boards.
10
The BSP closely monitors minimum wage hikes in wage per day terms. Based on the Philippine
Statistics Authority’s integrated survey on labour and employment, 23.6% of total employment in
establishments employing 20 or more workers are minimum wage workers.
11
Minimum wages in the Philippines are set by each region’s respective wage boards.
12
For the years 2011–19, the compounded annual growth rate (CAGR) of nominal wages for the
Philippines was 3.1%, while the CAGR for the National Capital Region was 3.2%.
13
See “Bello orders minimum wage review”, Republic of the Philippines Department of Labor and
Employment, 9 March 2023, www.dole.gov.ph/news/bello-orders-minimum-wage-review/.
14
MIMAROPA is an acronym combination of the region’s constituent provinces: Mindoro, Marinduque,
Romblon and Palawan.
15
The difference in minimum wage and rate of increase across regions may be attributed to changes
in the cost of living in these areas as well as factors such as employment generation and investment
growth.

246 BIS Papers No 142

Comparison of average nominal and real wage against pre-pandemic trendlines
January 2011 to December 2022 Graph 10

A. Nominal wage B. Real wage

Source: BSP staff calculations.

Real wages

Despite the increase in nominal wages, real wages have declined relative to pre-
pandemic levels. Real wages largely followed their pre-pandemic trend before
deteriorating from the third quarter of 2020 (Graph 10B) amid the impact of Covid-
19 on businesses and households, a pause in wage petition approvals and, more
recently, rising inflation pressures. Inflation was elevated during the pandemic year
and accelerated towards 2022 amid supply shocks following the Russia-Ukraine
conflict and higher global crude oil prices.

Wage growth and inflation

Wage adjustments and inflation outlook

The approved minimum wage adjustments in 2022 have led to an increase in the
short-term inflation outlook of the BSP. Most regional wage boards announced the
approved wage orders in May 2022 with effective dates ranging from June to July
2022. Incorporating the adjustment in minimum wages, the BSP’s baseline inflation
forecast in May 2022 for 2023 was revised upwards by 0.2 percentage points to 3.9%.
The inflation forecast for 2023, however, also accounted for the higher GDP growth
forecast, as well as a slight increase in international oil prices for the period.

BIS Papers No 142 247

Wages respond to past inflation

Evidence from the Philippines suggests that while minimum wage hikes, on average,
increase the regional CPI, the impact is relatively small and may not result in wage-
push inflation.16 Moreover, using Granger causality between wages and prices,
updated estimations from a 2011 study17 on the Philippines using monthly data from
2011 to 2022 shows that it takes a month for wage changes to impact inflation before
dissipating (Table 2). This confirms that minimum wage hikes in the country would
most likely have a one-off impact on inflation. On the other hand, inflation was found
to Granger cause wage growth. The updated results of the Granger causality test in
Table 3 show that the impact of inflation on wage growth appears to persist for
several months. The result that inflation causes wage growth with a lag of one month
is consistent with observations in the domestic labour market wherein workers
immediately start to lobby for higher wages when faced with increasing prices. It is
also interesting to note that even on longer time periods, inflation still has an effect
on wage growth which may be partially explained by the wage determination process
in the country. Based on the omnibus rules on minimum wage determination in the
Philippines, no new wage order may be issued within a period of 12 months from the
current wage order taking effect. Hence, inflation one year ago effectively influences
minimum wage settings for the current period.

Granger causality test – wages on inflation Table 2

Number of lags in months p-value

1 0.091

6 0.849

12 0.932

18 0.832
Null hypothesis: wage growth does not Granger cause price inflation.

16
See F Cacnio, “The price effect of minimum wage: evidence from the Philippines”, Bangko Sentral
Review 2017, www.bsp.gov.ph/Media_And_Research/Publications/BS2017_03.pdf
17
See F Cacnio, “Do higher wages cause inflation?”, Bangko Sentral ng Pilipinas Economic Newsletter,
no 11-01, January–February 2011, www.bsp.gov.ph/Media_And_Research/Publications/EN11-01.pdf

248 BIS Papers No 142

Granger Causality Test – Inflation on Wages Table 3

Number of lags in months p-value

1 0.001

6 0.008

12 0.065

18 0.008
Null hypothesis: Price inflation does not Granger cause wage growth.

Source: BSP staff calculations.

Conclusion

With the improvement of domestic labour market conditions post-pandemic, there

are concerns about the tightening in the labour market which could induce rapid
wage growth and fuel inflation, thus causing wage-price spirals. While the domestic
labour market appears to have little slack, the BSP expects that this would not induce
rapid growth in wages as there is still ample room for employment levels to rise
without significantly contributing to inflationary pressures in the near term. This is
supported by the results of a study by Españo et al which indicates reduced sensitivity
of inflation to the unemployment gap, and increased importance of other factors –
inflation persistence and expected inflation – in explaining movements in inflation in
recent times.18 Given this, the risk of a wage-price spiral is limited for the Philippines
as inflation expectations remain within target in the medium term.
At the same time, the wage determination process in the Philippines partly limits
the emergence of wage-price spirals. Minimum wages in the Philippines are set by
each region’s respective wage boards on a 12-month cycle, thus abating the risk of
rapid wage growth. The steep wage growth in 2022 was, however, an exception, as
minimum wage adjustments have been stalled for almost two years due to the
pandemic. Average regional wage increases in 2022 were higher than expected – the
last wage adjustments had taken place in January 2020 for most regions.

18
See V Españo, R Lemence, J Armas and J Tabin, “Estimating a time-varying NAIRU and unemployment
gap: evidence from the Philippines”, forthcoming.

BIS Papers No 142 249

 Other factors that could avert the risk of a wage-price spiral in the Philippines
include declining real wages and aggressive monetary policy tightening.19 As
previously cited, real minimum wages in the country have been declining despite the
post-pandemic rise in nominal minimum wages. This is due to inflation continuing to
outpace nominal wage growth. In terms of monetary policy tightening, the BSP raised
its policy rate by a total of 350 basis points in 2022 to contain persistent inflation
pressures and manage inflation expectations.
Nevertheless, monetary authorities remain mindful of the risk of elevated price
pressures feeding into inflation expectations and price- and wage-setting behaviour.
At the same time, the strong commitment and credibility of the central bank would
feed into this decision-making process and reduce the risk of medium-term inflation
expectations from becoming disanchored. The current monetary policy framework of
the BSP (ie inflation targeting) helps mitigate the risk of a wage-price spiral emerging.
The BSP has successfully maintained a stable inflation environment over many years
and has responded decisively to bring inflation within the inflation target.20

19
See J Bluedron, “Wage price spiral risks appear contained despite high inflation”, IMF Blog, 5 October
2022, www.imf.org/en/Blogs/Articles/2022/10/05/wage-price-spiral-risks-appear-contained-
despite-high-inflation.
20
Since the BSP’s adoption of inflation targeting as its monetary policy framework in 2002, the BSP
achieved its inflation target in the period 2009–2014, and in 2017, 2019 and 2020.

250 BIS Papers No 142