Real wages and exchange rates in the Philippines, 1956-78 : an application of the Stolper-Samuelson-Rybczynski model of trade

Real Wages and Exchange Rates in the Philippines, 1956-78 An Application of the Stolper-Samuelson-Rybczynski Model of Trade Deepak Lal WORLD BANK STAFF WORKING PAPERS WNuber 604 I SWP6041   ,e&57 WORLD BANK STAFF WORKING PAPERS Number 604 406 7 Real Wages and Exchange Rates in the Philippines, 1956-78 An Application of the Stolper-Samuelson-Rybczynski Model of Trade Deepak Lal INTERNATIONAL MONETARY FUND JOlIT LIBRARY MAR 2 7 198'S INTERNATIONAL BANK FOn fECONSTMUCTION AND DEVELOPMENT WASHINGTON. D.C. 20431 The World Bank Washington, D.C., U.S.A.  Copyright ( 1983 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. First printing April 1983 All rights reserved Manufactured in the United States of America This is a working document published informally by the World Bank. To present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. The publication is supplied at a token charge to defray part of the cost of manufac- ture and distribution. The views and interpretations in this document are those of the author(s) and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting on their behalf. Any maps used have been prepared solely for the convenience of the readers; the denominations used and the boundaries shown do not imply, on the part of the World Bank and its affiliates, any judgment on the legal status of any territory or any endorsement or accep- tance of such boundaries. The full range of World Bank publications is described in the Catalog of World Bank Publications; the continuing research program of the Bank is outlined in World Bank Research Program: Abstracts of Current Studies. Both booklets are up- dated annually; the most recent edition of each is available without charge from the Publications Distribution Unit of the Bank in Washington or from the European Office of the Bank, 66, avenue d'Iena, 75116 Paris, France. Deepak Lal is reader in political economy at University College, London, and a consultant to the World Bank. Library of Congress Cataloging in Publication Data Lal, Deepak. Real wages and real-exchange rat,ee,in the Philippine*, 1956-78. (World Bank staff working papers .; no. 604) Bibliography: p. 1. Wages-Philippines-Mathematical models. 2. Foreign ecehange--Mathelatical models. 3. Foreign trade and employment-Philippines-5Mathematical models. I. Title. II. Series. HD5075.L34 1983 331.2'6599 83-10252 ISBN 0-8213-0213-2  Abstract The paper attempts to explain movements of real wages in the Philippines in terms of the standard trade-theoretic Stolper-Samuelson-Rybczynski model. In view of the factor intensities in the Philippines, commodities are aggre- gated into two composite goods--traded and non-traded--whose relative price-- the so-called 'real exchange rate'--is shown to have been an important determinant, with changes in relative factor supplies of less importance in determining real wages. A conventional two-sector model is set out, which distinguishes between the shoro-and long-run effects in terms of the 'quasi- fixity' of sector specific capital. A simple regression model is estimated and seems to provide a fairly good explanation of what has hitherto appeared to be a puzzling feature of post-war Philippines economic performance--high growth rates of output and employment, accompanied by declining real wages (in turn being associated with a rising incidence of poverty) in at least two periods. The final section of the paper briefly outlines the sources of the movements in the real exchange rate, leading to these real wage movements, and draws some tentative conclusions for economic policy.  This paper is a revised version of Chapter III of Lal (1980), prepared for the World Bank, which, however, should not be identified in any way with our views or analysis. The statistical computations were performed by Ted Black, and Clifford Wymer provided valuable statistical advice. Comments (on an earlier version) hy Romeo Bautista, Trent Bertrand, J. Borkakoti, Mark Leiserson, Mahar Manghas and members of a seminar at the World Bank and the SSRC's International Economics study group are gratefully acknowledged.  TABLE OF CONTENTS Page' Introduction . . . . .,. . . . .. . . . . . . . . . . . . . . . . 3 Part I . . . . . .... . .... . .... . .... . ... .. .... . .... . . . 5 The Setting . . . . . . . . . . . . . . . . . . .. . . .. . . 5 The Model * * . . . . . . . . . ..... 14 (a) Relative Commodity Price Changes . . . . . . . . . . . 16 (b) Changes in Factor Supplies . . . . . . . . . . . . . . 18 (c) The Adjustment Process . . . . . . . . . . . . . . . . 18 Part II . . . . . . . . . . . . . . . 0 . . . 0 . . . 0 . .... ........... 20 The Regression Model. . . . . . . . . . . . . . . . . . . . . . 20 The Results . . . . . . . . . . . . . . . . . 0. *0. ................. 21 Part III .. . . . . . . . . . . . . . . . . . . . . . . . . . 23 Causes of Relative Comodity Price Changes. . . . . . .#. . . . 23 Macroeconomic Policy, Exchange Rates and Real Wages . . . . . . 33 Footnotes. . . . . . . . . . . . . . . . . . . . . . . . 45 References . . . . . . . . . . . . . . . . . . . . . . . . . . . 48  -2- LIST OF TABLES Page # Table 1: Labor Force, Employment and Unemployment, 1956-1978 . . . 6 Table 1(A): Employment and Output by Industry, 1956-1977. . . . . . . 7 Table 2: (A) Agricultural Real Daily Wage Rate . . . . . . . . . . 8 (B) Real Wage-Rate Index of Skilled and Unskilled Laborers in Manila and Suburbs, 1956-1978 . . . . . . 9 Table 3: (A) 1969 Two-Sector Input-Output Table at Net of Taxes Producer Prices . . . . . . . . . . . . . . . . . . . 13 (B) Values of the Production Parameters Defined in the Text . . . . . . . . . . . . . . . . . . . . . . 13 Table 4: Indices: Relative Price, Real Wage and Capital-Labor Ratio Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Table 5: Regression Results (WE and WA Series with ALMON Lag). . . 24 Table 6: Price Indices of Domestic and Foreign Currency Prices of Importables, Exportables and the Exchange Rate. . . . . . 29 Table 7: Regression of PN, PT' M . . . . . . . . . . . . . . . . . 38 Table 8: Some Monetary and Balance of Payments Indicators, 1970 1970-1977 . . . . . . . . . . . . . . . . . . . . . . . . 43 LIST OF FIGURES Figure 1(A): Real Wages: Predicted and Actual (with autocorrelation lag-2) . . . . . . . . . . . . . . . . . 25 Figure 1(B): Real Wages: Predicted and Actual (with autocorrelation lag-3) . . . . . . . . . . . . . . . . .. . . . 26 Figure 2(A): Price Indices for Importables (1956-1978) . . . . . . . 30 Figure 2(B): Price Indices for Exportables (1956-1978) . . . . . . . 31 Figure 3 . . . . . . . . . . . . . . . . . . . . . . . . 39  -3- Introduction This paper attempts to explain post-war movements of real wages in the Philippines in terms of the standard trade-theoretic Stolper-Samuelson- Rybczynski (SSR) model. This may be of interest for three reasons. First, despite fairly rapid growth in output and employment, there have been two periods of marked real wage decline in the Philippines, which have also been associated with an increasing incidence of poverty. As these cannot be explained in terms of an unsatisfactory overall increase in the demand for labour relative to its supply (see Lal (1980)), various structuralist explanations have been popular (see Khan (1977)). In our view, these, too, are flawed, as they depend upon various forms of labour market segmentation for which there seems to be virtually no evidence in the Philippines (see Lal (1980), Ch. II). Hence our search for an explanation within the standard neo-classical trade-theoretic framework. Though the SSR theorems are amongst the most thoroughly researched in trade theory, and would seem to be directly relevant to our subject, they have rarely been applied.-/ This may be due to their long run character, as  -4- well as the other standard simplifying assumptions on which they are based. Their short run versions in the so-called Ricardo-Viner (RV) model, which assume sector specific capital stocks but mobile labour (in the three- factor two-commodity versions (see Jones (1971), Mayer (1974), Mussa (1974)] are known to suffer from the so-called neo-classical ambiguity [see Samuel- son (1971), Jones (1975)] concerning movements in the short run real wage. These, unlike the long run SSR versions, can no longer be predicted solely from the production structure of the economy and could, moreover, be at variance with the long run predictions. However, as Burgess (1980) has recently shown, once inter-industry flows are introduced into the 'two specific- one mobile factor' model, at least for certain parameter values of the production structure, this neo-classical ambiguity disappears. It is this version of the short-run version of SSR that we apply to the Philippines. The dynamics of adjustment to the prices and/or factor supplies have been studied by Mussa (1978). He shows that in an economy with ongoing capital formation (at increasing marginal cost) and depreciation of existing capital, the qualitative properties of the adjustment path are the same with static or rational expectations.2/ This enables us to sidestep the thorny issue of expectation formation and the adjustment technology in our empirical work, and to determine the time path of real wage movements purely in terms of standard parameters of the production side of the economy, and the exogenous relative price and relative factor supply changes, over time. Thirdly, as the empirically determined commodity aggregation (dic- tated by the relative factor intensities of commodities) for the Philippines entails a model that only distinguishes between traded and non-traded goods, the key relative price of these goods is also the so-called 'real exchange  -5- rate' of the Australian model of balance of payments adjustment [see Salter (1959), Corden (1977)]. Recently there has been much concern with the 'social' consequences of various IMF short-run stabilisation programmes in developing countries [see Nowzad (1981)]. A major component of these pro- grammes is measures to affect the real exchange rate. Hence the analysis and empirics of this paper which explicitly links real wage movements with those in the real exchange rate may also be of interest in the debate on the norma- tive question of the 'optimal' stabilisation scheme for a small open develop- ing country whose exports are natural resource rather than labour intensive. The paper is in three parts. The first provides the necessary Philippine background, and the particular trade-theoretic model we use in the second part to explain Philippines real wage movements between 1956-1978. The third part pinpoints the sources of the real exchange rate changes which we argue have led to the observed movements in real wages, and thus briefly considers the issues involved in devising 'optimal' stabilisation policies in an economy such as the Philippines. Part I The Setting Table 1 summarises the data on overall trends in the labour force, employment, constant price NNP and various measures of unemployment for the Philippines in the post-war years. Table 2 provides data on the movements in real wages for urban and rural labour. Elsewhere [Lal (1980)] we have studied the available evidence of the functioning of the Philippines' labour markets. The following conclusions from that study and the data in Tables 1 and 2 are relevant for our purposes.  -6 Table 1 LABOR FORCE, EMPLOYtENT AND UNEMPLOYMENT, 1956-1978 (in thousands except percent) "T?tpal Unemployed' Labor Force Empod Openly Uemloe Measure Measure 2 X Change Over ntanf pge Over P Percent of Percent of Year (Nos) Previous Years (Nos) Previous Years (Nos) Labor Force) (Nos) Labor Force) (Noe) Labor Force (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) 1956 9,029 8,009 1,021 11.3 2,013 22.3 1,578 17.5 1957 8,875 - 1.7 8,174 2.1 701 7.9 1,879 18.9 1,158 13.0 1958 d/ 9,317 5.0 8,555 4.7 762 8.2 1,769 19.0 n.a. n.a. 1959 9,345 0.8 8,705 1.8 639 6.8 1,075 17.9 n.a. n.a. 1960 d/ 9,521 1.9 8,828 1.4 692 7.3 1,758 18.5 n.a. n.a. 1961 9,995 5.0 9,245 4.7 750 7.5 1,846 18.5 1,265 12.7 1962 d/ 10,479 4.8 9,641 4.3 837 8.0 2,040 19.5 1,380 13.0 1963 10,710 2.2 10,039 4.1 670 6.3 1,980 18.5 1,378 12.9 1964d/ 10,898 1.8 10,253 2.1 641 5.9 1,862 17.1 1,178 10.8 1965 11,127 2.1 10,322 0.7 805 7.2 1,937 16.4 1,460 13.1 1966 11,821 6.2 10,984 6.4 837 7.1 1,966 16.0 1,366 11.6 1967 12,525 6.0 11,526 4.9 999 8.0 2,155 17.2 n.a. n.a. 1968 12,452 - 0.6 11,476 - 0.4 976 7.8 2,160 17.3 1,794 14.4 1969 e/ 12,605 1.3 11,732 2.2 873 6.9 2,028 16.1 1,370 10.9 19701e 12,758 1.2 11,988 2.2 770 6.0 1,893 14.8 n.a. n.a. 1971 12,911 1.2 12,245 2.1 666 5.2 1,758 13.6 1,037 8.0 1972 13,701 6.1 12,833 4.8 867 6.3 1,996 14.6 1,249 9.1 1973 14,140 3.2 13,450 4.8 690 4.9 1,899 13.4 1,086 7.7 1974 (Aug) 14,244 0.7 13,666 1.6 578 4.1 1,6441.' 11.5 946 6.6 1975 (Aug) 15,161 6.4 14,517 6.2 643 4.2 1 896-/ 12.5 1,029 6.8 1976 fAug) 16,244 7.1 15,427 6.3 818 5.0 2:2211.1 13.7 1,192 7.3 19777T (Oct 3) 15,200 - 14,470 - 730 4.8 n.a. n.a. n.a. n.s. 1978 / (Oct 2) 16,830 10.7 15,753 8.9 1,077 6.4 n.a. n.a. n.a. n.a. Compound Growth Rates 1956-76 3.0 3.3X 1956-61 2.1 2.91 1961-68 3.21 3.1X 1968-76 3.4X 3.8% The figures till 1973 are from Tidalgo (1976). She states that these are the full time equivalent unemployment of the visibly under- employed defined as below 40 hours and wanting additional work. However, from the November 1973 Labor Force Survey (NCSO Bulletin No. 40 T the total number of workers working under 40 hours and wanting additional work was only 900 thousand, which is less than the 1200 thousand 'fully unemployment" equivalent of these workers reported by Tidalgo in 1973 (column 7). Rovever, there were altogether (858,000 vorking less than 20 hours and 2,541,000 working less than 39 hours - 3399 thousand workers (including those not wanting additional work) working less than 40 hours (NCSO Bulletin No. 20 Table 12). If it is assumed that the average hours worked was 10 for those under 20, and 30 for those between 20 and 39 hours, we get the full time unemployment equivalent in thousands as: (3/4 (858) + 1/4 (2,541) - 1,278, which is close to Tidalgo's figure. We therefore deduce that Tidalgo's estimates refer to those working less than 40 hours (including those not wanting additional work), and hence are a rough measure of the surplus labor time (below a 'full time' employment norm of 40 hours) available in the employed labor force. Our estimatea for 1974 onwards therefore are based on this above assumption. Unemployed (openly) plus the full time equivalent unemployment of the visibly underemployed, defined as those persons working less than 40 hours a week. These figures have been computed in Statistical Appendix Table A.1, from the NCSO data, for those working less than 40 hours and wanting additional work, and they correspond more closely to a notion of involuntary underemployment, on the assumption that implicitly those wanting additional work, would be willing to work up to 40 hours at their current wages. Interpolated values by averaging the figures of the previous and the folloving year with October and May surveys. e/ Interpolated values by conputing the average annual growth rate of 1968-71. The labor force definition for these years is different, it is for the population 15 years and older, as compared vith 10 years and above for earlier years. See note a above for the basis of computing these figures. Note: The NCSO labor force surveys vere conducted biannually in May and October till 1968 (except for 1958, 1960, 1962 and l164). A May survey. was undertaken in 1969 but none in 1970 when the Census of Populstion and Housing was conducted. From 1971 a quarterly survey in February, May, August and November was instituted, except that the first quarterly survey in 1971 was in March. The sample design of the survey was changed in 1965 and again in 1971. The employment and labor force data from Tidalgo (1976) shown are averages of the May and October figures from 1956 to 1968, and quarterly averages from 1971 to 1973. 'For the years when only one or no labor force survey undertaken, the average of the preceding and the following year when surveys were undertaken is used instead' (Tidalgo, Ibid, p. 184).  -7- Table 1(A) EMPLOYMENT AND OUTPUT BY INDUSTRY 1956 TILL 1977 (A) EMPL40YENET All Kining & Electricity. Other Industry Agriculture Industry Services Quarrying Manufacturing Cons truc tion Gas and Water Transport Commierce Services (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) 1956 7702 4548 1217 1937 31 962 198 26 228 R03 906 1957 8199 4997 1275 1927 27 1005 228 i5 223 785 Q1Q 1958 8329 5276 1133 1920 21 927 161 24 238 743 048 1959 8575 5298 1258 2019 35 992 210 21 250 811 959 1960 8539 5234 1316 1999 29 1036 231 20 271 753 975 1961 9395 5618 1429 2348 38 1118 254 19 319 893 1136 1962 9680 .5914 1397 2374 29 1084 252 29 337 939 1094 1963 10655 6258 1702 2695 33 1288 343 38 371 11190 1234 1964 10220 6064 1401 2755 31 1209 341 20 325 1176 1053 1965 10543 6052 1570 2921 28 1221 299 22 367 1120 1428 1966 11032 6275 1707 3050 28 1331 323 25 387 1197 1465 1967 12185 5993 1821 4371 52 1389 347 33 385 1352 1633 1968 12481 7202 1838 3441 46 1387 378 27 380 1379 1684 1969 11235 6325 1720 3190 51 1291 349 29 383 1109 1696 1970 13358 6100 1876 5382 51 1354 438 33 498 838 2045 1971 12228 5966 1995 4267 67 1427 444 57 504 1579 2184 1972 12598 6794 1820 3984 56 1319 402 43 504 1497 19914 1973 13896 7592 1956 4348 60 1453 402 41 542 1551 2255 1974 13666 7547 1873 4246 42 1385 411 35 526 1547 2172 1975 14517 7768 2207 4542 54 1651 456 46 49 2 1623 242A 1976 15427 8126 2273 5028 56 1680 491 46 550 1864 2614 1977 14985 7046 2593 5346 91 1837 593 72 704 1951 '791 (B) REAL OUTPUT All Mining 4Electricity, Other Industry Agriculture Industry Services Quarrying Manufacturing Construction Gas and Water Transport Cosmmerce Services (1) (2). (3) (4) (5) (6) (7) (8) (9) (10) (11) 1956 23.00 8.20 5.40 9.50 0.31 3.70 1.18 0.15 0.78 5.50 3.20 19 57 24.20 8.40 5.80 10.00 0.35 3.90 1.34 0.15 0.82 5.80 3.40 1958 25.20 8.90 5.90 10.40 0.35 4.30 1.16 0.16 0.86 6.00 3.50 1959 26.90 9.40 6.40 11.00 0.39 4.60 1.24 0.17 0.90 6.40 3.70 1960 27.20 9.30 6.40 11.50 0.37 4.70 1.08 0.17, 0.95 6.60 3.90 1961 28.50 9.90 6.70 12.00 0.36 4.90 1.22 0.17 1.00 6.90 4.10 1962 29.50 10.30 6.90 12.60 0.36 5.20 1.19 0.17 1.046 7.30 4.30 1963 31.60 11.00 7.50 13.10 0.38 5.50 1.48 0.17 1.10 7.60 4.50 1964 32.60 11.00 7.90 13.80 0.38 5.70 1.65 0.17 1.15 7.80 4.90 1965 34.40 11.80 8.30 14.30 0.40 5.90 1.81 .0.19 1.21 9.10 5.00 1966 35.60 12.20 8.70 14.80 0.45 6.30 1.71 0.19 1.27 8.40 5.10 1967 37.50 12.50 9.40 15.60 0.50 6.90 1.82 0.20 1.34 9.00 5.30 1968 39.60 13.40 9.80 16.40 0.60 7.30 1.63 0.23 1.41 9.30 5.60 1969 41.20 13.80 10.30 17.20 0.69 7.60 1.74 0.23 1.48 9.70 6.00 1970 42.60 14.00 10.60 18.10 0.82 8.00 1.54 0.26 1.57 10.10 6.40 1971 44.30 14.40 11.20 18.60 0.99 8.30 1.65 0.29 1.67 10.30 6.60 1972 46.30 13.00 12.10 19.30 1.02 8.80 1.93 0.30 1.76 10.60 6.90 1973 49.90 15.70 13.60 20.60 1.06 10.10 2.08 0.31 1.90 11.20 7.30 1974 51.60 15.90 14.10 21.50 1.04 10.50 2.20 0.32 2.03 11.70 7.90 1975 55.00 16.90 15.20 22.80 1.05 10.70 3.08 0.37 2.15 12.30 9.40 1976 59.80 18.30 17.10 24.40 1.12 11.40 4.15 0.49 2.65 13.20 8.70 1977 63.10 19.20 18.40 25.50 1.26 12.20 4.39 0.52 2.59 13.60 9.30 Source: Yearbook of Labor Statistics various years and National Income Accounts data.  -8- Table 2 (A) AGRICULTURAL REAL DAILY WAGE RATE (at 1965 prices, except real wage index base 1972 - 100) Hicks- Khan d/ Author h/ ILO a/ Berry b/ McNicoll c/ Series A e/ Series B f/ Series C g/ BAECON it NCSUJ/ (Pesos) (Pesos) (Pesos) (Pesos) (Pesos) (Pesos) (Pesos) (Index 1972 (Pesos) a 100) 1950 3.32 1951 3.16 1952 3.69 1953 4.19 1954 4.42 3.66 145.0 1955 4.45 3.70 146.8 1956 3.64 3.85 3.59 142.3 1957 3.84 3.63 3.87 3.84 3.84 4.78 3.73 147.7 1958 3.80 3.59 3.84 3.80 3.80 4.63 3.58 142.0 1959 3.85 3.54 3.77 3.85 3.85 4.64 3.70 146.8 1960 3.68 3.36 3.69 3.69 3.69 4.40 3.51 139.1 1961 3.49 3.26 3.63 6.49 3.49 4.16 3.33 132.0 1962 3.41 3.25 3.55 3.41 3.41 4.06 3.40 135.0 1963 3.43 2.86 3.61 3.43 3.43 4.03 3.06 121.4 1964 3.03 2.78 3.03 3.03 3.56 2.85 113.0 1965 2.93 2.93 2.93 3.34 3.09 122.5 1966 2.98 2.98 3.20 3.73 3.23 128.2 1967 3.09 3.09 3.33 4.08 3.16 125.5 1968 3.04 3.04 3.34 4.00 2.81 111.6 1969 2.75 2.75 2.99 3.81 2.86 113.4 6.13 1970 2.44 2.56 2.44 2.75 3.43 2.85 113.0 1971 2.25 2.44 2.25 2.46 3.17 2.46 97.5 4.48 1972 2.17 2.58 2.17 2.44 3.04 2.52 100.0 3.71 1973 1.86 3.19 1974 1.48 2.29 90.7 2.01 1975 1.89 1976 2.95 117.0 1.96 1977 2.96 117.5 a/ This series was estimated by the ILO Sharing in Development team, and is reported in Berry (1978). It uses data from. BAECON wage surveys, or made available directly by BAECON. Deflation was by the consumer price index for areas outside Manila. b/ Estimated by Berry (1978) from BAECON data. Hicks & McNicoll (1977), estimates were derived by weighting the money wages for four categories of farm workers (plowmen, planters, harvesters and common laborers) in nine geographical regions, by the numbers of workers in each category. It also makes adjustments for payment in kind in the form of two meals per day for each worker. The deflator used was the consumer price index for regions outside Manila (available since 1957) spltced to the Manila price index for domestic consumer goods for the 1950-57 period (see Hicks-McNicoll, p. 91). d This is reported in Khan (1977). e Series A, is the unweighted average of BAECON wages rates for ploughman, planters and harvesters (for which alone data was available) till 1966, and from 1966 to 1973 onwards also includes the unweighted average of wage rates of cultivators, weeders and sprayers. For 1973 and 74, the daily cash earnings of salary and wage earners in agriculture for NCSO, Survey of Household Bulletin Labor Force, May Series, have been spliced in. f This is also from Khan (1977), and is the unweighted average of BAECON wage data for ploughman, harvesters and planters only. I! This is also from Khan (1977) and is the wage rate for ploughmen only. h These are our estimates from Table A-10. i These are our estimates of the unweighted average of BAECON wage rates of the same groups as in (d) above, but without any adjustment for payments in kind for meals. As in (d) above after 1966, the average is across wage rates of cultivators, weeders and sprayers, in addition to ploughmen, planters and harvesters for all regions. The deflator is the consumer price index for areas outside Manila from 1957, to which the Manila consumer price index is spliced for earlier years. / This is our estimate of daily cash earnings from the NCSO Labor force surveys.  -9- Table 2 (cont'd) (B) REAL WAGE-RATE INDEX OF SKILLLED AND UNSKILLED LABORERS IN MANILA AND SUBURBS: 1956-1978 (Establishment Data) (1972 - 100) Skilled a Unskilled a Common b b Salaried Wage Laborers Laborers Laborers Latheman Foreman Employees Earners (1972 Pesos) (1972 Pesos) (1972 Pesos) 1954 140.1 113.4 11.81 19.39 23.10 118.1 109.5 1955 141.5 117.8 12.27 19.36 23.84 123.5 113.8 1956 138.1 116.6 12.15 18.64 23.90 121.7 112.3 1957 135.7 113.4 11.28 16.80 23.89 122.2 114.2 1958 135.6 110.3 11.49 18.13 23.67 124.6 111.5 1959 139.5 112.2 11.69 18.34 24.48 131.5 117.3 1960 133.4 107.9 11.23 17.53 23.89 133.5 119.3 1961 131.2 108.8 11.34 16.02 24.21 134.4 117.8 1962 125.5 105.9 11.03 14.89 23.05 131.0 113.0 1963 122.3 105.6 11.01 14.47 22.51 128.2 108.1 1964 115.1 98.6 '10.28 13.54 21.37 121.0 104.3 1965 115.2 102.7 10.71 13.43 22.13 119.3 107.8 1966 114.9 104.8 10.91 13.49 21.84 119.0 112.8 1967 113.1 103.2 10.75 13.86 20.90 113.8 112.3 1968 119.4 112.1 11.68 13.89 21.89 116.8 110.3 1969 123.3 115.2 11.99 13.92 22.79 119.9 112.7 1970 114.4 111.6 11.63 12.65 20.91 109.7 105.9 1971 105.1 104.1 10.85 11.98 19.29 103.0 99.9 1972 100.0 100.0 10.42 11.26 18.34 100.0 100.0 1973 92.4 90.0 9.38 10.92 17.25 96.6 89.4 1974 75.6 72.8 7.58 9.29 14.61 79.5 73.5 1975 72.7 72.9 7.60 8.82 14.34 82.4 76.1 1976 71.2 72.3 7.53 8.81 14.38 86.7 82.3 1977 72.9 70.4 7.34 8.47 14.01 1978 76.1 68.4 Note: a) Real wage-rate index has been obtained by deflating money wage-rate index by the consumer price index (1972-100) in Manila. b) Real wages of three classes of laborer are derived by deflating the data in Table A.12 by the Manila consumer price index.  -10- First, purely in terms of the growth of employment relative to in- creases in labour supply (and noting some decrease in unemployment and under- employment) job creation has kept up with increases in labour supply. Nor has this been at the expense of any dilution in the 'quality' of jobs as judged by such indices as (a) the changes in average hours worked, (b) changes in the numbers (or percentage) of those who want additional work, and (c) changes in the distribution of employment by broad class of worker--salary and wage earners, self-employed and unpaid family workers. Neither is there any evi- dence of any 'discouraged worker' effect which might have meant a larger 'ex ante' labour supply than needed to meet the increases in labour demand [see Lal (1980), Ch. 1]. Second, Philippines labour markets have functioned fairly efficiently, and would seem to be closer to the competitive view of their likely behaviour than the opposing structuralist view which emphasises labour market segmentation. There is no evidence of trade union activity raising the price of organised sector labour above its supply price to any marked extent, while there is survey evidence to support the view that there are virtually no social barriers to entry into different labour markets in the Philippines. There is considerable inter- and intra-generational occupational and geo- graphical mobility [see Castillo (1977), ILO (1974), Abrientos (1972), Castillo (1975)]. There is also considerable intrasectoral mobility of labour within the rural sector, with multiple farm and non-farm occupations common amongst rural households. As such, at least for the unskilled, we would expect rural labour markets to be fairly well integrated. Similarly, for the so-called urban informal sector, survey results show considerable occupational mobility [see Tidalgo and Jurado (1978)]. Nor is there any evidence of any obvious barriers to entry into the urban 'formal' or the rural 'plantation'  sectors [see Lal (1980), Ch. II]. Hence, overall increases in labour demand can be expected to be diffused relatively rapidly over the various industrial, occupational and regional labour markets in the Philippines. Despite the above factors, there is considerable evidence of a de- cline in real wages between 1961-64 and again from 1969-74 for most groups in the economy, though any secular tendency for real wages to decline is statis- tically more speculative [see Khan (1977), Berry (1978), Lal (1980)]. Finally, there is some evidence of a falling wage share and output capital ratio and rising capital intensity over the last two decades [see Lal (1980) for a summary of the evidence which is largely confined to the manu- facturing sector]. Williamson (1971) has estimated an elasticity of substi- tution between capital and labour for Philippines manufacturing of about 0.9. If this applied to the economy as a whole, the above stylised facts would imply that there has been, in growth accounting terms, capital using technical progress strongly biased against labour in the Philippines. 3/ But, while suggestive, this does not in itself provide any explanation of the observed real wage movements. First, because it raises the further question of the causes of this form of biased technical progress in the Philippines. Second, and more importantly, some explanation is needed as to why this bias should have been particularly great during the two periods of marked real wage decline. It is in this context that we seek to explain the movements in real wages in terms of a more basic economic mechanism, viz. relative price move- ments in a fairly aggregated economy wide model. The principle we follow in our aggregation follows from the long run SS result that ceteris paribus, the real wage would be expected to be inversely (directly) correlated with  -12- decreases (increases) in the relative price of the most labour intensive 'commodity' in the economy. We distinguish three different sectors: those producing (i) im- portable, (ii) exportable, and (iii) non-traded commodities. Broadly, in the Philippines, these can be identified with (i) manufacturing (which is still mainly import-substituting); (ii) the cash crops, mining and other natural re- source intensive export activities (manufactured exports being a relatively minor part of this 'sector') and (iii) the rest, which comprise services, non- cash crop agriculture, and the production of various commodities for local/ domestic consumption. From the fragmentary data on factor intensities that can be pieced together [from Bautista (1975), Power and Sicat (1971), Hicks and McNicoll (1971), and Table 3 below] it appears that non-traded commodities are the most labour intensive in the Philippines. Though given the abundance of unskilled and semi-skilled labour in the economy, exportables may have been expected to be the most labour-intensive, in fact they appear to be land and natural resource intensive. If following Kenen (1965) we assume that land and natural resources require complementary inputs of capital to be made 'effective', we can 'lump together' both the traded goods as being capital in- tensive relative to the non-traded good. Moreover, to the extent that the domestic prices of traded goods are influenced by their respective world prices and the exchange rate, the domestic relative price of exportables and importables will be constant if the terms of trade are constant, and the tariff equivalent structure and level of trade restrictions remain unchanged. Though neither of these last two assumptions is strictly valid for the Philippines, we shall, however, be making it in order to allow us to treat traded goods as a Hicksian composite good.4/  -13- Table 3 (A) 1969 Two-Sector Input-Output Table at Net of Taxes. Producer Prices Traded (T) Non-Traded (N) I. Traded 0.347 0.077 Non-Traded 0.175 0.283 Total Intermediate 0.522 0.360 II. Wages 0.219 0.398 Rental 0.259 0.242 Value Added 0.478 0.640 Total Input 1.000 1.000 Source: This table has been derived from the 12-sector transactions table for 1969 for the Philippines given in Table 16.1 of the Philippine Statistical Yearbook 1978 (NEDA, Manila, 1978), as follows. Sectors 1- Agriculture, 2-Fisheries, 5-Food Manuf., 7-Construction, R-Utilities, 9-Transportation, 10-Trade, 11-Building, Insurance and Real Estate, and 12-Other Services, in the 12-sector table were aggregated as non-traded. The remaining sectors--3-Forestry and Logging, 4-Mining and Quarrying, 6-Other Manufactures, were treated as traded. The item under depreciation in the original table was treated as part of the rental, and the other item in value added-other value added, which includes both the wage and capital earnings of the self-employed, was broken down into its wage and capital components using the methods detailed in Lal (1978), p. 101. (B) The above table yields the following values of the production parameters defined in the text: TT 0.4; a 0.1 VT = 0.5; vN = 0.6 aLT ' 0.4949; aLN a 0.6495 aKT a 0.5052; aKN = 0.3505 In Lal (1978), short and long run demand elasticities for labour with respect to the wage rate have been estimated. Using the estimates for large scale manufacturing for traded and traditional services for non-traded goods, gives the following short run elasticities: (see Lal (1978), Table 53, p. 147). =T 0.3; tN - 0.5- Finally, from the Statistical Yearbook, 1978, op. cit., (p. 46), 34.1% of total employment was in agriculture, forestry and fishing. From the 1969 input-output table, 7% of the wage bill for this sector was for forestry and fishing. Assuming that employment was also distributed in this proporti6n yields 2.39% of the labour force in forestry and fishing. Similarly, whilst other manufacturing in the total manufacturing wage bill was 75%, which ,yields share of other manufacturing in total employment of 12.98%. The total share of traded good employment is thus 2.39 + 12.98 - 15.4%. Hence, ALT 0 0.15; LN ' 0.85 . Substituting these values in (7a) yields: w* : A .p*T  -14- The Model Consider the two-good, two-factor model in which capital (K) is immobile between the two sectors--traded (T) and non-traded (NT)--in the short run, but mobile in the long run. Labour (L) is mobile in both the short and long run. Unlike the models of Jones (1971), Mayer (1974), and Mussa (1974), there are intermediate goods flows from both industries, which (unlike Burgess (1980)) also include inputs of each good in its own production. The following equations in Jones (1965) algebra describe the unit cost and the factor balance conditions of the resulting general-equilibrium model, where Yn and Yt are the gross outputs of the non-traded and traded goods, pi is the price of the i commodity, aii is the i input in the production of the jth commodity and w is the common wage rate and r the rental rate in the ith industry. akiri + a,iw + aTiPT + aNiPN = Pi (i=N,T) (1) akiYi Ki (i=N,T) (2) aN YN a YT L (3) From (2) and (3) we have, (a ,N/akN)KN + (aLT/akT)KT = L (4) Total differentiation of (1) and (4) and denoting by: X* E dx/x , that is percentage changes, 0ij E aijpi/pi , that is distributive shares of the inputs i in industry j .  -15- ij E aq * Y/Li, is the share of the labour force in industry j and ai E (a*i-aki /(w -r ) , is the elasticity of substitution of the primary factors in the ith industry, we have: e) r* +9w *+ + JNT 5 kj ;