Kasambahay Law: Its unintended consequences

JC Punongbayan

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It could not only increase short-run unemployment among young and low-skilled workers, but also rob them of the opportunity to better their lives and that of their families in the long run

JC PUNONGBAYANIt’s often said that a little knowledge of economics goes a long way.

After all, economics is, at its core, a study of behavior and incentives, of how people (whether in households, firms, or government) behave when faced with different incentives.

It is no wonder then that economists have played leading roles in public policy issues (e.g., the RH and Sin Tax Laws) where there is a need to consider the different incentives faced by various individuals and groups in the crafting of society’s rules.

Yet another law with public policy implications seems not to have been scrutinized as closely: the “Kasambahay Law” (RA 10361) recently signed by President Aquino.

The premise of the law is simple: for too long househelps around the country have been the subject of abuse by their employers (in the form of unjust salaries or harsh working conditions) and the protection afforded by existing laws is lacking. The enactment of the Kasambahay Law came months after the well-publicized case of Bonita Baran, a househelp whose horrid experience at the hands of her employers (resulting in her blindness, among several other injuries) prompted no less than a full-blown Senate investigation.

The Kasambahay Law aims to improve the plight of the millions of househelps across the nation by establishing sweeping measures affecting several aspects of their employment. These measures include mandated benefits, occupational standards, and a minimum wage. (See the Official Gazette for the full text of RA 10361.)

Minimum wage

The minimum wage is one of the most basic examples in Economics 101 of the effects of government policy on market outcomes. It is also usually the first instance where government policy is introduced in the elementary model of supply and demand.

In particular, it is a well-known tendency that the imposition of a minimum wage (and subsequent increases of it) results in a surplus of laborers in the market, a phenomenon otherwise known as unemployment. This stems from the twin tendencies of the minimum wage to introduce an incentive among workers to find work and a disincentive among employers to hire. That is, as more workers seek employment due to the wage floor, some employers will find the new effective wage prohibitive and therefore find themselves better-off laying off their househelps than retaining them.

To be sure, economists around the world are in disagreement over the specific impact of minimum wages on employment. (For instance, a study could find that a 10% increase in the minimum wage might result in a decrease of employment by around 3%.) Yet even by their standards, there are few issues in which economists are more agreed with than the economic impact of the minimum wage.

Indeed, the minimum wage policy provides a rare exception to the old quip, associated with George Bernard Shaw, which says that if economists were laid end to end, they would not reach a conclusion. A survey, for instance, of more than a thousand US economists in the 1990s showed that a considerable 79% believed that a minimum wage increases unemployment among young and low-skilled workers.

Note that the consensus specifically pertains to the impact of the minimum wage on young and low-skilled workers (rather than across all subgroups of the labor market). The reason is quite simple: On average young and low-skilled workers tend to do things slower and with more errors than their older, more experienced counterparts. Hence, they are likely to be the ones who bring the least economic value to the employer in the first place.

With the imposition of a minimum wage, the value that employers get for their services dwindle the most (and may even represent a cost to the employer) thereby making these workers usually the first to go. Economist Paul Samuelson put it succinctly: “What good does it do a black youth to know that an employer must pay him US$2 per hour if the fact that he must be paid that amount is what keeps him from getting a job?”

Potential impact

This brings us to the potential impact of the Kasambahay Law on the Philippine market for househelps. It is a fact that most househelps in the country are young and low-skilled. They are typically teenager migrants who came from low-income provinces, with an intention to seek entry-level employment (preferably in urban areas) so they could send money back to their families and help with the finances.

It is especially important for these breadwinners to find entry-level work, even in the short run, to establish bases and build networks as they look for better opportunities later on. But with the imposition of the Kasambahay Law, the disincentive for employers to employ these young and low-skilled workers may have adverse and far-reaching effects.

First, it is likely that middle-income employers will find the minimum wage especially binding because they are more likely to be paying less than the minimum wage in the first place (in contrast with more affluent employers). The law, for instance, implies that employers paying salaries below P5,000/month will have to shell out at least P368/month more for SSS, Philhealth, and Pagibig benefits. (Not to mention other transaction costs involved in enrolling one’s househelp to these benefits, which may include securing a birth certificate, NBI clearance, etc.)

With these added costs, the likelihood of laying off househelps is likely to be highest among middle-income employers and those in middle-income areas who vastly outnumber the rich who will have the least problem retaining their househelps.

Second, the law seeks to improve the plight of the approximately 2 million househelps throughout the country. In reality, the law will improve only the plight of a fraction of those 2 million househelps who will manage to cling on to their jobs after the imposition of this law. For some, their wages will increase to at least P2,500/month. For many others, their wages will plummet to P0/month.

In other words, the law favors some of the currently employed househelps at the expense of others who will have to be laid off and all prospective househelps who will inevitably have a harder time looking for work in the future.

Third and lastly, the disincentive to hire not only results in short-run unemployment among young and low-skilled workers but it also robs them of the crucial first step they need to build their lives in the cities and bring their families back at home out of poverty. This is especially the case in poor, agricultural areas where one major incentive to send breadwinners to urban areas is to ensure a steady flow of income via remittances. This is intended to protect themselves from the vagaries of weather which may result in uncertain agricultural outcomes.

In other words, when unusually strong typhoons destroy a huge swath of cropland in the province, the steady inflow of remittances coming from breadwinners in the cities (and who work in the non-agricultural sector) minimizes the impact of these exogenous shocks on their daily consumption. When these breadwinners lose or fail to find jobs in urban areas, this informal insurance mechanism devised by the poor also breaks down.

Unintended consequences

Unintended consequences are a favorite topic among economists because they highlight how government intervention in markets (though sometimes defensible) may lead to perverse outcomes, usually the opposite of the expected results. A famous historical example was the Prohibition in the US during the 1920s which sought to suppress alcohol trade. It instead resulted in a vibrant underground market for alcohol.

The same goes with the Kasambahay Law, a law fraught with unintended consequences and whose underlying economics are in question. Of course, only time (and the data) will tell. But by failing to see that the very decision to employ househelps is intricately linked with the wages paid to them, the Kasambahay Law threatens to increase the disincentive to hire among middle-income employers and those in middle-income areas. This could not only increase short-run unemployment among young and low-skilled workers, but also rob them of the opportunity to better their lives and that of their families in the long run.

Thus, while it was grounded on good intentions, it is unclear whether the Kasambahay Law will really improve the plight of the millions of current (and future) househelps whose jobs and lifetime earnings now hang in the balance. Indeed, the law might in fact worsen the plight of the very people it intended to help. This may yet be another instance of how good intentions often pave the road to hell. – Rappler.com


The author is a summa cum laude graduate of the University of the Philippines School of Economics. His views are entirely his own and do not in any way reflect the views of his affiliations.

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JC Punongbayan

Jan Carlo “JC” Punongbayan, PhD is an assistant professor at the University of the Philippines School of Economics (UPSE). His professional experience includes the Securities and Exchange Commission, the World Bank Office in Manila, the Far Eastern University Public Policy Center, and the National Economic and Development Authority. JC writes a weekly economics column for Rappler.com. He is also co-founder of UsapangEcon.com and co-host of Usapang Econ Podcast.