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Juan Miguel Maria G. Ventura

Prof. Teresa J. Ho

Econ 198 Social Policy

May 3, 2017

Ending Endo: The appropriate policy response?

Contractualization, popularly referred to as endo, refers to a hiring practice wherein the

worker is legally labeled as an independent contractor, even though the characteristics of the

relationship between the worker and the employer is one that fits an employee-employer

relationship.1i iiiii The motivation, of course, is to get away from mandated legal contributions to

employee benefits such as Social Security System, PhilHealth, 13th month pay, and so on. 2iv

Due to a lack of standard definition, the hiring practice is hard to describe. But essentially

it is characterized by short-term and temporary employment lasting for not more than five

1
A standard definition was impossible to obtain. As of writing, there is no provision under the Labor Code

of the Philippines. Also important to note that the website of Kilusang Mayo Uno (KMU) does not provide official

statements readily available, and the Law Journal of the Phililppines was also unavailable for access. In any case,

this definition is the most common definition implied in several articles. For instance, it is implied in Acua (2016),

Santos (2016), and Testa (2016) among others. Meanwhile, a blog article in KMU suggests that there are different

forms of contractualization, and that they should all be outlawed. This implied definition could be found in

https://kilusangmayouno.org/on-the-feb-27-dialogue-with-duterte-workers-unified-position-end-all-forms-of-

contractualization/.
2
This article lists in more detail a comparison between hiring an employee vs. hiring a contractor:

http://businesstips.ph/hiring-an-employee-vs-hiring-an-independent-contractor-in-the-philippines/.
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months, rehiring of a different set of workers to perform the same duties and functions as the set

before, and the process goes on and on endlessly. 3

In the Labor Code of the Philippinesv, however, a somewhat similar employment

arrangement is defined. This term is contracting defined as: an arrangement whereby a principal

agrees to put out or farm out with a contractor or a subcontractor the performance or completion

of a specific job, work, or service within a definite or predetermined period, regardless of

whether such job, work or service is to be performed or completed within or outside the premises

of the principal. The Code particularly specifies and mandates a trilateral relationship that

should be involved in this employment arrangement. The following parties are involved: (1)

principal; (2) contractor; (3) contractual employee.

Meanwhile, in Section 5 of the same 2002 amendment, a provision specifically prohibits

against labor-only contracting, which it defines thus: an arrangement where the contractor or

subcontractor merely recruits, supplies or places workers to perform a job, work or service for a

principal... In addition, it specifies that the contractor or the subcontractor must have

substantial capital or investment, and that the contractor must exercise the right to control over

the performance of the work of the contractual employee.

Interestingly, even before the 2002 Labor Code Amendment prohibiting labor-only

contracting, in 1997, already exactly twenty years ago, the Supreme Court issued a ruling that

prohibits this kind of recruitment practice. vi

3
Testa (2016) describes the continuous contracting in and out an endless cycle. Meanwhile Bello in

Santos (2016) describes the whole process as farming out workers, because, I think, similar to farming where the

same crops are sown and harvested seasons in and out, the workers, performing the same set of duties and functions,

are harvested every five months.

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Given such practices had already been outlawed since 1997, what issues about the labor

code are labor groups still taking to the streets, most recently on their demonstration on the first

of May this year? I arrive at two conclusions: implementation of certain provisions that would

strengthen and enforce the currently existing labor laws4vii; throw away altogether the trilateral

relationship provided by law 5viii.

Like any typical market, the labor market consists of buyers and sellers of the product

labor. In this market, the buyers of labor are the employers and the sellers of labor are the

workers.ix

In the neoclassical model of labor economics, the labor demand, or the demand for labor,

is based on the marginal productivity of labor (MPL).x MPL theory relates the marginal product

of labor, wage, and the number of workers the firm should hire in order to maximize its profits.

Essentially, the firm keeps on hiring workers up to the point where the wage rate is equal to the

marginal product of labor. xi

Meanwhile, the neoclassical model of labor-leisure choice is used to analyze labor

supply behavior.xii As its name suggests, a workers decision determines the number of hours to

work and the number of hours to spend at leisure, and the tangency between the indifference

curve and the budget constraint determines the hours to spend at leisure, which, after subtracting

from the total hours awake, derives the number of hours to spend at work to optimize utility.

4
Ranada (2017) quotes Duterte hinting at hiring more labor inspectors to crack-down on companies with

abusive labor practices.

5
Keeping endo alive: Doles department order no. 174 is a Rappler article explaining the evils of the

trilateral relationship stipulated in Department Order no. 174 of DOLE. References are provided in the endnotes.
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The main assumption in perfect competition is that both buyers and sellers cannot

influence the price, but can only take it as the market dictates. In the labor market, there is no

reason to assume a monopoly market because there are a lot of workers ready to sell their labor.

At the same time, with a large population of workers who are also consumers, it is plausible to

assume that new firms will continue to enter the market until such a point where there is zero

economic profit.

A criticism of the MPL theory is that employers do not actually compute the MPL to

make business decisions, and, probably, most employers have never heard of MPL. xiii In any

case, employers do not need to know the MPL, because they would naturally cut costs and

equate the wage rate to the MPL because otherwise, competitors would undercut wages and they

would run out of business.xiv In other words, labor demand has a strong incentive to know and

measure their production functions.

On the labor supply side, the labor-leisure choice model is not a long-shot from reality

because workers know their preferences as well as their budget constraints more than anybody

else.

An externality is a spillover where the private marginal costs and benefits do not reflect

or equal the social marginal costs and benefits. It is a spillover because there is inefficiency or

waste. In the labor market, workers receive private payments equal to their marginal productivity

of labor, and firms receive labor to produce output which they can sell to a different market.

With regards to increasing returns to scale: In the supply side, the number of hours that

employees must work is fixed because it is determined by the firm, and so they do not have
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influence over their earnings, unless they increase their productivity. 6 At the same time,

assuming the firm is one of many, then increasing returns to scale is unlikely.

These conditions lead us to conclude, theoretically at least, that: labor markets are close

to a competitive market; the labor market is well-informed; there are no externalities; and that

there is no increasing returns to scale.

In the previous analysis, it was shown that the labor market is a somewhat efficient

market left to its own devices. Meanwhile, as labor is unlike other commodity products such as

food and clothing which may be bought and sold at the market clearing price, the labor market is

teeming with equity issues as workers have dignity and rights. There are issues of gender, race,

and ethnicity in the labor market. 7

Apart from discrimination, there are also issues relating to the minimum wage, unequal

power, payroll taxes, and regulation of working hours.xv These are all issues of equity. The

minimum wage, for example, is a wage floor that sets a lower bound wage paid to individual

workers 8, which may not be the efficient wage for workers who have a lower marginal

productivity; the right to form labor unions addresses the issue of unequal power in the

bargaining process; progressive taxation addresses distributional issues; and regulation in the

working hours prohibit employers from exploiting workers to work for long hours of work unfit

for a humane lifestyle.

6
The model does not allow for this.
7
These are the common labor market issues presented in Ehrenberg and Smith (2012), Borjas (2016), and

in Boeri and Ours (2008).

8
Boeri and Ours (2008).
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The practice of contractualization, as previously defined, therefore, may be efficient as

employers naturally desire to minimize costs and maximize profits; but may not be equitable as

workers are denied security of tenure which entitle them to benefits like social insurance.

Ending endo is an equity intervention because it would mandate employers to make

contributions which would improve the welfare of the workers. In short, ending endo is a

redistribution of resources from employers to employees.

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Works Cited

i Contractualization: Which meaning do we mean?. Acua, C. (2016). Taken 1 May 2017

from http://business.inquirer.net/215071/contractualization-which-meaning-do-we-mean.
ii Employees ask dole: Whats contractualization?. Santos, G. (2016). Taken 2 May 2017

from http://newsinfo.inquirer.net/807270/employees-ask-dole-whats-contractualization.
iii What you need to know about contractualization and the end of contract. Testa, D. M.

(2016). Taken 2 May 2017 from https://www.ecomparemo.com/info/what-you-need-to-know-

about-contractualization-and-end-of-contract/.
iv Testa, D. M. (2016).
v Rules implementing articles 106 to 109 of the labor code, as amended; Department

order no. 18-02 (Series of 2002). Department of Labor and Employment. Taken 2 May 2017

from http://www.ble.dole.gov.ph/downloads/issuances/DO_18-02_s02.pdf.
vi Acua, C. (2016).
vii Duterte to sign eo vs endo. Ranada, P. (2017). Taken 2 May 2, 2017 from

http://www.rappler.com/nation/168543-labor-day-philippines-duterte-endo-executive-order.
viii Keeping endo alive: Doles department order no. 174. Rappler Philippines. (2017).

Taken 2 May 2017 from http://www.rappler.com/thought-leaders/164921-endo-

contractualization-alive-dole-department-order.
ix Ehrenberg and Smith. (2012). Modern labor economics: Theory and public policy.
x Borjas, G. J. (2016). Labor economics, 7th ed. New York, New York: McGraw Hill

Education.
xi Ibid; page 88.
xii Ibid; page 34.
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xiii Ibid; page 94.

xiv Ibid.
xv Boeri, T., Ours, J. v. (2008). The economics of imperfect labor markets. New Jersey:

Princeton University Press.