Cyrille Schwellnus
OECD Economic Surveys: Philippines 2026
Abstract
Only about one-third of the employed population in the Philippines works in formal-sector jobs with full social and labour market protections, such as contributory old-age pensions, minimum wages and security of tenure. The remaining two-thirds work in informal jobs that do not, or only partially, protect workers. Mandatory social contributions, minimum wages and dismissal protections are high relative to the productivity of most workers and weaken incentives for formal employment. This chapter recommends a package of reforms to boost formal employment and improve social protection by reducing the labour cost wedge between formal and informal jobs. This package would consist of a greater reliance on general taxes in the financing of social protection, especially in the area of health; setting minimum wages at more market-compatible levels, including by allowing for more regional differentiation; and providing more certainty on dismissal costs, including by setting a cap on compensation in case of litigation.
Labour market institutions in the Philippines are meant to provide a comprehensive package of social and labour market protections to formal-sector workers, encompassing contributory old-age pensions, health insurance, minimum wages and security of tenure. But only about one-third of the employed population works in formal-sector jobs, with the remaining two-thirds only partially covered by social and labour market protections. Many informal-sector workers do not have access to an old-age pension, earn below the legal minimum wage and do not benefit from security of job tenure. Non-contributory social pensions have alleviated the lack of contributory pension coverage to some extent, but benefit levels are well below the poverty line.
As a result, the labour market consists of a relatively small segment of high-quality jobs with comprehensive social and labour market protections and a relatively large segment of informal jobs with limited social and labour market protections. Creating a unified and consistent social protection system in which all workers are covered by a basic set of social protection mechanisms while those who contribute receive better benefits remains an outstanding task. One laudable, albeit partial exception to this is healthcare, where basic coverage has been universal since 2019, although there is scope to improve formalisation incentives in the current system.
The distinction between formality and informality is also relevant to businesses. Formal firms and entrepreneurs are registered and comply with core licensing and permit requirements. Informal firms are typically small, unregistered entities. Not all employees in formal firms hold formal jobs, whereas employment in informal firms is predominantly informal. In the Philippines, around 56% of informal workers are found in informal firms and private households, while 44% work in formal firms (Cabegin, 2023). Firms that rely on informal labour often remain small to avoid detection, higher formal labour costs and regulatory obligations (Ohnsorge and Yu, 2022). Firm informality also undermines the productivity of the formal sector through unfair competition: by not complying with costly regulations, informal firms face lower operating costs and can undercut formal firms on price, eroding their market share and profitability and weakening incentives to scale up, invest and innovate.
A key driver of informality is the relatively high cost for businesses to create jobs that are in full compliance with the labour code, especially for workers with relatively low skills. Mandatory social contributions amounting to around 23% of gross wages, minimum wage rules that are only enforced for formal jobs, as well as regulations on lawful dismissals drive up the costs of formal jobs relative to informal ones. While businesses hiring highly productive workers can usually afford this additional cost, hiring lower-productivity workers while paying social contributions and fully complying with minimum wage and dismissal laws is often economically unviable. Consequently, most jobs, especially low-skill ones, do not benefit from the legal protections of the labour code. The high share of informal jobs suggests that the level of labour code protections may be too strict relative to current skill and productivity levels of most workers. More market-compatible social and labour protections, in combination with tighter enforcement, would likely help to cut informality and increase de facto protection for workers by reducing the large share of unprotected workers in the informal segment of the labour market.
This chapter analyses labour market institutions in the Philippines in view of providing social and labour market protections to a larger proportion of workers, while improving the overall efficiency of the labour market. The focus is on reforms to policies shaping social protection, minimum wage setting, and employment protection. The key message is that bringing more workers into the formal economy through reforms in these areas would not only improve the incomes and well-being of vulnerable workers but would have positive effects on growth and productivity. While informal employment can be a stepping stone for formal employment, many informal workers are trapped in low-productivity jobs that provide little training and weak perspectives for moving up the skills and productivity ladder (OECD, 2024a).
The remainder of this chapter is structured as follows. Section 3.2 provides a brief overview of poverty and health outcomes in the Philippines amid high informal employment and describes key social protection and labour market regulations. Section 3.3 discusses options for reform, focusing on the financing of the social protection system, the system of minimum-wage setting and employment protection laws. Section 3.4 concludes.
The Philippines has made significant progress in reducing poverty and improving public health outcomes over the past 15 years. Absolute poverty measured at USD 4.20 a day at 2021 purchasing power parities has come down from 39% in 2010 to around 17% in 2023 (Figure 3.1). Over the same period, life expectancy at birth – a common indicator of public health – increased by about one year to 70 years. These developments are consistent with a range of other social and health indicators, including the nationally defined poverty rate (15.5% in 2023), infant mortality, and stunting, which have improved significantly since 2010. However, poverty in the Philippines remains higher and life expectancy lower than in most other Southeast Asian peers with similar levels of income per capita. While poverty and life expectancy are around the levels in Indonesia, poverty is significantly higher and life expectancy significantly lower than in Thailand and Viet Nam.
Note: Panel A: The bar denotes data for 2023 except for IDN (2024); CHL, TUR, VNM, MEX and IND (2022); MYS (2021); and ZAF (2014). The triangle denotes data for 2010 except for CHL, BRA, PHL and IND (2009); and MYS (2008).
Source: World Bank WDI.
Income inequality in the Philippines has declined notably, with the Gini coefficient falling from around 47.7 in 2000 to 39.3 in 2023. This sustained reduction partly reflects the narrowing of regional disparities. While large gaps remain between Metro Manila and lagging regions such as the Bangsamoro Autonomous Region of Muslim Mindanao, income growth in rural and less developed areas — supported by migration, remittances, and infrastructure investment — has outpaced that in urban centres. Within-region inequality has also declined in several areas. Although the tax and benefit system has contributed only modestly to redistribution, its role has grown gradually. The expansion of social protection programs has helped reduce poverty and inequality at the lower end of the distribution. However, direct taxation and transfers remain limited in scale, with a modest impact on income inequality. In regional perspective, the Philippines’ income inequality remains relatively high. The Gini coefficient is comparable to Malaysia but significantly higher than in Indonesia, Thailand, and Viet Nam. While the Philippines has made clear progress in reducing inequality, it continues to face challenges in creating a more inclusive income distribution relative to its regional peers.
High poverty and weak public health outcomes relative to peers partly reflect relatively low public spending on social protection. Internationally comparable data suggests that the Philippines spends about 5% of GDP on social protection, split about evenly between health and other social expenditure (Figure 3.2, Panel A). This is slightly above the level of Indonesia but well below Viet Nam, Thailand, and a range of other emerging market economies. Non-health social expenditure includes pensions (1.4% of GDP), conditional cash transfers and supplementary in-kind support. Price subsidies for rice and fuel provide support to the poor but are poorly targeted and imply significant leakage to non-poor consumers. In addition, the government provides emergency assistance through untargeted transfers to people in distress, including coverage of medical bills, funerals, transportation and food.
Social protection is de facto segmented into two groups: those in the formal and those in the informal labour market, with formal workers defined as those paying social contributions, which is the only case for about one-third of the employed population (Figure 3.2, Panel B; Box 3.1). Formal workers are generally protected by comprehensive social security benefits, including contributory old-age pensions and healthcare benefits, and are also protected by labour market regulations, including minimum wages and employment protection laws (Table 3.1). The statutory retirement age in the contributory pension system is 60 years and the replacement rate for a worker at the average wage is high by international standards, amounting to 72.4% of gross earnings as compared to 50.7% in the average OECD country (OECD, 2024c), which will lead to a financial imbalance in the pension system in the long term (Chapter 1). In contrast formal workers, most informal workers are neither covered by social security nor protected by labour market regulations, which is part of the explanation for weak social outcomes, including high in-work and old-age poverty (World Bank, 2016). Informality also poses a significant barrier to productivity and to responsible business conduct, as companies operating in the informal sector often invest less into their workers and are typically not subject to legal and regulatory frameworks, including the OECD Guidelines on Multinational Enterprises that address workers’ rights in Chapter V on Employment and Industrial Relations (OECD, 2023b).
Source: ILO World Social Protection Data Dashboards.
High labour costs relative to productivity in the formal sector are related to the design of social protection and labour market regulations, and this contributes to labour market segmentation. Informal employment is common across developing and emerging market economies and partly reflects low levels of education and skills that constrain workers’ ability to meet the technical, regulatory, or productivity requirements of formal employment. But the design of social protection and labour market regulations further reduces incentives for formal employment, especially of lower-qualified workers. Social contributions amount to approximately 23% of gross wages, which is close to the OECD average but high for an emerging economy with limited enforcement capacity and a large proportion of workers with limited education and skills (Figure 3.3). Paying such high social security contributions while complying with minimum wage and employment protection regulations may be feasible for hiring highly qualified workers. But it may be excessively costly for less qualified workers with lower productivity.
Share of social contribution in gross wage, 2024 or latest year available
1. "Results apply only for the minority case where the employee works in a firm with more than 20 employees".
Source: OECD Labour taxation - average and marginal tax wedge decompositions database; Taxing wages in selected partner economies: Brazil, China, India, Indonesia and South Africa; Social Security System - Republic of the Philippines; TMA Group.
Like in many other emerging-market economies, the lack of coverage of large parts of the population with social security and formal labour market protection mechanisms has led to the emergence of non-contributory social assistance schemes (Arnold et al., 2024). These have covered some of the gaps left by contributory schemes, but may in some cases have weakened the incentives for formalisation, as some informal workers have access to social benefits without contributing actively to the social security system.
Key social assistance programmes include the Social Pension Program for Indigent Senior Citizens (SPISC) and the flagship conditional cash transfer programme Pantawid Pamilyang Pilipino Programme (4Ps). About 20% of the 11 million seniors above 60 years receive a contributory retirement pension and about 45% receive a social pension that is targeted to the most vulnerable seniors. This means that about one-third of senior citizens does not have access to any kind of old-age pension, often making them dependent on family members. While pension coverage is higher than in a number of regional peers, including Indonesia, Malaysia and Thailand, the level the of social pension at about USD 210 – 36% of the national poverty line – is relatively low and clearly insufficient to eradicate old-age poverty. The 4Ps programme targes families with children, conditional on school attendance and health check-ups, covering roughly 4.4 million households, with evaluation studies typically finding positive effects on school enrolment, health outcomes and household income (Orbeta et al, 2021). Other social programmes include emergency cash transfer, assistance to individuals in crisis situations and benefits that provide support to the elderly population in case of need.
This chapter defines informal employment as referring to workers who do not actively contribute to an old-age pension scheme. According to this definition, informal employment accounts for 66.6% of total employment (ILO, 2024). This encompasses most self-employed workers (with and without employees), who account for about 30% of the employed population; most unpaid family workers, around 7%; and a significant share of wage and salary workers, who make up the remaining 63% of the employed population.
While self-employed workers and unpaid family workers are not legally required to register with the social security system, wage and salary workers are in principle required to register and pay social contributions. However, they can avoid paying social contributions in various ways, as a result of which only about 60% of wage and salary workers pay social contributions, according to some studies (Cabegin, 2023):
Non-declaration of employment: Employers and workers may perceive the benefits of registering with the social security system – including access to contributory old-age pensions – to be smaller than the costs in the form of social contributions.
Mis-classification of employment status: Employers and workers may also opt to mis-classify an employment relationship as a contract between a buyer of services and an independent contractor. This can, for instance, be the case for digital platform-mediated work, such as driving for a ride-sharing or delivery platform, which is typically similar in nature to an employer-employee relationship. In the context of the Philippines, it can also be the case for so-called “job orders” and “contract of services” work which is mainly used in the government sector and involves the hiring of contractors for piecework or special tasks. While “job orders” and “contract of services” workers are classified as wage and salary workers in the statistics of the Philippine Statistics Authority, they are not subject to registration requirements with the social security system. According to some studies, about one-third of government employees are hired using these two categories (Santoalla et al., 2025).
There is a large overlap between non-payment of pension contributions and non-coverage by minimum wage and employment protection regulations. Self-employed workers and unpaid family workers are not subject to the wage and security of tenure protections of the labour code. Wage and salary workers who are mis-classified by their employers for social security purposes, are unlikely benefit from minimum wage and employment protection regulations, even though some employers may voluntarily pay wages above the legal net minimum wage. Since the minimum wage in the Philippines is defined in gross terms, the net minimum wage after payment of mandatory social contributions is 23-24% below the gross minimum wage. This implies that non-payment of social contributions can generate a gain for the employer despite paying a wage above the net legal minimum wage.
A major achievement has been the introduction of universal healthcare in 2019, prior to which informal workers had only limited access to healthcare services. Health insurance is now essentially universal across the population but covers only select healthcare services, with out-of-pocket expenditure amounting to more than 40% of households’ total health expenditure (OECD, 2024b). Moreover, the rollout of universal healthcare from 2020 may have further reduced incentives for formal employment by covering all citizens irrespective of contribution payment. While all non-poor citizens are expected to pay health contributions, healthcare services are de facto also available to those who do not contribute. This creates incentives to work informally and not pay health contributions, given that it is generally difficult for the administration to verify income status and impose administrative fines ex-post.
1. The Employees’ Compensation Programme covers work-injury, illness and death compensation. The rate is fixed at 30 PHP for worker with a monthly gross wage above 15000 PHP (10 PHP for workers earning below 15000 PHP). Assuming a monthly gross wage of 20000 PHP, this amounts to a rate of 0.15%.
Source: OECD based on ILO Social Protection Dashboard and national sources.
3.4.1. Moving to multi-tiered social protection
The key challenge for expanding social protection is to extend it to workers who are currently neither covered by the social security system nor non-contributory schemes, while strengthening incentives for formal employment. One way to achieve this could be by moving to a unified, multi-tiered social protection system, with universal basic benefits financed by general tax revenues and more generous top-up benefits financed by social contributions (Arnold et al., 2024).
Financing this basic benefit pillar through general taxation rather than social contributions would avoid raising the cost of formal job creation. For those earning up to around the full-time minimum wage, this would be the only mandatory pension system. Substantially reducing social contributions for low-income workers from the current 23% of gross wages to levels close to zero, while maintaining mandatory social contributions for higher-wage workers in return for a more generous benefit package, would provide social protection to the entire population and strengthen incentives for formal employment. Full equivalence between contributions and benefits would not be desirable from a distributional perspective, but there should be sufficient differentiation in terms of benefits between the non-contributory and contributory scheme to maintain higher-wage workers’ incentives to pay social contributions.
A second, contributory benefit pillar would complement the basic pension for those with higher incomes, to achieve pension benefit levels that not only prevent old-age poverty but are also a decent replacement for working-age incomes. The contributory and non-contributory pillars should be seamlessly integrated within the pension system to achieve the desired replacement rates for everyone in an effective way.
A third pillar of voluntary individual savings could complement the basic and contributory pillars. On average across OECD countries, voluntary savings improve replacement rates by 26 percentage points for the mid-income worker (OECD, 2023a). In ten OECD countries, private voluntary schemes cover more than 40% of the economically active population, in some cases incentivised by government top-ups, and occupational pension plans are playing an important role providing coverage and adequacy for retirement.
Expanding the coverage of non-contributory old-age pensions
Establishing a universal basic pension that includes the remaining third of the old-age population who currently do not receive any pension benefit, could prevent old-age poverty, regardless of individual work histories in the formal and informal sectors. This could be achieved by expanding participation in the non-contributory pensions scheme SPISC through the easing of conditions required to obtain this benefit to only a minimum registration period with the social security administration. Registering would not entail any cost for low-income earners as workers with incomes below and around the minimum wage would no longer be required to pay social security contributions. The objective of the minimum registration period would be to encourage formality. At the same time, non-contributory periods of registration would only give access to a lower non-basic pension and not translate into contributory pension rights, while those eligible for a contributory retirement pension would be excluded from receiving a non-contributory SPISC pension.
For those with higher wages, contributions and better benefits should be phased in progressively to avoid strong threshold effects and a bunching of reported incomes right below that threshold. Setting the wage threshold where contributions start rising involves trading off potential revenue losses for the social security system against the economic and social gains of formalising employment. For instance, social security registration without payment of social contributions could be restricted to workers earning wages in the vicinity of the minimum wage. The gains from reducing social contributions in terms of additional formal employment are likely to be small for high-wage workers, with about 90% of workers in the top income quartile being formally employed (World Bank, 2016). This suggests that for high-wage workers, revenue considerations from social contributions outweigh formalisation considerations. The opposite is the case for low-wage workers, with about 90% of workers in the bottom income quintile being informally employed. The trade-off is most pronounced in the middle of the wage distribution, with formal and informal employment in the middle quintile being broadly evenly distributed. Earlier estimates indicate that, on average across regions, the minimum wage is around 80% of the median wage (World Bank, 2016). This suggests that setting the threshold at which mandatory contributions should be phased-in somewhat above a reference wage roughly corresponding to 1.5 times the average minimum wage – to include most workers in the middle quintile of the national wage distribution -- would be effective to encourage formalisation.
To preserve incentives for workers with incomes above the threshold where contributions start rising to actually pay these contributions, the benefit level of the non-contributory social pension scheme would initially need to remain low. The current benefit level of the social pension scheme SPISC is about 50% of the minimum contributory pension of the social security system, which should be sufficient to ensure differentiation between the schemes in terms of benefits. In addition, maintaining low social contribution rates for workers around the income threshold will be necessary to create strong incentives for correctly declaring incomes and paying contributions. For instance, the contribution rate could gradually increase from a range of 5-9% at 1.5 times the average minimum wage to 18-20% at around 2.5 times the average minimum wage, which would be one indicative option for avoiding sharp threshold effects in the labour tax wedge.
Shifting the financing mix of universal healthcare to general tax revenues
Healthcare coverage has been universal in the Philippines since 2019. Health contributions amounting to 5% of gross wages are in principle mandatory for the active population in working age with incomes above the poverty line, with non-poor informal workers expected to contribute voluntarily. However, non-payment of contributions effectively does not exclude people from coverage. In the rollout phase of the Universal Healthcare Law from early 2020, access to healthcare benefits initially required registration with the Philippine Health Corporation (PhilHealth) and payment of health contributions in nine out of the previous twelve months. This requirement was intended to provide incentives for the payment of health contributions but was dropped in 2022, as making access to benefits conditional on prior contribution payment was seen to violate the principle of universality. About 92% of the population is currently registered with the Philippine Health Insurance Corporation (PhilHealth), with about two-thirds registered as having an obligation to pay premiums and one-third registered as subsidised members, given that their incomes fall short of the poverty line. The remaining 8% of the population is not registered with PhilHealth but has access to health services in case of need.
Universal healthcare coverage is a remarkable achievement and a positive step towards improving health outcomes and ultimately human capital in the Philippines. However, the current financing structure is partly based on social contributions, which raises the cost of formal employment. Incentives for workers to pay social contributions are weak, since access to healthcare services is not conditioned on previous contributions. This creates a moral-hazard problem, with currently only about 20% of the employed population actively paying contributions to PhilHealth (Task Force Informatics, 2024). Even among informal workers who contribute voluntarily to PhilHealth, there is a risk that they are under-declaring their earnings to reduce their contributions. On top of the moral hazard problem, this may jeopardise the financial sustainability of universal healthcare in the long term as the population ages.
Shifting the financing mix of universal healthcare from social security contributions to general taxation would improve incentives for formal employment by reducing non-wage labour costs by 5 percentage points of gross wages. Several OECD countries including Denmark, Finland, Italy, New Zealand, Norway, Portugal, Spain, Sweden, primarily finance their universal healthcare systems through general taxation. This is generally viewed as having beneficial effects on employment, especially when the tax base for payroll contributions is narrow such as amid high informality (Yazbeck et al., 2020). Brazil, Chile and Thailand are examples of emerging market economies that successfully introduced universal tax-funded health systems. The experience of Spain provides an example of a successful transition from a system of health insurance tied to employment status and financed by payroll contributions to a universal healthcare system based on general taxation (Box 3.2).
Prior to 1986, Spain's healthcare system was largely financed through payroll contributions, linking access to employment status. This model proved inadequate during periods of high unemployment, as it excluded a substantial portion of the population from healthcare services (OECD, 2000). In response, the 1986 General Health Law established the Spanish National Health System, transitioning the financing structure to rely on general taxation. The reform aimed at decoupling healthcare access from employment, ensuring that all residents, regardless of their job status, could receive medical care.
One of the main advantages of healthcare financing through general taxation, as implemented in Spain, is its alignment with the system’s core principles of universality, free access, equity, and fairness. The Spanish model supports virtually universal coverage for the population, with care predominantly provided free at the point of delivery, except for certain items like outpatient pharmaceuticals and specific prostheses. The funding mechanism is intended to be progressive, where the progressivity of the overall tax system contributes to the fairness of health financing. The system also uses allocation formulas that aim to distribute funds to regions based on need to reduce imbalances. By relying less on payroll taxes, the system minimises the tax burden on labour, encouraging employment. Moreover, the tax-funded system is more straightforward to administer compared to systems heavily reliant on payroll contributions, which require tracking individual employment statuses and contributions.
Financing universal healthcare through general taxation resources would allow to gradually increase the health services effectively covered by PhilHealth without increasing the cost of formal employment. Changes in the financing structure of universal healthcare should not result in a reduction of overall public resources allocated to healthcare. Despite healthcare coverage being universal, the Philippines has one of the highest shares of out-of-pocket spending in overall current health expenditure among Southeast Asian peers. In 2021, the share of out-of-pocket spending (44.6%) was somewhat higher than in Indonesia, Malaysia and Viet Nam (between 30-40%), but significantly higher than in Thailand (8.8%) (CBRD, 2025). The PhilHealth benefit package covers a broad range of health services, including inpatient and outpatient services, prevention and specialised care. While public healthcare services are formally available to all, many citizens face de facto barriers such as remoteness, long waiting times, and inadequate service provision, and many private or accredited healthcare facilities charge fees above the amount covered by PhilHealth. Moreover, reimbursement rates for pharmaceuticals typically only cover a fraction of the cost. While these issues could partly be addressed by regulatory action, in the medium term additional investment in public health infrastructure and higher reimbursement rates will be needed to reduce high out-of-pocket health expenditure and improve health outcomes.
Financing the transition towards universal, tax-financed social protection and healthcare
Combining reforms to expand coverage of non-contributory pensions with the reform of universal healthcare financing could be an effective way to provide comprehensive social protection while strengthening incentives for formal employment (Figure 3.4). Universal healthcare funded from general taxation would broad access to medical services regardless of employment status or income. Tax-financed social pensions would fill gaps in retirement income for individuals not covered by contributory systems, particularly those earning up to or slightly above the minimum wage. Targeted social programmes, also tax-funded, would offer means-tested support to the poorest, ensuring a basic level of income security. Contributory social security, financed through payroll taxes, would provide more generous and earnings-related benefits to high-wage workers. These instruments collectively form a continuum of coverage: from broad-based health and pension support for low-wage workers to more tailored social security benefits for workers with higher earnings.
Source: OECD.
The fiscal impact of this broad reform package consisting of universal old-age pensions; reduced social security contributions for workers who are earning less than 1.5 times the minimum wage; and the shift from payroll-financed to tax-financed universal health insurance is estimated at around 0.5% of GDP in the short run, and about 0.6% of GDP by 2050 (Table 3.2). While this requires significant fiscal reforms to raise revenues and make public spending more efficient, the analysis in Chapter 1 suggests that it is well within the realm of feasibility.
This estimated fiscal effect is the result of three elements (Table 3.2). First, expanding coverage of the social pension to all people above age 60 without a contributory pension would require covering an additional 3 million people. At the current benefit level of the social pension, this would imply additional public expenditure of around 0.1% of GDP in the short term. By 2050, the impact on the fiscal balance could be significantly larger, with the population above age 60 projected to roughly double over the period. Second, exempting workers in the first two earnings quintiles from paying social contributions while applying a low entry rate to most workers in the middle income quintile around the minimum wage would result in revenue losses of another 0.2% of GDP. Third, the move from contribution-financed to tax-financed universal healthcare coverage would imply foregone contribution revenues of around 0.2% of GDP that would have to be replaced by higher general tax revenues.
Note: It is assumed that the benefit level of the social pension is initially maintained at 1000 pesos.
Source: OECD calculations.
3.4.2. Reforming labour market regulations
Labour market reforms are key to enhance the impact of reforms to the social protection system on formal employment. Reducing labour taxes may only have a limited impact on formal employment if rigid labour market regulations drive up the cost of formal employment. For instance, employers may be reluctant to declare low-wage workers to the social security administration despite low social contributions if this requires a substantial wage hike to comply with minimum wage legislation. Similarly, high costs of laying off formal workers may discourage employers from hiring workers on regular employment contracts in the first place. A comprehensive package of reforms that simultaneously addresses high taxes on formal labour and rigidities in labour market regulation would be more effective in strengthening formal employment than a piece-meal reform focusing exclusively on social contributions.
Refining the system of minimum wage setting
The Philippines operates a more flexible minimum wage-setting system than most OECD economies, with minimum wages set at the regional level through tripartite boards rather than nationally. The Regional Tripartite Wages and Productivity Boards, consisting of representatives from workers, employers and the government consider criteria such as the needs of workers and their families, the capacity of employers to pay, prevailing wage levels and requirements of economic and social development when setting minimum wages. Minimum wages are usually adjusted once a year but can be adjusted more frequently upon petition, for instance during periods of rapid price increases for basic goods and services. Minimum wages are differentiated by broad occupational group – non-agricultural workers, agricultural workers and domestic workers – and in some regions by size of the business. Over 2011-24, nominal minimum wages grew at broadly the same average annual rate as the consumer price index (3.4%). This means that the real minimum wage remained broadly stable, well below average labour productivity growth of around 2.9%.
Despite its apparent flexibility, the system of minimum wage setting in the Philippines is insufficient in protecting workers from in-work poverty. In principle, a system of differentiated minimum wages setting allows accommodating differences in labour market conditions across regions, occupations and businesses better than a single national minimum wage, which allows to balance the protection of workers and possible adverse effects on formal employment. The evidence suggests that minimum wages tend to be higher in Philippine high-productivity regions than in low-productivity ones. However, there appears to be insufficient differentiation of minimum wages across regions to account for large regional productivity differences. While the average level of the minimum wage relative to average labour productivity appears to be broadly in line with emerging market peers, it is very high in number of low-productivity regions (Figure 3.5, Panel A). For instance, measured labour productivity in the National Capital Region (NCR) is 6.3 times higher than in the Bangsamoro Autonomous Region of Muslim Mindanao (BARMM), while the ratio of regional minimum wages is about 1.8. This results in a regional minimum wage adjusted for productivity in the National Capital Region that is below the national averages of most emerging market peers, but very high in regions with low labour productivity.
Note: In Panel A, the bottom of the whisker shows the ratio of the minimum wage to labour productivity in the region with the lowest ratio (National Capital Region), while the top of the whisker shows the ratio in the region with the highest ratio (Bangsamoro Autonomous Region of Muslim Mindanao). Labour productivity is calculated as the ratio of regional GDP to regional employment, with regional employment based on the location of work. Panel B shows the share of workers earning less than the regional minimum wage, using the lowest minimum wage as the cut-off when the regional minimum wage is differentiated by firm size and/or industry.
Source: WorldBank WDI, ILOstat, PSA, national authorities, OECD calculations.
The consequence of limited minimum wage differentiation across regions is that minimum wages can be relatively high in regions with lower productivity, where a large share of wage and salary workers earn less than the legal minimum wage. In the National Capital Region – where labour productivity is about three times the average in the remainder of the Philippines –about one-quarter of wage and salary workers earn less than the legal minimum wage, suggesting that its level is broadly appropriate (Figure 3.5, Panel B). By contrast, in some regions, more than 40% of wage and salary workers earn less than the legal minimum wage. In a number of regions outside the National Capital Region, the minimum wage does not effectively protect workers from in-work poverty due to non-compliance, given that a significant share of wage and salary workers are employed informally.
Setting minimum wages at more market-compatible levels while strengthening enforcement would limit adverse effects on formal employment. Better taking into account the trade-off between higher minimum wages and higher informal employment in the minimum wage setting process would protect workers from in-work poverty more effectively than the current system. The effectiveness of minimum wages in addressing in-work poverty does not only depend on its level, but also on the structure of the labour market. Poor workers are generally self-employed or employed informally, implying that the minimum wage protects only a minority of workers from in-work poverty. Moreover, high minimum wages may reduce incentives for formal employment, driving more workers into low-wage jobs in the informal economy.
Labour productivity and consumer price inflation should be key considerations in the minimum wage setting process. Simplifying the system of minimum wage differentiation by focusing on regional differentiation only and putting a larger weight on regional labour productivity differentials in wage setting would improve enforceability and limit adverse effects on formal employment. In regions where minimum wages appear out of line with productivity – as manifested by high shares of workers with earnings below the minimum wage – minimum wage increases should be moderate until minimum wage differentials with the National Capital Region become more aligned with productivity differentials. The National Wages and Productivity Commission (NWPC) – which formulates guidelines for minimum wages and can review regional minimum wage levels – could play a critical role in this respect. Establishing an independent consultative body consisting of academic researchers to provide input for NWPC guidelines and reviews could complement ongoing capacity-building initiatives for Tripartite Board Members and ensure the key trade-offs are taken into account. This approach has been adopted by several OECD countries, including France and the United Kingdom.
Minimum wage-setting reforms could be complemented by stronger and smarter compliance mechanisms. Stronger coordination between the Department of Labour and Employment, the National Labour Relations Committee, and the Social Security System is essential to improve enforcement and close gaps in worker protection. A free, confidential hotline or online portal could provide guidance to employers, workers, and their representatives on wage rules, employment rights, and workplace disputes, drawing on experience from Germany and the United Kingdom. Once operational, a nationwide awareness campaign could promote compliance and publicise available support tools, as done in Costa Rica (Gindling et al., 2014).
Reforming employment protection legislation
Stringent employment protection legislation, including rules for hiring and dismissals, can weaken incentives for formal employment. Employers may prefer to hire workers informally or on non-regular contracts if dismissal costs on regular formal contracts are high. Key components of dismissal costs are the length of notice periods and the amount of severance pay. In the Philippines, the degree of employment protection depends on the cause for dismissal. The law distinguishes between just causes, such as misconduct or underperformance of the employee, and authorised causes related to the underperformance of the business, such as redundancy or business retrenchment. In the case of dismissals for just cause, employers need to observe due process, but there is no notice period nor severance pay. When the termination is for authorised cause, employers must observe a 30-day notice period and employees are entitled to severance pay equivalent to one month’s pay for every year of service. This formula, which substantially raises the risks of employers in the case of business difficulties, is similar to that in other emerging market economies without fully developed unemployment insurance systems (World Bank, 2023).
Although severance pay and notice periods are similar to other emerging market economies, employer surveys nonetheless suggest hiring and dismissal rules are a significant barrier to doing business in the formal sector. A comparatively large share of respondents indicates that barriers to the hiring and dismissal of workers restrict the availability of talent (Figure 3.6). Many wage and salary workers are hired informally or repeatedly on temporary contracts and through temporary work agencies (so called end-of-contract or “endo” hiring) rather than regular employment contracts, despite being illegal according to the labour code. This effectively allows employers to avoid high costs of compliance with employment protection laws and the risk of litigation in case a dismissal is ruled as unlawful by the courts, which can be particularly damaging to businesses. Dismissals for authorised cause require detailed documentation to be submitted to the Department of Labour, including on substantial business losses, the necessity of retrenchment and exhaustion of other measures to avoid retrenchment. Moreover, in case of an adverse ruling by the courts, businesses are exposed to compensation payments, legal fees, as well as reinstatement and backpay, which creates large uncertainty about separation costs for employers.
Share of respondents who agree that more flexibility in employment protection would raise the availability of talent
Source: World Economic Forum (2025).
From the perspective of economic efficiency and worker protection, it would be preferable to set employment protection at more market-compatible levels. This would improve incentives for employers to employ workers on formal contracts, providing some job tenure protection to workers who previously do not benefit from such protection at all. A key issue is to reduce costs related to compliance and the risk of litigation for dismissals for authorised cause. A first step to achieve this would be to waive the requirement to notify the Department of Labour for individual dismissals for authorised cause. Only collective dismissals above a minimum threshold should be required to submit documentation to the Department of Labour.
Legal certainty for employers could be enhanced by restricting reinstatement requirements and backpay to specific cases – such as discrimination or specific protected categories of workers – and compensation payments in case of adverse court rulings should be capped. The Italian Jobs Act of 2015, for instance, capped compensation for unlawful dismissal (Box 3.3). Lowering employer liability should be carefully designed to encourage formal hiring while preserving adequate protection against unfair dismissal. Finally, the authorities could further promote out-of-court mediation. The Single-Entry-Approach (SEnA) programme and improved access to dispute resolution mechanisms, including through the digitalisation of services, are welcome attempts to enhance the role of mediation but remain relatively limited in scope. One option would be to allow the employer to offer compensation to the dismissed employee. The permissible upper limit for compensation could be set at the compensation cap for adverse court rulings, which would have the advantage of legal certainty for the employer while avoiding lengthy and potentially costly court proceedings.
Italy’s Jobs Act of 2015 reformed the dismissal framework for open-ended contracts, simplifying proceedings and limiting employer liability. It established fixed caps on indemnity payments in cases of unjustified dismissal. For unjustified dismissals for objective reasons, employees receive two months’ salary per year of service, with a minimum of four and a maximum of twenty-four months. Unjustified dismissals for subjective reasons – misconduct or disciplinary-related -- may trigger reinstatement, with employers’ backpay capped at twelve months’ salary, plus mandatory contributions These changes effectively limit financial exposure for businesses, replacing open-ended indemnities with predictable, bounded compensatory obligations.
A further key measure was the promotion of out-of-court settlements (“conciliazione incentivata”), encouraging amicable dispute resolution by offering tax-favourable lump‑sum payments to employees, capped at 18 months of salary. By reshaping incentives to favour settlement, the mechanism supports labour market flexibility and dispute efficiency, aligning with broader active labour market policy objectives. Employers benefit from capped financial exposure, while employees retain eligibility for unemployment benefits and receive net compensation without tax or social security deductions. Through these measures, the Jobs Act contributes to a culture of negotiated resolution, alleviating administrative overload and raising predictability in employer–worker relations. This also simplifies legal procedures and reduces the caseload of formal litigation.
Together, these reforms limit backpay liability, cap compensation, and incentivise negotiated solutions, thereby balancing labour market flexibility with worker protection.
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