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Group 5
Rogelio II B. Largo​ ​ ​ ​ ​ ​ Marco Luis C. Dumlao
Adriane Zen Y. Tiangco​ ​ ​ ​ ​ ​ Vinzen Josh L. Borja
Kean Constantine B. Fonghe​ ​ ​ ​ ​ Johan Sebastian C. Ricalde
​ ​ ​ ​ ​ ​ ​ ​ John Paul G. Guevarra
ECON 185.65i Group Paper

​
Part I

Read Bruce E. Kaufman’s "Economic Analysis of Labor Markets and Labor Law: An
Institutional/Industrial Relations Perspective" in the Research Handbook on Economics of Labor
and Employment Law (2012). Answer the following questions (question and answer form):

1. Distinguish neoclassical economics (NE) and institutional economics/industrial relations

(IEIR). Identify the fundamental or foundational similarities and differences between the two
schools of economic thought.

Neoclassical Economics (NE) revolves around market efficiency and rational

decision-making. It relies on a few key assumptions. One assumption is that firms and
individuals act rationally, with both maximizing profit and utility, respectively. Another is that
NE views labor and individuals as a factor of production, where workers' wages are based
solely on their output or marginal productivity. NE also assumes that any type of
unemployment is only temporary and will self-correct over time. Additionally, NE asserts that
markets are self-regulating and self-sufficient, meaning they adjust without the need for
government intervention. NE identifies government intervention as a factor that generally
distorts efficiency. Within the Second Law and Economics Movement (SL&EM), government
intervention is only valid when there is a presence of market failure and should occur before
market activity, including hiring. Examples of these pre-market regulations include ante lump
sum taxes and payments. These regulations ensure that the market can adjust without
externalities affecting the natural demand and supply of labor (Overfeldt 2007; Freedman
2008; Medema 2010, cited in Kaufman 2011).

Institutional Economics and Industrial Relations (IEIR) has a completely different,

socially embedded view on markets compared to Neoclassical Economics (NE). While NE
views markets as self-regulating, IEIR argues that markets and economies do not function
purely competitively and efficiently. Instead, they are significantly influenced by societal
norms, historical backgrounds, and institutional frameworks that shape and impact the market.
Kaufman (2011) identifies that, under IEIR, both buyers and sellers are “embedded in a
personal, long-term, and socially interdependent relationship where many things besides price
mediate and coordinate the exchange” (Dunlop 1994; Befort and Budd 2009, p. 40, cited in
Kaufman 2011). As such, IEIR identifies endemic power imbalances in the market.
Employers, positioned at the top, hold significantly more influence than individual workers,
creating self-reinforcing distortions, especially in unregulated markets.

The primary distinction between these two schools of thought is that IEIR suggests
government intervention is needed at all stages of employment. This includes setting labor
standards before hiring, supporting union work to ensure fair conditions and benefits during
employment, and providing unemployment benefits after employment.

Despite the glaring differences between NE and IEIR, they share some similarities,
particularly in acknowledging the central role of the employer-employee relationship in
shaping market operations. While NE is more skeptical of government intervention, it still
recognizes that some form of intervention is necessary to correct economic disparities without
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distorting natural market mechanisms. For this reason, interventions such as taxation and
subsidies are considered valid under NE, as they take place before market transactions. IEIR,
on the other hand, focuses on regulations designed to address economic inequalities rather
than controlling prices or the actual market (Whinston and Green 1995, cited by Kaufman
2011).

2. Using your answers in number 1, identify the advantages and disadvantages of using NE.

The primary benefit of using Neoclassical Economics is that it provides a stronger

and more precise framework for predicting market behavior and economic outcomes. Because
relationships and assumptions are held as dogmatic in NE, economists operate on clear and
time-tested theoretical models to maximize resource allocation and profits, especially in
relation to labor. This means that under an NE school of thought, and assuming its
assumptions hold true, firms and governments may be better off as the market is optimized for
maximum growth through minimal government intervention. This leads to fewer instances of
unemployment and higher economic and labor outcomes.

Another advantage of Neoclassical Economics is that it necessitates minimal

government intervention, insulating the market and firms from potential government
bureaucracy and corruption. There are fewer bureaucratic hurdles for firms, lower taxes, and
fewer policy interventions related to workers and wages. This makes managing labor much
simpler for firms, allowing them to treat it as any other commodity. NE enables businesses to
freely maximize profit and drive constant innovation in industries to remain competitive, with
minimal consideration for anything beyond economic efficiency. This is because both sellers
and buyers act out of self-interest, and competition allows price adjustments to occur
naturally, moving the market toward full employment equilibrium (Kates 1998, cited in
Kaufman 2011). NE would thrive if the world today were focused purely on innovation and
economic efficiency. However, as Kaufman explains, this is not the case, leading to the
disadvantages of NE.

The primary disadvantage of NE is that it operates on oversimplified assumptions

about the economy. The assumption of a perfectly competitive labor market is a fundamental
limitation of NE, as this rarely exists in reality (FL&EM Group, cited in Kaufman 2011). NE
assumes that both firms and individuals are on equal footing, behave perfectly rationally, and
possess all the necessary information to make rational choices without information
asymmetries. However, in reality, firms have more power in deciding wages and labor
conditions. This imbalance can lead to unfair treatment of workers and the disregard of their
basic human rights.

NE also assumes that the market self-corrects over time. However, this assumption
does not hold in an economy where monopolies and wealthy individuals shape the market,
creating disparities. NE favors minimal government intervention, arguing that regulations
cause imbalances and disrupt the natural flow of the market, leading to inefficiencies.
However, government intervention is sometimes necessary to correct market failures and
protect workers' welfare. Because of this, labor unions and crucial interventions such as
minimum wages, safety regulations, and other worker protections are not readily present
under NE. This absence leads to mistreatment and exploitation of workers in the long run.
This is not to say NE, as a school of thought, has a wrong approach. As Solow states, by itself
as a consideration it is merely incomplete because it considers only supply and demand forces
(Solow 1990: 22, cited in Kaufman 2011).

3. Using your answers in number 1, identify the advantages and disadvantages of using IEIR.

Institutional Economics/Industrial Relations (IEIR) acknowledges that:

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(1) labor markets are inherently imperfect and that the assumptions of NE about perfect
competition may not always be true;
(2) that labor itself primarily is something that’s inalienable from the human being and thus
every worker must be treated with respect to their basic rights and dignity rather than as mere
commodities, and;
(3) that it is necessary to take into account broader ethical, social, and justice considerations
such as of workplace power disparities and social costs rather than just economic efficiency
when making economic and policy-making decisions;

IEIR poses several important economic and social advantages over NE. Unlike NE –
which assumes markets naturally lead to economic outcomes – IEIR acknowledges structural
power imbalances and informational asymmetries that often result in unjust working
conditions, necessitating the importance of unions and pro-labor policies to protect the
welfare of workers (Belman and Belzer 1997; Block, Roberts, and Clark 2003; Arthurs 2006;
Traynor and Dau-Schmidt 2009; Estlund 2010, cited from Kaufman 2011). Under this school
of thought, firms and governments must consider it a priority not just to maximize economic
efficiency but also for workers to be treated fairly through proper negotiation between unions
and firms and with proper laws by the government. With Kaufman stating that the goal of
labor law is not just to maximize productivity, but to ensure justice for the workers is also
prioritized. This allows the economy to maintain a stable social order, which leads to a more
balanced economy (Adam 1897, as cited in Kaufman 2011). More than protecting workers
already in employment, IEIR also acknowledges discrimination between certain social classes
such as gender or race and allows government interventions throughout the market such as
anti-discrimination laws to protect the marginalized and ensure an equalized playing field
even before laborers enter their jobs.

IEIR however over-relies on government intervention and institutional reforms which

in itself, are heavily dependent on the quality of institutions within a certain country or
jurisdiction. More often than not, the quality of institutions shape the quality of the execution
of reforms, and poor institutions in Global South countries for instance may still result in the
same unfair treatment of workers via corruption, exploitation, and patronage entrenched
within the system. Government regulations are victims to bureaucracy and red-tape as well,
resulting in slow responses that lead to even more market inefficiencies. Reliance on laws and
policies to be created can also create rigid regulations for firms, increasing friction or
uncertainty in the hiring process making it harder and more taxing for firms and workers to
enter into labor relations. Not only that, but due to the more liberated approach to government
interventions, and a less neoclassical view of economics, IEIR policies may disregard the
potential for deadweight loss and inefficiencies created by policies such as minimum wages
and higher taxes for instance, further hurting the market and potentially causing collateral
damage in the form of increased unemployment or inflation.

4. Briefly, give concrete 2-3 examples of how using NE and IEIR in understanding labor
regulation/labor law might result to different outcomes/analyses

// Professor’s Comment: Examples given were not responsive to the question, because a labor
law/labor regulation was not expressly identified.. The question asks a labor regulation/labor law to
be identified, and then show how NE and IEIR differ in opinion with respect to such labor
regulation. //

One example of how NE and IEIR differ in analyzing labor law is job security in the
market. From an NE perspective, job security is seen as secondary to market efficiency. Firms
freely dismiss less productive workers during periods of economic downturn, quickly
adjusting their workforce to meet market demands and maximize profitability. With this in
mind, firms are incentivized to fire workers or individuals who are less productive and replace
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them as necessary to adjust to the free market. NE views labor strictly as a factor of
production, thus workers providing labor should be paid “no higher minimum than the market
allows” (Budd and Scoville 2005; Gross and Compa 2009, p 35-36, as cited in Kaufman
2011). This is how firms can maximize profit and optimize for efficiency, however, this
means that workers have more precious employment conditions and less job security in the
process.

Conversely, IEIR emphasizes the inalienable human aspect of labor, supporting

worker protections and promoting protective measures like paid leave, severance packages, or
advance notices of termination requirements. IEIR identifies the role of labor regulations in
general to create stability for workers and prevent workplace and market disruptions,
ultimately concluding job security is broadly economically and socially beneficial. IEIR
encourages governments to actively implement protective policies to forward both effectively
and preemptively the interests of workers, providing them as well with safety nets to fall onto
should they lose their jobs.

Another example is automation and technological displacement in the market. From

an NE perspective, automation is a net positive for the economy, as it reduces costs for
businesses and allows firms to be more efficient and productive without having to hire more
workers. Despite the implications of an increase in unemployment in the market, NE believes
it is natural for businesses to opt for automation insofar as it allows them to become
competitive, provide better and cheaper products and services, and create greater value in the
economy. Notably, NE views workers solely on their role as a factor of production and their
marginal productivity; NE additionally assumes that displaced employees will adapt new
skills to be able to be competitive and stay employed. However, realistically, transition in
labor roles for many workers is often difficult and time-consuming, leaving them in states of
significant financial and social distress to the benefit of firms that immediately benefit from
cost-saving.

From an IEIR perspective, although automation is not immediately negative, it

recognizes the considerable need for protection for workers that mitigate its negative impacts
on workers. In this case, government intervention is needed, either to create laws or policies
to protect these workers, keep their jobs, give financial support to the unemployed or even try
to solve the problem at the root; giving workers skills that are harder to replace by machines.
Countries such as Denmark are applying this to their workforce, implementing reskilling
programs that are funded by the government in order to support workers.

Part II

Read the Supreme Court decision of Flight Attendants and Stewards Association of the
Philippines (FASAP) v. Philippine Airlines, Inc. (PAL), G.R. No. 178083, Decision (July 22,
2008); Resolution (Oct. 2, 2009); and Resolution (Mar. 13, 2018) on Unions and Collective
Bargaining

Watch Cathy Garcia-Molina’s Hello, Love, Goodbye, a 2019 Star Cinema film featuring the struggles
of Joy (Kathryn Bernardo), Ethan (Alden Richards), and other Overseas Filipino Workers in Hong
Kong on Overseas Employment. Answer the following questions (question and answer form) for
each case study:
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I.​ Flight Attendants and Stewards Association of the Philippines (FASAP) v. Philippine
Airlines, Inc. (PAL)

1. Identify the labor regulation/s present. Be as specific as possible. (Focus on those relevant to
the topics indicated.)

// Professor’s Comment: How about labor regulations related to the identified topic of Unions
and Collective Bargaining? //

The case of the Flight Attendants and Stewards Association of the Philippines
(FASAP) v. Philippine Airlines, Inc. (PAL) centers around the retrenchment of 1423 flight
attendants in 1998. The case involved multiple key labor regulations that are under the 1987
Constitution of the Philippines, the Collective Bargaining Agreement (CBA) agreed upon by
both FASAP and PAL, the corporate rehabilitation laws under Presidential Decree No. 902-A,
and the Philippine Labor Code during this time.

Article 283 of the Labor Code, now renumbered as Article 298, addresses the legal
requirements for a company to engage in retrenchment due to financial losses. The provision
states that for a company to terminate their workers as part of a valid retrenchment, it must be
done with the following elements present: 1) the retrenchment is reasonably necessary and
likely to prevent businesses losses that are substantial, serious and real or only if expected
reasonably by the employer, 2) the employer serves a written notice to employee/s concerned
and the Department of Labor and Employment (DOLE) at least one month before the
termination occurs, 3) the employer pays the retrenched employee separation pay in an
amount prescribed by the Labor Code, 4) the employee exercises its prerogative to retrench in
good faith, and 5) the employer uses fair and reasonable criteria in ascertaining who would be
retrenched or retained (Lambert Pawnbrokers v. Binamira, G.R. No. 170464, 2006). With this
provision in mind, FASAP argues that PAL failed to meet these elements in a variety of ways,
such as PAL not submitting audited financial statements before the labor arbiter, rehiring
probationary employees right after the dismissal of senior flight attendants, and ultimately
failing to prove that retrenchment was a last resort. PAL argued that the company was going
under corporate rehabilitation, meaning that their retrenchment was valid insofar as they were
exempted from normal financial reporting requirements and that such retrenchment was
necessary as part of a strategic downsizing program necessary for the benefit of the company.

The Collective Bargaining Agreement between PAL and FASAP was also cited, more
specifically Article XIII. This article outlines the criteria of how PAL is supposed to conduct
retrenchment and the performance appraisal system. FASAP argued that PAL did not follow
the provisions of the CBA, which mandates them to consider seniority as a key factor, along
with performance, and professionalism. Additionally, FASAP contended that PAL violated the
CBA by only using the 1997 performance ratings as the sole basis of retrenchment, as well as
also not consulting with the union in regards to the retrenchment which is required under
Section 30 of the CBA. PAL, however, argues that the CBA states that the company is only
required to “meet and consult” with FASAP regarding the retrenchment, meaning that they do
not need to come to an agreement with FASAP nor secure their consent before implementing
the retrenchment program. PAL contended that the company based significantly their
retrenchment on the operational needs of the company such as merit work, attendance and
check rides.

Another critical labor regulation present was Article 248 of the Labor Code, which
prohibits unfair labor practices (ULP), including union discrimination, which FASAP alleged
that the retrenchment program targeted. With 10 out of 12 FASAP officers being dismissed or
demoted, FASAP argued that PAL used this as a tool to weaken union representation, which
would constitute illegal dismissal targeting union activity.
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Additionally, the case also involves the labor law concern of quitclaims and waivers,
which are governed by jurisprudence such as EDI Staffbuilders International, Inc. v. NLRC
(1999). Quitclaims are regarded as disfavorable because, within Philippine labor law, they are
normally indicators of, or are made in, a state of coercion or economic duress on behalf of
employees. Previously, the quitclaims by retrenched employees were found to be illegal by
the Supreme Court.

PAL also cited Presidential Decree No. 902-A, more specifically, Section 6(c) and (d)
which governs corporate rehabilitation and receivership, in order to support their actions of
retrenchment of their workers. PAL claimed that the retrenchment was justified as they were
under corporate rehabilitation, and as such, this was part of the company restructuring its
business to combat their significant financial troubles. FASAP countered this by arguing that
the company did not incur actual financial losses and that retrenchment was not necessary, as
the company quickly hired back employees after the dismissal of senior flight attendants.

2. Using NE, how can the existence of such identified labor regulations be justified? Explain.

While it is true that neoclassical economics (NE) leans towards assuming the
efficiency of labor markets and the necessity of non-intervention, the labor regulations named
above can be justified both within the framework of the Second Law and Economics
Movement (SL&EM), which is rooted in Coasian bargaining and neoclassical price theory.
Under Neoclassical Economics, labor regulations (such as those mandating collective
bargaining or restrictive layoffs) are justified only as remedies for clear market failures as
understood within SL&EM. The default presumption is that freely functioning labor markets
and voluntary contracts lead to efficient outcomes, so any legal intervention (e.g. requiring
‘just cause’ for termination or special union rights) must be structured such that they correct
some disruptions and distortions in the market (Kaufman, 2011). Given this, we can justify
the labor regulations in the following ways.

Article 238, or presently 298, of the Labor Code (Retrenchment)

NE justifies the provisions on retrenchment through transaction-cost economics and

the Coase Theorem (Kaufman, 2011). Normally, employees and firms are capable of
negotiating appropriately their retention or severance such that both maximally benefit under
Coasean bargaining. Nevertheless, it is acknowledged that asymmetric information of parties
and moral hazard exists which can significantly distort market processes such as retrenchment
– as such, the presence of labor law is required to prevent bad faith behaviors (Kaufman,
2011). Article 298 requires retrenchment is done in good faith, as a last resort, and are
justified by the presence of legitimate financial concerns and records, proving such actions are
taken with consideration for the broad economic concerns of the company and not out of
misallocation, arbitrary decision-making, or opportunism within the internal structure. This
aligns as well the concept of Pareto efficiency, lessening inefficiencies in human capital
allocation.

Article 248 of the Labor Code (Unfair Labor Practices)

Monopsony power is one of the central concerns of neoclassical economics, which is

present when employers have a disproportionate extent of leverage due to frictions in the
labor market. If firms, such as PAL in this case, can retaliate and forcibly stop union activity
without legal consequence, this ultimately may suppress wages below a competitive
equilibrium, and as such this leads to significant labor market inefficiencies (Kaufman, 2011).
Thus, one could justify that Article 248’s prohibition in cases of union
discrimination/coercion/interference corrects against extreme abuses of monopsony power
which would create such suboptimal employment outcomes. Nevertheless, it is worth stating
that NE’s position on allowing ULP protections is highly skeptical, as NE as Kaufman (2011)
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notes also recognizes that labor unions – in ostensibly competitive markets – too often lead to
inefficiencies such as excessive bargaining costs or reduced managerial discretion in
employment decisions.

The Collective Bargaining Agreement (CBA)

Notably, CBAs within neoclassical economics are considered as an institutional

mechanism that, at its best, reduce transaction costs and enhance employment stability in
markets where contracts are often incomplete (Kaufman, 2011). Additionally, factoring in that
individual bargaining is far more likely to be subject to inefficiencies, such as information
asymmetry and enforcement difficulties, opens the consideration of CBAs, like that between
FASAP and PAL, as a “second-best” institutional mechanism for employees and employers to
negotiate properly and in a structured manager the terms of employment. Despite this, NE
recognizes that CBA provisions should not introduce rigidities which fundamentally prevents
an optimal labor allocation (Presidential Decree No. 442, 1974). In the case FASAP v. PAL,
NE would argue that the focus on seniority as a key decision factor in retrenchment processes
is itself inefficient, as it sidelines other considerations such as individual worker productivity,
thus leading to labor misallocation (Kaufman, 2011).

Presidential Decree No. 902-A (Corporate Rehabilitation)

The theory of dynamic efficiency, as espoused by NE, serves as a justification for the
presence of corporate rehabilitation laws and labor regulation (Kaufman, 2011). Firms
experiencing financial distress, given Coase Theorem, should be enabled to and are
empowered to renegotiate creditor and employee contracts (Presidential Decree No. 902-A,
1976). Despite this, there remains problems in renegotiation, such as collective action
problems, information asymmetry and high transaction cost – this necessitates PD 902-A as a
legal framework for such restructuring to occur (Kaufman, 2011). It is worth mentioning,
however, that NE is significantly against the use of mechanisms such as retrenchment to
unnecessarily and suboptimally distort the workforce, arbitrage on labor costs, or cause
operational inefficiencies.

3. Using NE, what are the economic implications of such identified labor regulation/s?

The Neoclassical Economics (NE) perspective emphasizes that such regulations or

labor laws like (1) retrenchment, (2) those against unfair labor practices, and (3) corporate
rehabilitation, if too stringent, can impose economic costs by restricting business flexibility.
market efficiency, and distorting economic results (Kaufman, 2011).

Retrenchment is a crucial issue in the FASAP v. PAL case. Before conducting

layoffs, companies are required by Article 298 of the Labor Code to demonstrate financial
difficulties. According to Kaufman (2011), NE detractors frequently see these rules as
restricting since they impede businesses' ability to freely modify their workforces in response
to shifts in the economy. In this instance, it may be argued that retrenchment laws make it
more difficult for PAL to react swiftly to a decline in the aviation sector. Delays caused by the
need for firms to show financial difficulty, and sometimes go through drawn-out legal
procedures make it more difficult to make effective labor market reforms, particularly during
recessions. Moreover, in the PAL case, requiring the airline to reinstate 1,400 attendants with
back wages (as the 2008 decision ordered) could be seen as economically perilous –
effectively a huge financial burden that might discourage business investment or even
bankrupt the firm. Neoclassical economists would worry that such outcomes signal to firms
that adjusting employment during downturns is prohibitively costly, potentially leading to
lower hiring in the first place or resort to automation/outsourcing in the long run. ​
​
​ According to Kaufman, NE theory highlights that in order for businesses to thrive in
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cutthroat markets, labor market flexibility, including the capacity to lower labor expenses
during challenging times is crucial. Because they force businesses to follow strict recruiting
and firing practices that aren't appropriate for the fast-paced market, rules like retrenchment
procedures may result in inefficiency. These limitations may make it more difficult for PAL to
adapt to shifting demand trends, which would hinder its capacity to thrive.

In relation to unfair labor practices, the FASAP v. PAL case (G.R. No. 178083, July
22, 2008) also calls into question whether laws safeguarding union activity restrict employers'
freedom to engage in free negotiations. According to Kaufman (2011), NE contends that by
restricting businesses' ability to negotiate wages and benefits, labor rules that forbid unfair
labor practices might skew market outcomes. If confirmed, PAL's purported discrimination
against union members serves as an illustration of how unfair labor practice laws aim to level
the playing field. From a NE perspective, these laws can be viewed as impeding the best
possible labor talks since they might hinder employer tactics or make it more difficult for
employers to manage their employees, particularly if union activity gains undue clout.
Furthermore, this perspective holds that while basic protections (against fraud, for safety, etc.)
are important, excessive labor intervention can produce inefficient allocations that may not be
to the firm’s or workers’ best intentions – for example, keeping too many workers in a
struggling company (hurting productivity) or raising industry costs (leading to higher prices
for consumers or less competitive firms).

Corporate rehabilitation under Presidential Decree No. 902-A is another rule that the
NE may protest against. Kaufman (2011) discusses how these policies can reduce the
incentives for businesses to undergo the necessary cost-cutting or restructuring changes to
become more profitable. Through a NE lens, expecting government involvement or bailouts
can delay necessary process adjustments in the market and prolong the misalignments that
caused the financial problems of the company in question. This may diminish the overall
efficiency of the market in the PAL case by insulating the firm from the consequences of
managerial incompetence or financial mistakes.

4. Using IEIR, how can the existence of such identified labor regulation/s be justified? Explain.

The FASAP v. PAL case (G.R. No. 178083, July 22, 2008), when evaluated through
the lens of Institutional Economics/Industrial Relations (IEIR), demonstrates that labor laws
can and must serve as a guarantee against potential exploitation of employees and promote
fairness in labor relations, not least in industries where workers are vulnerable to power
imbalances within corporations. Rather than assuming a level playing field, the IEIR view
starts from the premise that labor markets such as the one in the case are inherently
characterized by unequal bargaining power and human considerations that pure market theory
overlooks.

For IEIR, the rule of retirement which states under Article 298 of the Labor Code is
a crucial protection to prevent workers from being wrongly dismissed in times of hardship.
From an IEIR perspective, Kaufman (2012) argued that labor standards like retrenchment
laws prevent companies from doing things like force-cut staff in the pursuit of profit at the
cost of employees' source of livelihood. In the case of PAL, its financial hardship and the need
for consultations between employer and workers and their unions, the rule ensures that
workers are not unfairly affected by separation from their jobs. This protection is particularly
important in fields like aviation where workers may have unique skills and face significant
challenges finding new work after being laid off.

According to IEIR theory, this regulation is necessary to ensure overall social stability
and fairness in the labor market. It is noted that this type of negotiation is often imbalanced,
with employers holding significantly more negotiating power. By imposing limits on
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retrenchment, labor laws foster an equal workplace by reducing job insecurity and enhancing
social justice, which makes employees immune to shocks of sudden or unjust dismissal.

Such restrictions also serve to address power imbalances between employers and
employees, therefore promoting a fairer labor market regarding unfair labor practices
(Kaufman, 2012). The allegations of PAL discriminating against members of a union, if true,
reinforce the need for laws that forbid employers from taking adverse actions against
employees who engage in collective bargaining, or who participate in union-related activities.
The IEIR denies that these protections ensure that employees have a right to bargain freely,
and advocate for their rights without the fear of some punishment or dismissal from their jobs.
According to Kaufman (2012), these rules are essential for preserving a reasonable and fair
system of industrial relations because they add legitimacy to unions and encourage working
action between employers and employees.

For FASAP v. PAL, an employees' rights participation in union activities defense

guarantees that PAL will not erode workers' bargaining power by retaliation. This, according
to IEIR, is imperative to protecting workers' rights and protecting rights within labor relations
for the long term.

IEIR sees corporate rehabilitation as a key policy for mitigating the broader social
impacts of firm collapse. As Kaufman (2012) noted, policies that allow failing firms to
rehabilitate themselves rather than being liquidated help preserve employment and reduce
social costs. In the FASAP v. PAL case (G.R. No. 178083, July 22, 2008), PAL is again open
to a type of bankruptcy alternative with sustenance in employment under Presidential Decree
No. 902-A. IEIR argues that this approach is a way to balance the social obligation to protect
communities and employees from the harms of corporate collapse with the need for economic
efficiency.

This is a law that is designed to stem mass unemployment as it allows businesses time
to recover without bleeding people dry, an important consideration for industries such as
aviation where too many job losses can take down a country. Such measures are critical for
reinforcing the long-term health of the labor market because they ensure workers are not left
behind when businesses encounter short-term financial hardship (Kaufman, 2012).

5. Using IEIR, what are the economic implications of such identified labor regulation/s?

From an Institutional Economics and Industrial Relations (IEIR) perspective, labor

regulation has proven imperative in maintaining fair employment practices, protecting worker
rights, and ensuring economic stability. Retrenchment laws have served as a safeguard for
employees over the years to defend them from the different corporate decisions that could
negatively affect them and the case of FASAP v. PAL (2018) is a perfect example of this. In
the case over 1,400 flight attendants and stewards were affected the Supreme court ruled that
Philippine Airlines (PAL) failed to give appropriate proof and justify the retrenchment
program. The Airline failed to show and prove the financial distress of employees through
audited financial statements. This is a clear demonstration on how labor laws prevent
companies from using economic events specifically down turns to justify mass layoffs.

From an IEIR perspective, labor regulations are not just legal restrictions, instead they
are necessary to correct power imbalances in the labor market. Employers, particularly large
corporations, often hold monopoly power, meaning they can dictate wages and employment
conditions due to limited alternative job opportunities for workers. Kaufman explains that
labor laws help counteract this by ensuring procedural fairness and requiring businesses to
provide justifiable reasons for employment termination​. Without these safeguards, employers
could retrench workers arbitrarily, leading to increased job insecurity, economic inequality,
and lower consumer spending.
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The PAL case also underscores the economic importance of job security.
Retrenchment laws ensure that companies explore alternative cost-cutting measures before
terminating employees, such as reducing executive salaries or optimizing operational
efficiency. PAL had options such as offering stock to employees and reducing management
pay, yet it chose to proceed with mass layoffs without fully exhausting other financial
recovery strategies​. This aligns with Kaufman’s argument that labor regulations push
companies to consider long-term economic stability rather than short-term profit motives​.

Additionally, these labor laws promote wage stability, workforce morale, and industry
productivity. When workers feel protected and fairly treated – as through union representation
or job security provisions – they are also likely to be more productive, experience higher
morale, and invest more in firm-specific skills (since they are less afraid of arbitrary
dismissal). Regulations requiring good-faith bargaining and fair termination processes can
reduce the incidence of strikes, sabotage, or high turnover that often accompany exploitative
conditions. In the PAL scenario, having a union (FASAP) and a CBA in place meant there
was an established process to discuss cost-cutting measures and criteria for layoffs, which
potentially averts chaotic or violent confrontations. Economic efficiency, in the institutional
view, is not opposed to worker protection – rather, true efficiency must consider long-term
societal costs. For instance, extremely low wages or sudden mass layoffs might boost a
company’s short-term profit, but they can also lead to industrial conflict or depress consumer
spending (since unemployed or underpaid workers have less purchasing power), harming the
broader economy.

The broader economic impact of labor regulations is also evident in how they
mitigate the negative effects of corporate restructuring on consumer demand and economic
stability. PAL’s retrenchment decision not only affected the dismissed employees but also had
potential ripple effects on consumer spending, service quality in the airline industry, and the
financial well-being of thousands of families. Kaufman stresses that unregulated labor
markets can lead to volatile employment patterns, which in turn create economic uncertainty
and weaken overall financial growth​. The FASAP v. PAL ruling reinforced the importance of
ensuring that labor laws prevent mass job losses without economic justification, thereby
protecting both workers and the broader economy.

6. Suppose such identified labor regulation/s are absent. Do you think the case study’s narrative
would have changed? Explain

Considering how the FASAP vs. PAL case might have unfolded absent the labor
regulations in question highlights their impact. Without union and collective bargaining
protections, FASAP’s ability to challenge PAL’s retrenchment would have been severely
limited. If Philippine law did not require just cause or proof of financial losses for mass
layoffs, PAL could have terminated the 1,400 flight attendants at will, and the employees
would have had no legal recourse to claim reinstatement or backwages. The dispute likely
would never reach the Supreme Court; the airline’s decision would stand as a matter of
managerial discretion. This would set a precedent for other companies to do the same and
would have thus resulted in higher unemployment, weaker worker protections, and an
unstable labor market​in the long run.

Kaufman emphasizes that without labor laws, firms would have unchecked power to
exploit workers, suppress wages, and retrench employees arbitrarily​. In a deregulated labor
market, companies would prioritize cost-cutting over employee welfare, leading to mass
layoffs whenever businesses face financial difficulties, regardless of their actual financial
standing. Such a deregulated scenario might be seen as economically efficient – PAL would
swiftly cut costs to stay afloat without navigating years of litigation and without retrenchment
laws, PAL could have eliminated jobs purely for profit-driven reasons rather than genuine
economic hardship, increasing worker exploitation and weakening the overall labor market​.
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On the other hand, the company could adjust its labor force in a downturn unencumbered by
court scrutiny, potentially improving its chances of survival and saving other jobs. Indeed, in
a purely free-market context, one would expect that if workers anticipate the risk of arbitrary
dismissal, they would factor that into their employment contracts (e.g. demand higher pay to
compensate for lack of job security).

The institutional/IR perspective suggests a darker counterfactual, however. Without

legal protections, the power imbalance in 1998 would tilt entirely to PAL’s favor: the union’s
bargaining power would evaporate, and employees would likely be forced to accept the
retrenchment (and perhaps meager separation pay, if any) without voice. The outcome for the
affected flight attendants would almost certainly have been worse – no reinstatement, no
backwages, and possibly no financial cushion beyond what the employer might voluntarily
give. The absence of union rights could also mean that PAL might not have engaged in any
consultation or fair criteria at all in selecting who lost their jobs. The selection could have
been purely at management’s whim (potentially opening the door to favoritism or targeting of
union activists, with no legal consequences). Economically, while the company’s short-term
costs would be lower, the social and industrial relations costs could be high. History has
shown that when workers are pushed to the wall without legal remedies, they may resort to
strikes, protests, or other disruptive actions. In PAL’s case, if FASAP had no legal avenue, an
aggressive collective action (like a prolonged strike or public campaign) might have ensued,
potentially grounding flights and harming the business anyway. Moreover, without collective
bargaining, labor conditions at PAL might have deteriorated long before the crisis – lower
wages and benefits could have been imposed, which might save costs but would also mean a
less committed workforce and lower living standards for thousands of employees. As
institutional economists note, an economy without unions or labor standards is not necessarily
better off – the purported gains in efficiency can be undermined by resulting inequity and
conflict​.

. In this counterfactual scenario, the 1998 retrenchment would simply have been one
more unilateral employer action, and the notion of “justice” or “fair play” in the workplace
would depend solely on the goodwill of management. The Supreme Court’s role in protecting
workers’ rights (as seen in the actual case) would be nil, since no such rights would exist to
enforce. Ultimately, evaluating this scenario underscores why those labor regulations were
instituted: to balance economic goals with social justice, preventing outcomes where
employees bear all the pain of enterprise failures or downturns. Without them, the scale of
justice in the FASAP-PAL conflict would have tipped decisively toward cost-cutting at the
expense of worker welfare, fundamentally altering both the process and outcome of the
dispute.

a.​ Hello, Love, Goodbye

1.​ Identify the labor regulation/s present. Be as specific as possible. (Focus on those
relevant to the topics indicated.)

//Professor’s Note: How about Philippine labor regulations? //

a.​ In Hello, Love, Goodbye, the story includes a variety of labor regulations that affect
Overseas Filipino workers (OFWs) – the most crucial of which, immediately, is the
Hong Kong Immigration Ordinance (Cap. 115) that have the following regulations
visible in the film:
i.​ Restricted visa conditions: Under sections 7 and 11 of Cap. 115, every
Foreign Domestic Helper’s (FDH) permission to remain in Hong Kong is
reliant on them working exclusively for the specific employer in their
employment contract, referred to as the “condition of stay” (Hong Kong
Immigration Ordinance, 1971).
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ii.​ Breach of condition of stay: Section 41 of Cap. 115 designates any break of
FDH conditions (for instance, the unauthorized side work Joy did such as
working for a bar or selling products on the street) as a criminal offence,
which are subject to fines and potentially up to two years’ imprisonment
(Hong Kong Immigration Ordinance, 1971).
iii.​ Exclusion from permanent residency: Section 2(4)(a)(vi) of Cap. 115
indicates that FDHs are not treated as an “ordinary resident” in Hong Kong,
even despite them spending years or decades there. This automatically
excludes FDHs like Joy from obtaining the seven-year residency requirement
for right of abode in the country (Hong Kong Immigration Ordinance, 1971).
iv.​ Removal and deportation: If an FDH is found to violate their condition of
stay, sections 19 and 20 of Cap. 115 empowers Hong Kong authorities to
issue removal and deportation orders, mandating the worker to leave Hong
Kong immediately (Hong Kong Immigration Ordinance, 1971).

b.​ Additionally, there are other regulations within the Standard Employment Contract
or SEC (ID 407) that FDHs agree to with their employer that are also evident in the
film.
i.​ Single employer and specific duties: The contract stipulates that an FDH
must perform domestic tasks (cleaning, cooking, child or elderly care) for one
named employer and their household in particular only (Hong Kong Labour
Department, 2020).
ii.​ Live-in requirement: FDHs must reside in their employer’s home, and
lodging elsewhere or frequently staying out overnight is typically disallowed
(Hong Kong Labour Department, 2020).
iii.​ Minimum allowable wage (MAW): There is a mandated salary floor for
FDHs within the Standard Employment Contract, but this is relatively much
lower than local living costs, which often spurs many FDHs like Joy to seek
extra income in illegal pursuits (Hong Kong Labour Department, 2020).
iv.​ Two-week rule: Notably, upon contract termination, FDHs are allowed only
14 days to leave Hong Kong or sign a new contract otherwise their stay
beyond is unlawful, which explains Joy’s panic in the initial plan of her
employer to terminate her before she had enough saved for her Canada plans
(Hong Kong Labour Department, 2020).

2.​ Using NE, how can the existence of such identified labor regulation/s be justified?
Explain.

To start, Neoclassical Economics (NE) assumes that labor markets function efficiently under
competitive conditions, such that wage rates and employment outcomes are determined by
supply and demand—a fundamental economic theory (Posner, 2007, as cited in Kaufman,
2011; Boeri & van Ours, 2008, as cited in Kaufman, 2011). From this perspective, labor
regulations, like those depicted in the film Hello, Love, Goodbye, specifically Hong Kong’s
Immigration Ordinance (Cap. 115), can be viewed as NE mechanisms designed to ensure
efficiency in labor allocation and protect firms’ interests within a competitive market (Solow,
1990, as cited in Kaufman, 2011; Medema, 2010, as cited in Kaufman, 2011). Thus, from an
NE perspective, policies such as employer exclusivity, restrictions on side jobs, exclusion
from permanent residency, and penalties of deportation are considered justified (Epstein,
1983, as cited in Kaufman, 2011; Posner, 2007, as cited in Kaufman, 2011).

Restricted Visa Conditions (Section 7 & 11 of Cap. 115) and Single Employer (SEC ID 407)

These regulations, in NE, are justified to the extent that it promotes market efficiency and
lessens transaction costs (Coase, 1937, as cited in Kaufman, 2011; Williamson, 1985, as cited
in Kaufman, 2011). As NE assumes that competitive labor markets lead to optimal
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employment contracts (Solow, 1990, as cited in Kaufman, 2011; Wachter & Wright, 1990, as
cited in Kaufman, 2011), the restricted visa condition (Sections 7 & 11 of the Hong Kong
Immigration Ordinance, Cap. 115) establishes lower hiring and monitoring costs for
employers by preventing FDHs from switching jobs arbitrarily (Coase, 1937, as cited in
Kaufman, 2011). Thus, Kaufman argues that firms or employers would lose profits if they do
not adopt efficient employment structures (Wachter, 2004, as cited in Kaufman, 2011). By
setting a mandatory condition for FDHs to have a single employer under the standard
employment contract (SEC ID 407), the law ensures predictability and stability, which in turn
can reduce search and training costs for employers (Coase, 1937, as cited in Kaufman, 2011).
Thereby binding FDHs like Joy to one employer, the regulation minimizes job-switching
risks, assuring employers can recoup investment in recruitment and training. For example, if
Joy’s employer (Mrs. Chung) invests time and resources to integrate her into their household,
unrestricted mobility could disrupt this arrangement, increasing search and replacement costs
(Williamson, 1985, as cited in Kaufman, 2011). Kaufman notes that the NE aligns with
Coase’s theorem, where “clearly defined rights reduce conflicts, thereby reducing transaction
costs” (Coase, 1960, as cited in Kaufman, 2011). Therefore, the single-employer mandate acts
as a pre-emptive solution to potential market inefficiencies, preserving equilibrium in a
competitive labor market (Posner, 2007, as cited in Kaufman, 2011; Medema, 2010, as cited
in Kaufman, 2011).

Breach of Condition of Stay (Section 41 of Cap. 115): Criminalizing Unauthorized Work

The criminalization of unauthorized work, such as Joy's bartending and street vending, is
rationalized by Neoclassical Economics (NE) theory as a means of addressing the
principal-agent problem and moral hazard (Williamson, 1985, as cited in Kaufman, 2011;
Dow, 1997, as cited in Kaufman, 2011). Kaufman highlights that NE prioritizes "monitoring
cost efficiency" through legal frameworks (Wachter, 2004, as cited in Kaufman, 2011). By
penalizing side jobs, Section 41 deters FDHs from diverting effort away from their primary
employment, ensuring contractual fidelity. NE assumes that rational actors weigh the costs
and benefits of their actions, and the threat of fines or imprisonment increases the cost of
non-compliance, thus aligning worker behavior with employer expectations (Becker, 1976, as
cited in Kaufman, 2011). Kaufman cites Coase’s argument that "penalties act as low-cost
deterrents... reducing employers’ need for intrusive supervision" (Coase, 1960, as cited in
Kaufman, 2011). While strict, this regulation is designed to prevent productivity losses and
maintain efficient resource allocation, reflecting NE’s belief that legal enforcement can
correct skewed information without overregulation (Posner, 2007, as cited in Kaufman, 2011).
However, Kaufman’s institutionalist perspective points out that such penalties exacerbate
power imbalances, with FDHs like Joy facing disproportionate risks compared to
employers—an aspect that NE overlooks in its focus on efficiency (Commons & Andrews,
1916, as cited in Kaufman, 2011; Budd, 2004, as cited in Kaufman, 2011). NE justifies the
regulation as addressing the principal-agent problem: unauthorized side jobs increase
employer uncertainty about productivity and reliability, potentially undermining overall
productivity (Kaufman, 2011). By criminalizing breaches, the regulation reduces monitoring
costs and clarifies employment contracts, thus preventing activities that could harm
contractual performance and maintaining efficiency in labor resource allocation (Coase, 1937,
as cited in Kaufman, 2011). This reasoning aligns with Coase’s theorem by reducing
transaction and monitoring costs and maintaining a clear contractual relationship, ultimately
promoting market efficiency (Coase, 1960, as cited in Kaufman, 2011).

Exclusion from Permanent Residency (Section 2(4)(a)(vi), Cap. 115)

NE would justify exclusion from permanent residency by emphasizing the importance of

minimizing labor market distortions and long-term externalities (Posner, 2007, as cited in
Kaufman, 2011; Medema, 2010, as cited in Kaufman, 2011). Kaufman highlights the NE’s
focus on minimizing externalities, arguing that residency rights could manifest into “fiscal
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burdens” by increasing reliance on social services (Boeri & van Ours, 2008, as cited in
Kaufman, 2011). By categorizing FDHs as temporary workers, Hong Kong avoids labor
market saturation, which might depress wages for local workers (a “crowding-out” effect)
(Solow, 1990, as cited in Kaufman, 2011). Thus, NE views FDHs as “flexible inputs” in a
competitive market, where their status ensures that employers can adjust labor supply to
demand fluctuations (Wachter & Wright, 1990, as cited in Kaufman, 2011). For instance,
Joy’s exclusion from residency, despite years of service, exemplifies NE’s prioritization of
efficiency over equity (Pareto Optimality), treating labor as a commodity rather than a human
resource (Arrow & Debreu, 1950s, as cited in Kaufman, 2011; Becker, 1976, as cited in
Kaufman, 2011).

Live-In Requirement (SEC ID 407)

NE rationalizes the live-in rule as a cost-saving measure that reduces employer expenses for
lodging and transportation (Posner, 2007, as cited in Kaufman, 2011). Kaufman notes that
“competition in external labor markets regulates practices inside firms” (Wachter & Wright,
1990, as cited in Kaufman, 2011) By mandating residency, employers avoid paying separate
housing allowances, aligning with NE’s focus on cost minimization (Becker, 1976, as cited in
Kaufman, 2011). For Joy, this means sacrificing personal freedom (e.g., privacy, autonomy)
by living in Mrs. Chung’s cramped spare room, but NE views such trade-offs as inevitable in
competitive markets (Solow, 1990, as cited in Kaufman, 2011). The requirement also ensures
FDHs are available for irregular hours, maximizing labor utility (Lazear, 2000, as cited in
Kaufman, 2011).

Minimum Allowable Wage (MAW) (SEC ID 407)

NE would justify Hong Kong’s Minimum Allowable Wage (MAW) for FDHs as a targeted
intervention to address market failures while preserving competitive efficiency (Posner, 2007,
as cited in Kaufman, 2011; Medema, 2010, as cited in Kaufman, 2011). Kaufman explains
that NE cautiously tolerates wage floors when they approximate competitive outcomes, acting
as a corrective to distortions like employer monopsony power or information asymmetry
(Boeri & van Ours, 2008, as cited in Kaufman, 2011). In sectors dominated by a few
employers, such as domestic work, the MAW counters employers’ ability to suppress wages
below equilibrium levels, ensuring FDHs like Joy receive compensation closer to their
marginal productivity (Solow, 1990, as cited in Kaufman, 2011). By establishing a regulatory
baseline, the MAW mitigates information gaps for migrant workers unfamiliar with local
wage norms, guiding rational actors toward “efficient contracts” (Coase, 1937, as cited in
Kaufman, 2011) that reflect labor’s “shadow price”—the implicit value of work in a
frictionless market (Williamson, 1985, as cited in Kaufman, 2011). NE argues that the MAW
prevents a destructive “race to the bottom” in wages, aligning pay with labor’s opportunity
cost while avoiding efficiency losses from worker exploitation, such as malnutrition or high
turnover (Solow, 1990, as cited in Kaufman, 2011). However, NE insists the MAW must
remain low to preserve employment levels, as raising it further could price FDHs out of jobs,
destabilizing demand in a competitive market (Posner, 2007, as cited in Kaufman, 2011).

3.​ Using NE, what are the economic implications of such identified labor regulation/s?

We can break down the economic implications of such identified labor law regulations from
the perspective of NE in the following sections:

Labor Market Inefficiencies, Wage Distortions, Labor Supply Constraints and

Deadweight Loss

Broadly, we can define labor market inefficiencies as occurrences when restrictions prevent
workers from moving freely to better jobs, leading to wasted potential and a restriction of the
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economic agency. There are many domino effects to these inefficiencies, one of which being
deadweight loss which represents lost economic value due to such inefficiencies. We can liken
this to a skilled worker being forced to stay in a low-paying job because of visa rules, even
when better opportunities exist, which is the same situation Joy finds herself in; remaining
underemployed and dissatisfied with her job in Hong Kong. These inefficiencies can be
attributed specifically to the regulations Restricted Visa Conditions & Employer
Exclusivity (Cap. 115, Sections 7 & 11), Minimum Allowable Wage (MAW) in the
Standard Employment Contract, Live-in Requirement in the Standard Employment
Contract and Exclusion from Permanent Residency (Cap. 115, Section 2(4)(a)(vi)).

We expect a few economic implications under this section. The first is, reduced worker
mobility where we notice that FDHs are restricted to one employer, limiting their ability to
seek higher-paying or better-matching jobs, causing labor market rigidities (Medema, 2010,
as cited in Kaufman, 2011). This is intuitively bad for a couple of reasons, the first being a
misallocation of labor. Since FDHs cannot switch to industries or employers that value their
skills more, the market fails to allocate labor to its most productive use (Posner, 2007, as cited
in Kaufman, 2011). In the movie, Joy graduated from university and her skillset was more set
for a nursing job at a hospital, but due to constraints from her Visa type, she was unable to job
hop from being an FDH to working at a hospital. The second is a more macroeconomic
perspective tackling the concept of deadweight loss. Deadweight loss is the gap between
available labor supply and legal employment opportunities resulting in lost economic value,
as FDHs are prevented from contributing more efficiently to the economy (Kaufman, 2011).
The friction between accurate job matches causes a market inefficiency where an economy
could theoretically resolve the issue between labor supply and demand in varying industries
and reach the appropriate equilibrium. This implies underemployment and dissatisfaction
between certain demographics of the labor force. Finally, this implies reduced market-based
wage adjustments and artificial wage constraints. Since FDHs cannot negotiate wages freely,
the market fails to adjust wages to reflect productivity, leading to either labor shortages or
excess labor supply (Kaufman, 2011). This can be seen in the film where Joy is forced to
make a decision between going home and negotiating with her employer, which due to the
restrictions on her mobility created a power disparity where her employer had
disproportionate power and forced joy to halve her pay just to remain in Hong Kong. Going to
a more theoretical note, If the MAW is set too high, employers may reduce hiring, leading to
higher unemployment among FDHs. If set too low, workers suffer from lower purchasing
power, causing a decline in overall demand in the economy (Kaufman, 2011). In this instance
it appears that the MAW is set to the latter option and is a lot of the driving force behind why
Joy is strapped for money even despite the pay being comparatively better than pay in the
Philippines.

Unemployment & Informal Market Growth

Broadly we can understand that unemployment occurs when workers willing to work cannot
find jobs due to restrictions, while informal market growth refers to workers engaging in
illegal or unregulated employment. This can be seen in cases where strict work permits force
people to take cash-only, off-the-books jobs to survive as evident in various instances in the
film. The inefficiencies brought about by this section can be attributed to Breach of
Condition of Stay & Criminalization of Unauthorized Work (Cap. 115, Section 41) and
Two-Week Rule & Deportation for Contract Termination (Cap. 115, Sections 19 & 20)

In the following sentences, we elaborate several economic implications from this market
distortion. The first can be explained through the concept of job search inefficiency, where
FDHs cannot easily find new employment after contract termination, leading to higher
frictional unemployment (Medema, 2010, as cited in Kaufman, 2011). Had Joy been unable to
negotiate with her employer, she would only have 1 month to find a new employer based on
the movie which if scaled to more and more FDHs would mean more frictional
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unemployment. The second is another well shown example in the movie, an expansion of the
informal economy. Since legal job transitions are difficult, FDHs turn to illegal side jobs,
shifting economic activity to the unregulated shadow economy, which is less productive and
harder to tax (Friedman & Friedman, as cited in Kaufman, 2011). The community of rakets
outsourced and spread by underemployed Filipinos show an expansion of an informal
economy whose income cannot be tracked nor taxed by the Hong Kong government. The
final inefficiency is higher enforcement and compliance costs. Authorities spend resources
monitoring and penalizing unauthorized work, creating bureaucratic inefficiencies (Kaufman,
2011). The government will have to spend less resources on economic expansion, and redirect
this money to less economically efficient areas of investment.

4.​ Using IEIR, how can the existence of such identified labor regulation/s be justified?
Explain.

To introduce IEIR is to juxtapose it to NE, in which it is more critical of exploitative labor

practices implicitly manifested from NE principles—"revolves around different assessments
of the benefits and costs of labor law, unions, and other such measures" (Kaufman, 2011).
IEIR provides a framework to understand regulations like Hong Kong’s Immigration
Ordinance (Cap. 115) and Standard Employment Contract (SEC) for FDHs, which could be
justified as institutional mechanisms to promote stability in labor markets, balance competing
interests, and lay the groundwork for regulatory reform (Commons, 1934, as cited in
Kaufman, 2011).

Restricted Visa Conditions & Single-Employer Mandate (Cap. 115, Sections 7 & 11)

These regulations institutionalize structured employment frameworks, aligning with the

Institutional Economics of Industrial Relations (IEIR) objective of formalizing labor
interactions to mitigate contractual ambiguities and enforce accountability (Commons, 1934,
as cited in Kaufman, 2011). By legally binding foreign domestic helpers (FDHs) to a singular
employer, the policy establishes definitive contractual parameters, obligating employers to
invest in skill development, cultural integration, and sustained reliance on their workforce.
Kaufman (2011) posits that institutions “define the rules of the economic game”, and this
regulatory intervention introduces predictability into otherwise volatile labor markets. For
instance, employers are incentivized to allocate resources toward training workers in
household-specific protocols—such as childcare routines or dietary restrictions—secure in the
knowledge that FDHs cannot unilaterally terminate employment. This mutual stability
reduces transaction costs (Coase, 1937, as cited in Kaufman, 2011): employers avoid the
financial burden of recurrent recruitment, while workers retain occupational security within a
codified role. The single-employer mandate also mitigates adverse market externalities.
Absent regulation, competitive labor markets risk destabilization through employer strategies
to undercut wages or dilute benefits, thereby incentivizing worker mobility and eroding labor
standards (Commons & Andrews, 1916, as cited in Kaufman, 2011). Thus, by restricting
FDHs’ ability to transition between different employers, the law establishes a baseline for
equitable compensation and working conditions, curtailing exploitative practices tied to
transient employment. Over time, this institutional scaffolding may incorporate standardized
mechanisms for dispute resolution or employer evaluation, further embedding procedural
equity into the employer-FDH relationship (Dunlop, 1994, as cited in Kaufman, 2011).

Minimum Allowable Wage (MAW) (SEC ID 407)

The MAW exemplifies IEIR’s principle that wage floors "raise the plane of competitive
action" (Adams, 1897, as cited in Kaufman, 2011), establishing a legal baseline to correct
systemic wage suppression. While the wage is low, it represents an institutional
acknowledgment of workers’ need for basic income security. By quantifying a minimum
standard, the MAW prevents employers from unilaterally lowering wages further, creating a
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base for collective advocacy. For instance, labor unions or advocacy groups can leverage the
MAW as a starting point to negotiate incremental increases tied to productivity or living costs.
Kaufman (2011) notes that labor markets require structured interventions to address inherent
power imbalances. The MAW acts as a distortion-correcting mechanism, countering
employers’ monopsonistic power in sectors like domestic work, where job alternatives are
limited. Thus, as seen implicitly in the film, Joy’s employer cannot legally pay her less than
the MAW, even in a market skewed by labor mobility. This institutional safeguard aligns with
IEIR’s emphasis on formalizing labor relationships to prevent exploitation, as it cements a
legal barrier against unchecked employer-employee exploitation (Budd, 2004, as cited in
Kaufman, 2011).

Live-In Requirement (SEC ID 407)

The live-in rule underscores IEIR’s recognition of employment as a relational and social
institution rather than a purely transactional exchange (Commons, 1934, as cited in Kaufman,
2011). By integrating FDHs into households, the policy fosters proximity that can
theoretically enhance mutual understanding and employer investment in worker well-being.
For instance, employers who share living spaces with FDHs may develop greater empathy for
their needs, leading to informal agreements on rest hours or familial support. Kaufman (2011)
argues that employment relationships are embedded in social contexts, and the live-in
requirement could serve as a platform for codifying norms like privacy protections or shared
responsibilities. Thus, proximity in the theory, could humanize the employer-worker dynamic,
encouraging a more empathetic and informal accommodations. For instance, Mrs. Chung
sharing her home with Joy witnesses her hardships trying to break free from financial
constraints, all whilst being exhausted as a caregiver for her family. That prompted informal
agreements on her rest periods and was able to forgive Joy for forgetting to pick up her child
in school, even if it was such an irredeemable mistake. Thus, Kaufman (2011) notes that
employment is “embedded in social contexts”, and the live-in regulation could institutionalize
norms like reciprocal respect, privacy, boundaries, or collaborative household agreements.
Which align with the IEIR’s vision of workplaces as ecosystems of cooperation (Budd, 2004,
as cited in Kaufman, 2011).

Two-Week Rule & Deportation Policies (SEC ID 407; Cap. 115, Sections 19 & 20)

These rules enforce labor market fluidity and contractual adherence, key tenets of IEIR’s
focus on stability (Dunlop, 1994, as cited in Kaufman, 2011). The two-week rule pressures
employers and workers to resolve disputes efficiently, reducing prolonged uncertainty. For
example, employers are incentivized to address grievances promptly to retain trained workers,
while FDHs are motivated to secure new employment swiftly. Deportation policies
underscore the importance of clear contractual boundaries, ensuring employers uphold their
obligations to avoid sudden labor shortages. While rigid, these regulations provide a
structured framework that could be softened with reforms, such as state-funded job-matching
services or extended transition periods, to reduce worker vulnerability without sacrificing
market stability (Kaufman, 2011). For instance, the two-week rule–which mandates FDHs
like Joy to either secure a new contract or leave Hong Kong within 14 days of
termination–pressures both employers and workers to resolve conflicts efficiently. Hence, the
reason on why Mrs. Chung had to bring the bad news, and fire Joy as soon as possible due to
financial constraints. Thus, compelling Joy to seek a new “job” as soon as possible to avoid
any deportation issues.

Single Employer and Specific Duties (SEC ID 407)

The requirement for Foreign Domestic Helpers (FDHs) to perform explicitly defined
domestic tasks for a single employer aligns with the IEIR framework’s emphasis on structured
labor relations as a mechanism to balance power asymmetries and reduce ambiguity
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(Commons, 1934, as cited in Kaufman, 2011). By giving emphasis on specific duties (e.g.,
childcare, cooking, cleaning), the policy institutionalizes clarity, ensuring both parties operate
within mutually understood boundaries. This specificity minimizes disputes over job
assignments, preventing employers from exploiting workers with unorthodox demands while
ensuring reliable service delivery. Kaufman (2011) argues that such rules “define the
constraints and opportunities” of employment relationships, fostering accountability and trust.
For instance, Joy’s contractual obligation to care for her employer’s children and manage
household chores protects her from being overburdened with tasks like managing a family
business, while the employer gains assurance that core responsibilities will be met. IEIR
views this structured approach as foundational to stabilizing labor markets, reducing
transactional friction, and enabling long-term investment in human capital, such as
employer-funded training for childcare protocols (Dunlop, 1994, as cited in Kaufman, 2011).

Furthermore, the regulation also reflects IEIR’s relational view of work, where said
previously–employment is a social contract built on reciprocity rather than a purely economic
exchange (Budd, 2004, as cited in Kaufman, 2011). By clarifying roles, the SEC ID 407 also
fosters interdependence: employers rely on FDHs for household management, while workers
depend on employers for wages and housing. This mutual reliance, anchored in clear
expectations, cultivates cooperation and reduces mistrust. Kaufman (2011) notes that
institutions “stabilize expectations”, allowing both parties to plan for the future—employers
invest in training, while workers build expertise in their defined roles. Though restrictive, the
specificity of duties creates a scaffold for incremental reforms, such as advocating overtime
pay for tasks beyond contractual hours or health benefits tied to job-specific risks. IEIR
recognizes such policies as malleable structures that, while imperfect, provide a baseline for
evolving labor standards that harmonize efficiency with equity, aligning with Kaufman’s
(2011) vision of labor markets where “efficiency and fairness are mutually reinforcing”.

5.​ Using IEIR, what are the economic implications of such identified labor regulation/s?

Similar to market distortions and inefficiencies as analyzed through the lens of NE, Hong
Kong’s labor regulations for FDHs create a rigid labor market that prioritizes employer
control and cost efficiency but leads to significant economic inefficiencies and social
disparities. We can categorize the economic implications into two major sections: [1] Labor
Market Constraints and Economic Inefficiencies and [2] Institutional Barriers and
Socioeconomic Outcomes. These sections illustrate how restrictive policies limit labor
mobility, distort wages, encourage informal labor markets, and reinforce economic
dependency between sending and receiving countries.

Labor Market Constraints and Economic Inefficiencies

The regulatory structure in Hong Kong creates an inflexible labor market where FDHs
experience limited job mobility, suppressed wages, and a lack of economic agency. These
inefficiencies reduce overall productivity, increase informal employment, and impose
economic costs on both workers and the broader economy. One implication of these
constraints is restricted labor mobility and wage suppression. Several regulations prevent
FDHs from seeking better employment opportunities, effectively locking them into low-wage
jobs. The Restricted Visa Conditions & Employer Exclusivity (Cap. 115, Sections 7 & 11)
mandate that FDHs work exclusively for a single employer, limiting their ability to pursue
higher-paying roles or negotiate for better conditions. Similarly, the Single Employer and
Specific Duties Clause in Standard Employment Contracts prevents workers from seeking
additional income outside their designated domestic tasks. These restrictions create labor
market rigidities, where workers are unable to match their skills with more productive
employment opportunities (Medema, 2010, as cited in Kaufman, 2011). The Minimum
Allowable Wage (MAW) Regulation enforces a wage floor but remains far below the living
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costs in Hong Kong. This leads to artificial wage suppression, where wages fail to adjust
based on productivity, thereby reducing overall purchasing power and economic demand. The
inability to negotiate wages freely further deepens the power imbalance between workers and
employers, as seen in Hello, Love, Goodbye, where Joy’s financial struggles stem from her
restricted earning capacity. Kaufman (2011) highlights that when wage-setting mechanisms
are constrained, workers become trapped in low-income cycles that hinder economic mobility.

Another implication is reduced employment security and productivity. The Live-in

Requirement (SEC ID 407) forces FDHs to reside with their employers, often leading to
unpaid overtime, mental strain, and exhaustion, all of which negatively affect productivity.
Unlike standard employment relationships, FDHs have no physical or temporal separation
between work and rest, which diminishes their well-being and long-term work efficiency
(Dunlop, 1984, as cited in Kaufman, 2011). Additionally, the Two-Week Rule forces FDHs to
either secure new employment within 14 days of contract termination or leave Hong Kong.
This results in frictional unemployment, where workers face extreme difficulty in
transitioning between jobs. Rather than contributing continuously to Hong Kong’s economy,
these workers risk being prematurely displaced, leading to lost labor potential and economic
inefficiencies (Dunlop, 1984, as cited in Kaufman, 2011). The Breach of Condition of Stay
(Cap. 115, Section 41) criminalizes unauthorized work, preventing FDHs from
supplementing their income through alternative employment. This strict enforcement does not
eliminate demand for additional labor; instead, it shifts economic activity into informal
markets, where transactions go unregulated and untaxed. Rather than improving economic
efficiency, these policies reduce the taxable workforce, limit consumer spending power, and
weaken economic dynamism (Dunlop, 1984, as cited in Kaufman, 2011).

Finally we also explore the implication of informal labor market expansion and compliance
costs. When FDHs are barred from legal job transitions, they often turn to unregulated work,
expanding the shadow economy where labor laws do not apply, wages remain unmonitored,
and productivity is not optimized. As seen in the film, workers like Joy engage in
off-the-books employment, participating in Hong Kong’s underground economy. These labor
restrictions also lead to higher enforcement costs for the Hong Kong government. The
Deportation and Removal Orders (Cap. 115, Sections 19 & 20) mandate state resources to
monitor, detain, and deport workers who violate their visa conditions. Instead of channeling
resources toward economic expansion, the government must allocate funds for enforcement,
which provides no direct economic return and creates bureaucratic inefficiencies (Boyer &
Smith, 2001, as cited in Kaufman, 2011).

Institutional Barriers and Socioeconomic Outcomes

Beyond direct labor market inefficiencies, Hong Kong’s labor regulations also create
structural barriers to economic mobility, reinforcing social and financial dependence among
FDHs. These policies perpetuate economic disparities, hinder worker empowerment, and
prevent long-term contributions to the local economy. We can first explore the economic
implication on barriers to economic mobility and social inclusion. One of the most restrictive
policies is the Exclusion from Permanent Residency (Cap. 115, Section 2(4)(a)(vi)), which
prevents FDHs from acquiring the right of abode even after years or decades of service in
Hong Kong. This law ensures that FDHs remain permanently transient, preventing them from
investing in local businesses, acquiring property, or participating in the broader economy.
Without the ability to establish roots, FDHs have no long-term economic security, limiting
their capacity for upward mobility (Cahuc & Zylberberg, 2004, as cited in Kaufman, 2011).
Additionally, the Two-Week Rule accelerates worker displacement by allowing only a brief
window to secure new employment. This rule disproportionately affects low-income migrants
who lack the financial buffer to endure extended job searches, forcing them into vulnerable
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20
situations where they accept exploitative contracts or return home with financial instability
(Freeman & Medoff, 1984, as cited in Kaufman, 2011).

Secondly, we can understand another economic implication as the concept of economic

dependency and power imbalance between sending and receiving countries. Hong Kong’s
policies ensure a continuous supply of low-cost foreign labor while restricting worker
bargaining power. The Restricted Visa Conditions (Cap. 115, Sections 7 & 11) and
Minimum Allowable Wage (MAW) Regulation maintain an economic system where FDHs
cannot demand fair wages or better working conditions. This regulatory structure benefits
Hong Kong by keeping domestic labor costs low but leaves workers in a cycle of economic
dependence, where they must endure harsh conditions to support families abroad (Kaufman,
2011).

Finally, we can also see broader economic and social costs. Hong Kong’s strict labor laws
contribute to an expanding informal economy, weakening overall economic regulation. By
criminalizing side jobs, the government inadvertently reduces its tax base and discourages
skills maximization. Instead of allowing FDHs to contribute to the economy legally, these
policies redirect economic activity to unmonitored sectors, reducing efficiency and overall
economic growth (Dunlop, 1984, as cited in Kaufman, 2011).

From an IEIR perspective, Hong Kong’s labor regulations create a dual labor market that
prioritizes employer interests while limiting FDHs’ economic agency. These policies suppress
worker mobility, encourage informal labor, and increase enforcement costs, leading to
inefficiencies and financial instability. More balanced regulations—such as allowing multiple
employers, revising wage policies, and extending transition periods—could improve labor
productivity, economic security, and worker well-being while still addressing Hong Kong’s
labor needs. Importantly, this is not to say the the act of government intervention and
regulation during and after economic actions is necessarily always inefficient, rather, there
exists lapses in consideration towards employees in these instances and there stands to be
more space for Hong Kong to revise and revamp its FDH laws in the direction of balancing
employer-employee relations and power dynamics. For example, in theory the MAW is a
distortion-correcting mechanism if adjusted appropriately as it offers workers fair wages
especially in the FDH industry. It could be argued that the minimum wage given to FDHs
could be lower when coupled with existing restrictions on job mobility, employer choice, and
exclusion from permanent residency and thus in this way the market distortion inherent to the
power imbalances between employers and employees is somewhat mitigated albeit with itself
some lacking considerations. In the same way there are lapses in allowing a completely free
market self-regulate through laissez-faire economics, there are similar occurrences wherein
IEIR itself overregulates or fails to regulate appropriate labor concerns.​

6.​ Suppose such identified labor regulation/s are absent. Do you think the case study’s
narrative would have changed? Explain

In the movie Hello, Love, Goodbye, the key labor regulations present such as the Hong Kong
Immigration Ordinance (Cap. 115) and the Standard Employment Contract (ID 407) were the
main source of all the social, economic and emotional problems experienced by the OFWs.
With the main character being an OFW, Joy had to plan her life around these labor
regulations, if these strict regulations were absent then it would have altered the entire
narrative of the story.

Throughout the course of the film, Joy struggles financially with the very first problem she
encounters due to the labor regulation Hong Kong Immigration Ordinance, more specifically
the “condition of stay” requirement under Section 7. Stating that Joy is only allowed to work
under her employer as a Foreign Domestic Helper (FDH), breaking this regulation will result
in a fine and imprisonment of the worker. However, due to the wages of an FDH not being
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21
sufficient enough to provide for her family and also to save up to one day pursue her dreams,
Joy was forced to work illegal side jobs with the fear of being arrested and subsequently
deported from Hong Kong. Without this regulation the pressure Joy was feeling would have
been lighter, as she could work multiple jobs legally which would have lightened her financial
burden during her stay in Hong Kong. Additionally, Section 2(4)(a)(vi) states that FDHs are
excluded from being able to apply to be permanent residents as they are not seen as “ordinary
citizens” of the country. Despite Joy being employed she was a temporary worker in the
country, if this regulation was absent then Joy’s aspirations might have been affected. Joy
treated her work in Hong Kong as temporary because due to this regulation obtaining
residency in the country is impossible, this is one of the reasons why she aspired to move to
Canada. If she had been able to be an official resident of Hong Kong after seven years then
the need to move to Canada for a better future and work might have not happened.

The Standard Employment Contract (SEC) was also a key regulation that affected Joy’s life,
mainly the two-week rule once the contract is terminated. This regulation states that FHDs,
like Joy, are given 14 days or two weeks to find another job, and if the individual is unable to
satisfy this condition, then the person is forced to leave Hong Kong. Because of this Joy’s
work has little to no job security, adding to the pressure on Joy to work perfectly to not anger
her employer. This situation was explicitly shown in the movie, where Joy was being
threatened by her employer that she would terminate Joy’s contract due to being late for
picking up her employer’s daughter after school. Another example was at the start of the film,
where Joy’s employer was struggling financially and informed Joy that she would have to
terminate their contract to make ends meet for her family. This inevitably led Joy to find side
jobs despite it being illegal to continue supporting her family to prepare for the eventual
termination of her contract. If this regulation was absent then Joy would feel less pressure in
the event that she would lose her current job.

Lastly, the country’s Minimum Allowable Wage (MAW) also affected Joy throughout the
film. Despite this regulation meant to protect workers from being exploited by their
employers, the minimum wage laws set by the Hong Kong government are significantly lower
than the cost of living which forces FDHs to look for different ways to make more money,
even if these acts were illegal.

The presence of these labor regulations shaped the narrative and the subsequent struggles of
Joy and many other FHDs in the film. These laws directly attack the workers’ freedom and
job security, restricting and forcing them into difficult situations where the only option is to
not get caught doing these illegal acts to solve their problems. If all these identified labor
regulations were not present in the film, Joy’s problems would be less dire and she would feel
less pressure throughout her stay in Hong Kong. Her life might have been changed as well,
without these strict labor regulations being present, staying and being able to bring her family
to Hong Kong might have been a possibility.

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