Philippine Wage Inequality Persists Despite Economic Growth and Rising Education

A compelling new study by the World Bank’s Poverty and Equity Global Practice, authored by Nadia Belhaj Hassine Belghith, Francine Claire Fernandez, and Benjamin Aaron Lavin, investigates the evolving landscape of wage inequality in the Philippines over the past two decades. Drawing on rich datasets from the Philippine Labor Force Survey (LFS) and the Family Income and Expenditure Survey (FIES), the research traces how changes in educational attainment and occupational structures have shaped income disparities between 2002 and 2022. Despite major strides in poverty reduction, from 49.2 percent in 1985 to just 16.7 percent in 2018, the study reveals that inequality has proven more difficult to dislodge. As of 2021, the top 10 percent of the population earned six times more than the bottom 50 percent, with the Gini coefficient among the highest in Southeast Asia. The findings highlight education as the single largest driver of income inequality, contributing over 30 percent to the national income gap, followed by occupational differences at 23 percent.

A Degree Still Pays, But Not Equally for Everyone

The study places a strong emphasis on the role of education in determining wages. In 2022, a college graduate earned on average 95 percent more than a high school graduate, underscoring the strong wage premium attached to higher education. However, this premium hasn’t diminished over time, even as more people pursue tertiary degrees. The sluggish growth in the number of college-educated workers, particularly among men, has kept skilled labor in relatively short supply and thus maintained high wage differentials. Interestingly, the wage premium has been consistently higher for women than men, suggesting that women with higher education enjoy stronger relative earnings than their male counterparts. Yet, this does not necessarily equate to better labor outcomes. The youth unemployment rate among college graduates aged 25 to 34 stood at 8.1 percent in 2022, significantly higher than the 4.6 percent among their non-college peers, raising concerns about mismatches between educational qualifications and labor market demands. Young graduates also seem to have higher reservation wages and longer job search periods, which delay entry into employment and potentially exacerbate wage inequality.

Middle-Skill Jobs: A Brief Resurgence, Then Retreat

Between 2012 and 2016, the Philippines experienced a noteworthy compression in its wage distribution, driven largely by gains in middle-skilled employment. These included routine jobs in clerical work and machine operation, as well as non-routine roles in sales and services. During this window, workers in these occupations, especially those without college degrees, saw real wages grow significantly, contributing to a decline in wage inequality. But this trend has since reversed. From 2016 to 2022, middle-skill jobs declined as a share of employment, while low-skill occupations expanded. This shift may signal an early phase of occupational polarization, where both high-skill and low-skill jobs grow at the expense of mid-level roles. If persistent, this development could hollow out the labor market and reverse previous gains in equity. The researchers caution that while such polarization has long been observed in advanced economies, it remains unclear whether the trend in the Philippines is structural or a temporary artifact of the COVID-19 pandemic and other cyclical shocks.

Who Benefits Most from Education and Skill?

Using advanced statistical methods such as Recentered Influence Function (RIF) regressions, the study explores how returns to education and skill vary across the income distribution. The results are striking: returns to both college education and high-skill occupations increase steadily with income level. In other words, the wealthier you are, the more you gain from higher education and top-tier jobs. This phenomenon not only reflects the labor market’s valuation of skills but also points to deeper structural inequities, such as disparities in school quality, access to professional networks, and other unobservable advantages, which compound the benefits of education for already-advantaged individuals. Conversely, mid-skill occupations have a moderating effect on inequality, particularly at higher income levels, though their impact on lower-income workers is less clear. The research also reveals that for non-college-educated workers, especially men, occupational reallocation into middle-skill roles between 2012 and 2016 accounted for a substantial share of wage gains. These movements played a critical role in flattening the wage curve during that period.

Mismatches in the Job Market Undermine Progress

The labor market's ability to absorb skilled graduates remains patchy, especially when analyzed by field of study. Graduates in natural sciences and mathematics fare better in job placement, while others in popular fields like ICT and engineering face unexpectedly high unemployment rates. The disconnect suggests that student choices are being driven more by perceived prestige or societal expectations than by actual labor market signals. Moreover, while older graduates with experience tend to enjoy greater employment security, younger graduates face a more uncertain landscape. This implies that simply increasing access to tertiary education is not enough. Policymakers must also consider how well education systems align with the dynamic needs of employers. The authors call for broader reforms that focus on improving basic education, closing quality gaps in higher learning institutions, and strengthening partnerships between educators and the private sector to ensure better matching between skills and jobs.