How do we handle labor income of overseas workers?

Summary of discussion:

Three approaches were discussed. These are: FIRST, to treat ROW compensation as part of labor income in both the LCD profiling and in the intra-household transfers computations; SECOND, to treat ROW earnings as inter-household transfers, i.e. treat foreign workers as separate households; and THIRD, a combination of 1 and 2 where ROW earnings are treated as part of labor income in LCD profiling but as transfers in the intra-household transfers computations.

Ian and I had initially decided to take the first approach since we do have the Survey of Overseas Filipinos (SOF) which can give information on the characteristics of overseas workers like age. Integrating ROW earning into the aggregate YI-profile by age was easy to do. However, we got stuck in the next step, intra-household transfers computations. The overseas workers are actually not included in the household roster. If their income is added to household labor income, they are effectively being added back as members of the household; and in turn their consumption would have to be estimated in some way and also included in household expenditure. But then foreign workers consumption expenditures, as Maliki pointed out, are not part of Philippines GDP. Moreover, artificially adding the foreign workers into household rosters means that they will be assigned asset consumption in the intra-household transfers computation – when in fact their consumption is zero because they are actually absent from the household. Thus, we decided during our discussion that this approach is too complicated, with so many conceptual and estimation issues involved.

The second approach provides the means to integrate ROW compensation in a manner that is computationally manageable and conceptually consistent. The issues in intra-household transfers computations described above for Approach #1 are avoided in Approach #2. That is, the approach gives the means to get around having to add back the foreign worker into the household roster and, thus, avoid the difficulties described for intra-household transfers computations described for Approach 1. However, in this approach some information is lost. That is, the age profile of foreign workers will not be reflected in the overall YI-profile by age because ROW compensation will be left out of labor income.

The third approach was considered to get the best parts of Approaches 1 and 2. The approach would allow for the age profile of foreign workers to be reflected in the aggregate YI-profile by age (as in Approach 1) and, at the same time, have an uncomplicated way to do intra-household transfers computations (as in Approach 2). But is there an internal inconsistency in this approach? The ROW compensation will be assigned to different age groups in the aggregate LCD profiling, i.e., assigned to age groups of foreign workers, versus assignment to the household head age groups in the intra-household transfers computations. Wouldn’t then the deficit calculated for a specific age group in the aggregate LCD profiling be different from the deficit calculated in the intra-household transfers computations?

After the discussions, Ian and I are inclined to use the second approach for the Philippine NTA, i.e. treat ROW compensation as inter-household transfers. One other issue connected to Approach #2 arises: there will be need to redefine the SNA control aggregate for labor income. To be consistent with treating ROW compensation as inter-household transfer, ROW compensation has to be taken out of the control aggregate for labor income. (Racelis 12/2006)

The key issue is whether overseas workers (OSW) and their economic activity are counted as part of the domestic economy or part of the rest of the world (ROW). I believe that the general practice is to include them in the domestic economy to the extent feasible and that this is the practice in the Philippines and the UN SNA.

An important issue that needs to be researched is the details of how OSW are handled in the Philippines NIPA and elsewhere. If understand correctly you are saying that the earning of OSW are included in NIPA. There have to be balancing items in NIPA, i.e., outflows that match the inflows. Or put in other terms, what is the disposition of the labor income. Can you talk to the Stats people and find out what they are doing? Once we know for sure we can make a decision about how to adjust the NIPA control totals.

There may be some issues related to measuring compensation of overseas workers. We want to include the value in-kind payments, e.g., housing, food, health care, etc. provided at their overseas worksite. Also, are their special provisions about tax treatment of the income? Do workers (or their employers) have to pay a fee to the government? This should be included as part of the compensation.

For our purpose we want to identify the outflows in NTA:

The first is consumption. Can you confirm that NIPA consumption does not include the value of consumption by OSW? If it does not, I think we should estimate it and adjust the aggregate control value. We might safely assume that per capita consumption by OSW is independent of age. Then if we have an estimate of total consumption by OSW we could calculate the per capita value directly. An alternative would be to make some other simple assumption that OSW consumption is similar to consumption by adults living in the Philippines. There is also an issue about classifying OSW consumption. Can we estimate what part of private consumption is health, education, housing, and other? If not, we may want to create a separate category OSW private consumption.

The second is transfers. We have public transfer outflows from OSW which would be the value of the taxes they pay on overseas compensation. As you point out below, how we handle private transfers depends on whether or not the OSW are considered to be members of domestic households or not. Currently the household roster does not include them? I think what makes sense is to count OSW as separate units. When they return to the Philippines they have private transfers equal to Yl – C – public transfers. We would have a separate category of transfers. (Mason 12/2006)

Labor income plus transfers (public and private) total underestimates sources of financing of household consumption in the Philippines case if labor income from abroad (i.e., from overseas contract workers or OCWs) is not included. About 20% of Philippine employed labors are working outside of the country. In the 1999 Income Accounts, net compensation of employees “from rest of the world” was 222 billion while labor compensation was 800 billion. We believe the same issue arises in other countries, like India and China that similarly have large components of their labor force employed abroad. How should we handle compensation of overseas workers in our NTAs? Include as part of labor compensation? Treat as inter-household transfer (from households based abroad or from rest-of-the-world, ROW) and allocate to household heads of recipient households? (Salas 8/23/06)

amason: (Wed Aug 23 21:21:44 2006 )

I suspect that the answer to this question will depend to a great extent on the availability of data or our ability to make reasonable estimates in the absence of data.

In principle, I think the key to answering this question is defining the population for which the accounts are being estimated. Do we include overseas workers in the population or do we exclude them?

If we include them, we need to include them fully (or in a consistent way). I'm making some guesses here. Presumably we won't know the guest workers consumption but the net compensation is compensation net of consumption? If so, I think we have two choices. First, we could just add his labor income to the labor income of domestic workers and make no adjustment to consumption. Second, we could estimate the consumption of the guest workers - for example, assume that they have the same consumption as domestic workers. In this, case we would add their estimated consumption to the consumption of the non-guest worker population and we would include this amount in labor income.

Do we consider the overseas worker to be a member of a domestic household or a separate not? The answer to this question may depend on what the household survey is assuming. If overseas workers are included in the household survey is their labor income included? If not we would need to make an adjustment to the household's labor income and consumption to include the overseas worker. If we do this, then their earnings should be picked up in the calculation of intra-household transfers and household saving.

The alternative would be to count them as a separate household and their remittance as an inter-household transfer.

Another alternative would be to exclude them entirely from the population and to just treat this as a transfer from the ROW to households. I think we don't want to do this if we can avoid it.

How do we treat state owned enterprise (SOEs)?

In the UN System of National Accounts general government includes the value of services produced and provided to consumers for free or at an economically insignificant price. More details on this are provided in the UN SNA 1993 manual - a link is availabe on the Documents page under valuable resources.

In NTA SOEs are treated like any private corporation. In this case, however, the SOE is owned by the taxpayers. If the SOE generates a surplus, this is counted as non-labor income that accrues to taxpayers. The surplus is then taxed away from taxpayers. If the SOE generates a deficit, this is counted as negative non-labor income for taxpayers, who then receive a public transfer payment of equal amount.

Some useful language from the 1993 UN SNA is as follows:

4.107. When a government unit wishes to intervene in the sphere of production it has three options:

(a) it may create a public corporation whose corporate policy, including pricing and investment, it is able to control;

(b) it may create a NPI that it controls and mainly, or entirely, finances;

(c) it may produce the goods or services itself in an establishment which it owns and which does not exist as a separate legal entity from the government unit itself.

However, if a government establishment, or group of establishments engaged on the same kind of production under common management,

(a) charges prices for its outputs that are economically significant;

(b) is operated and managed in a similar way to a corporation; and

(c) has a complete set of accounts that enable its operating surpluses, savings, assets and liabilities to be separately identified and measured;

it should be treated as a quasi-corporation. Such quasi-corporations are market producers that are treated as separate institutional units from the government units that own them. They are classified, sectored and sub-sectored in the same way as public corporations.

How do we treat social benefits paid to government workers, e.g., health and retirement benefits?

The first point to understand is that government workers and private workers are treated in similar fashion in NIPA. Any payment to a government worker is compensation for their work effort and is part of labor income. This includes social contributions, e.g., health care payments and pension payments. These are not transfers because they are a payment for work effort.

What about payments to former workers including retirees? In principle, the imputed value of paying future benefits should be included in labor income at the time the worker was employed. In the case of funded social programs, current labor cost includes payments to the fund that will finance future benefits. When social benefits that will be provided in the future are not funded, an estimate of the value of funding that benefit should be counted as current labor cost.

In practice, countries do not estimate the value of unfunded future obligations to current workers. Instead, payments of pension and health care benefits to retirees is taken as an estimate of the value of unfunded future obligations to current workers. An important point is that the pension and health care benefits should be allocated to current employees not to current retirees.

The treatment of social contributions is discussed in the UNSNA 1993 manual. The link is in the documents section of the website. The UN states the following.


Employers' social contributions (D.12)

7.43. An amount equal to the value of the social contributions incurred by employers in order to obtain social benefits for their employees needs to be recorded as compensation of employees. Employers' social contributions may be either actual or imputed. They are intended to secure for their employees the entitlement to social benefits should certain events occur, or certain circumstances exist, that may adversely affect their employees' income or welfare - sickness, accidents, redundancy, retirement, etc. Social benefits are described in chapter VIII, and also in annex IV at the end of this manual.

 Employers' actual social contributions (D.121)

7.44. These consist of social contributions payable by employers for the benefit of their employees to social security funds, insurance enterprises or other institutional units responsible for the administration and management of social insurance schemes. Although they are paid by the employer directly to the social security fund or other scheme, the payments are made for the benefit of the employees. Accordingly, employees should be treated as being remunerated by an amount equal to the value of the social contributions payable. This imputed remuneration is recorded in the generation of income account as a component of compensation of employees. Employees are then recorded as paying social contributions of equal value as current transfers to social security funds, other schemes, etc., in the secondary distribution of income account.

 Employers' imputed social contributions (D.122)

7.45. Some employers provide social benefits themselves directly to their employees, former employees or dependants out of their own resources without involving an insurance enterprise or autonomous pension fund, and without creating a special fund or segregated reserve for the purpose. In this situation, existing employees may be considered as being protected against various specified needs or circumstances, even though no payments are being made to cover them. Remuneration should therefore be imputed for such employees equal in value to the amount of social contributions that would be needed to secure the de facto entitlements to the social benefits they accumulate. These amounts depend not only on the levels of the benefits currently payable but also on the ways in which employers' liabilities under such schemes are likely to evolve in the future as a result of factors such as expected changes in the numbers, age distribution and life expectancies of their present and previous employees. Thus, the values that should be imputed for the contributions ought, in principle, to be based on the same kind of actuarial considerations that determine the levels of premiums charged by insurance enterprises.

7.46. In practice, however, it may be difficult to decide how large such imputed contributions should be. The enterprise may make estimates itself, perhaps on the basis of the contributions paid into similar funded schemes, in order to calculate its likely liabilities in the future, and such estimates may be used when available. Otherwise, the only practical alternative may be to use the unfunded social benefits payable by the enterprise during the same accounting period as an estimate of the imputed remuneration that would be needed to cover the imputed contributions. While there are obviously many reasons why the value of the imputed contributions that would be needed may diverge from the unfunded social benefits actually paid in the same period, such as the changing composition and age structure of the enterprise's labour force, the benefits actually paid in the current period may nevertheless provide the best available estimates of the contributions and associated imputed remuneration.

Real versus nominal values.

NTA estimates should be available in real and in nominal terms, but there has been little discussion about deflating or maintaining this information. Currently, the data that is uploaded and downloaded indicate whether it is nominal or real. The database itself does not include information about the base year for the price index used to generate real data, although presumably this would be part of documentation. There is no provision in the database browser to distinguish real and nominal data. The variable name could be used to do so, but this would be rather cumbersome (doubling the number of variable names). It seems ill-advised, however, to store both real and nominal values in the data base. It doubles the amount of information to be maintained, but also means that new values would have to be estimated and uploaded if a revised price series became available or if the base year changed. One approach would be to store only nominal values in the database along with an agreed upon price deflator. All countries would have the same base year for the price index. I believe that the website could be designed so that the real values would be generated on the fly using the nominal values and the price index.








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