DESPITE SUSTAINED if moderate growth in the last seven years, the crisis in the labor market triggered by the 1998 recession continues to worsen, manifesting itself early on in record-high open unemployment rates and of late in surging underemployment. If recent trends are anything to go by, the crisis in the labor market is likely to worsen in the next three years. Particularly worrisome is the decline in investments as this means less job-generating spending in the short run and shrinking productive capacity, which will hurt future employment creation.

The deepening jobs crisis today stands as the single biggest failure of the Arroyo administration. Despite sustained growth, unemployment has hovered at near record levels since 2001. A change in the official definition of unemployment may have obscured the bad situation. Nonetheless, the jobs deficit is clear to anyone who cares to see it. The employment-to-population ratio at 59 percent in 2006, after eight successive years of growth and counting, is even slightly lower than its level in 1998, a recession year. That is, only six out of 10 Filipinos of working age can find employment. Every year, over half a million Filipinos become of working age, with no prospects at all of finding gainful employment, let alone quality employment.

A new dimension to the sustained crisis in the labor market is surging underemployment. Since April 2005, underemployment has been rising rapidly as the bulk of new job creation has come from agriculture and informal services. Total underemployment went up from nine percent in 2004 to 12 percent in 2005 and 14 percent in the first half of 2006. In particular, visible underemployment, the proportion of part-time workers wanting additional work hours, has hit a 20-year high.

Rising underemployment is important because it may indicate growing poverty incidence. Underemployed workers carry a high risk of becoming poor with incomes insufficient to carry themselves and their families above the poverty threshold. Poor families are likely to be found among the underemployed more than among the unemployed simply because they cannot afford to be unemployed. This fact shows up in the regional data: Regions with high underemployment rates (rather than unemployment rates) tend to have high poverty incidence while regions with low underemployment report low poverty rates.

The worsening jobs deficit can be traced to low and poor-quality growth. Current GDP growth rates are simply not enough to generate enough jobs to absorb a fast-growing working-age population. Differences in growth forecast in the order of half a percentage point are minor and inconsequential. The economy must significantly raise its growth rate to be able to create adequate employment and quickly bring down joblessness.

WITH THE 2015 deadline for the Millennium Development Goals less than a decade away, the next five years will set the stage for success or failure in meeting these. Beyond this, there would be little time to put in place the policies and programs necessary to achieve these goals.

Government spending is crucial to fulfilling the MDGs since most of these involve the provision of public goods, including education, health services, water and sanitation, and so on. Poverty reduction hinges on economic growth that favors the poor as well as the provision of income support for the poorest and those who have no access to the benefits of growth.

It really should not take much for the Philippines to achieve the MDGs, says Rosario Manasan of the Philippine Institute for Development Studies (PIDS) in a recent study. Manasan estimates the additional annual government spending required in five MDG-related areas — poverty reduction, education, health and nutrition, and water and sanitation — would be 1.1 percent of GDP in 2007-2015.

This figure is small compared to the reduction in the fiscal deficit by three percent of GDP, from five percent in 2001 to two percent in 2005. Since the reduction in the deficit was achieved largely through spending cuts, there is little room for reallocating expenditures. Accommodating the necessary MDG-spending necessarily leads to a higher fiscal deficit. This throws into sharp relief the folly of a fiscal policy focused on cutting down the deficit at all cost.

No one questions the fact that by taming the fiscal deficit, the Arroyo administration removed the immediate risk of financial crisis posed by a ballooning public debt. The imposition of new tax measures has also arrested the decline in the tax effort. But significant downside risks remain on the revenue side as weak job creation and declining household incomes undermine tax revenues. Lower borrowing requirement by the government as a result of the smaller deficit also implies lower tax earnings from interest payments to lenders.

Success in the fiscal sector has been achieved at a steep price. A closer look at the fiscal balance shows that the lower deficit was achieved primarily through deep spending cuts in critical economic and social services. Furthermore, the tight fiscal policy, which aims to eliminate the deficit by 2008 or 2010 at the latest, has begun to hurt growth and job creation.

Contrary to claims that reducing the deficit will promote growth by restoring investor confidence, the record for the last six quarters show that investment spending in the real economy has been compromised. Declining investment spending presents cause for alarm in view of its negative effect on future growth and job creation. Without a strong recovery in investments, the Philippine economy will, at best, continue to grow at the moderate rate of four to five percent. At this pace, there is no getting out of the current doldrums, let alone catching up with our neighbors. In particular, the crisis in the labor market characterized by near-record levels of open unemployment and underemployment will continue to worsen. The effects of the deepening jobs crisis on poverty and welfare are all too obvious.

President Arroyo's economic managers are walking on a knife's edge. On the one hand, continuing to pursue a tight fiscal policy creates pressures on the real economy in terms of depressed demand, weak job creation, rising joblessness, and growing poverty. On the other hand, relaxing its fiscal stance to accommodate much-needed public spending runs the risk of displeasing the country's creditors. An alternative strategy calls for broader goals and a more flexible approach than the present administration has shown itself capable of imagining.

Maitet Diokno-Pascual is chair of the Board of Trustees of the Institute for Popular Democracy (IPD). Clarence Pascual is senior researcher at the Labor Education and Research Network (LEARN).