We often hear criticism from bankers, employers, and some economists that the increase to a 300-baht minimum daily wage is harming the Thai economy.
Labourers on a work site. The idea that low wages keep production costs down, resulting in higher profit, more investment, and economic growth, in an outdated economic theory. PAWAT LAOPAISARNTAKSIN
According to them, a higher minimum wage will reduce economic growth by bankrupting small businesses and driving away investors, both Thai and foreign, to other countries such as Laos, Myanmar and Cambodia where the wages remain relatively low.
This neo-liberal line of thinking assumes that low wages will keep production costs down, resulting in more profits, more investment, and economic growth.
This belief has now been proved outdated by modern economists. In fact, this attachment to low wages is why countries such as Thailand have been stuck in the middle-income trap which prevents Thais from attaining a higher standard of living and more equitable income distribution.
Here is why: The low wage policy actually applies to only the blue-collar jobs such as factory work. White-collar professionals, managers and executives can increase their remuneration much more freely, so much so that they _ especially those in the financial sector _ face widespread criticism that they earn too much because they are the ones who determine how much they get paid. This phenomenon is taking place at the same time that efforts are under way to erode labour unions.
As a result, the income gap between the blue collars and the white collars is growing unjustifiably wide. Thailand's income gap is massive.
Economists have used the Meidness-Renh model to analyse the negative impacts of high income inequality. Named after the two Swedish economists who proposed this theory, the Meidness-Renh model shows that an economy with a high level of income inequality maintains a low-technology economy by relying on unskilled workers who require lower wages than those in industries which use higher technology. The longer this practice continues, the more persistent the income gap becomes.
What follows is that low-technology industries can survive without having to invest in better production technology, but because productivity remains low, the overall standard of living remains low too. How then, is this trap eliminated? How can the economy be readjusted toward higher productivity, higher income and less income disparity? One way is by increasing the minimum wage paid to bottom-scale workers.
A minimum wage increase will result in bankruptcy for businesses who continue to rely on low-skilled, low-technology business practices. Bankruptcy for those who lag behind means more workers will be free to develop new skills and enter other jobs.
If the government invests in skills-training for these workers and stimulates the economy at the same time through investment in infrastructure and public welfare, then demand and consumption will grow.
The high-technology businesses will also grow, which means companies will be on the hunt for skilled workers and will invest more in development. This will raise the overall level of productivity and lead to a higher standard of living. In an open economy, the high-tech businesses will expand overseas, thus increasing their income and productivity.
Of course the minimum wage must also apply to migrant workers, otherwise low-technology producers will continue in their same old ways.
Some economists argue that government should focus on improving productivity, rather than manipulating wages. But policies which try to raise productivity generally don't work. Business owners need incentives to invest in better technology.
In sum, increasing the minimum wage can stimulate growth, raise the standard of living, and reduce income inequality, but it can't do this on its own. It needs to be part of a broader policy package which includes skills-training, accessible credit for firms that want to invest in higher technology, and increased investment in infrastructure and public welfare. All this costs money.
The two Swedish economists proposed this economic theory to the Swedish government in the 1940s. The government adopted it and by 1990, Sweden was among the countries with the highest standard of living and best income equality in the world. Singapore also had success with this model.
Through these economic structural changes, society will become more egalitarian. When human resources are used more efficiently, the country's competitiveness will increase and enable the country to free itself from the middle-income and low technology traps.
These changes can only happen when the government is seriously committed to the policy and willing to reform the tax system in order to fund skills-training and economic stimulus, as well as to support small businesses which need time and funding to adjust themselves to change.
Business owners who oppose the minimum wage increase are pursuing their own short-term interests. That's fine. But there are others who oppose the policy because they have become used to aligning themselves with the neo-liberal dogma about leaving markets alone. That era is over. The world economy is in the throes of immense change. Thailand's politics are in turmoil and the Thai economy needs new thinking. We simply can't afford to stick with the low-wage economy of the past.
Pasuk Phongpaichit is emeritus professor at the Faculty of Economics, Chulalongkorn University.
About the author
Writer: Pasuk Phongpaichit