The good, bad and the ugly of the wage hike

The wage increase that came into effect on Jan 1 means Thai workers will receive a daily minimum wage of 300 baht, an amount that is about 30-35% higher than in the past and three to five times higher than the minimum wage in neighbouring countries.

Many have criticised the government's minimum wage policy as potentially "destructive", saying it will lead to higher unemployment and price rises that will burden consumers. Others say it is about time workers got a fair wage to match the rising costs of living.

While it is too early to perfectly assess the real benefits and costs of this particular policy, the Thailand Development Research Institute (TDRI) has conducted simulations to predict possible consequences for the economy if the 300-baht wage policy is fully implemented across the country. In this piece, we look briefly at the "Good", the "Bad" and the "Ugly" effects of the wage hike.

The Good: Rising wages mean an increase in the disposable incomes of Thai workers across the country, with most of the benefits going to those on low pay scales. The timing of the hike is long overdue as real wages have been stalling, despite an increase in labour productivity and higher costs of living.

About 7.8 million, or 70%, of private employees will be affected by this policy. This will significantly reduce the "wage gap" between workers, particularly those with low incomes and with little negotiating power.

So rising wages are "good" for the workers, but at what price?

The Bad: The increased wages also mean a significant rise in the costs of production. Industries reliant on unskilled labour, such as textiles, clothing, and leather, will inevitably face a sharp rise in labour costs.

By the nature of their production processes, these industries have limited capability to replace a (now more expensive) worker with machinery. They would then have to lay off workers and/or pass on higher production costs on to consumers by charging higher prices.

Our simulation shows that in these labour-intensive industries, the average wage would increase by 40-50%, while in other industries like chemicals, rubber, plastics and electronics the average wage for unskilled labour would increase by about 20%.

For industries with more sophisticated technologies such as iron, machinery and vehicles and auto parts, the average wage for unskilled labour would increase by about 15%.

The Ugly: Our simulation also shows that a one-time increase in the minimum wage across Thailand to 300 baht would generate a slowdown in overall GDP of 2.6%, with a drop in private consumption and investment, as well as a decline in public spending. This is a huge economic contraction and, if not properly managed, could have a devastating effect on the economy.

In other words, we have to "qualify" the above discussion on the "good" as follows. The expected wage increase claimed above would accrue only to those workers who could keep their jobs and we estimate a slowing of job creation in the order of 1 million workers.

Once again, the impact will be worst in labour-intensive industries as mentioned above. Industries that can survive this wage hike are those which can improve their labour productivity and/or substitute labour with machinery. Industries with labour-based production will be severely punished.

So what is to be done? The key, we believe, is productivity.

Firstly, we must understand that "overall productivity" consists of three major components: 1) efficiency in using materials inputs, 2) capital productivity and 3) labour productivity.

The first two are efficiency relating to how non-labour components are used in the production process. This can range from the efficiency of machines, application of better logistics/supply-chain techniques and information systems. The final component, labour productivity, consists of labour-related factors -_ how efficiently workers can produce goods.

Secondly, to reduce the negative impact on the country's GDP by increasing productivity, our study suggests two options. The first is to improve the firm's "overall productivity". According to our simulation, an increase in overall productivity by about 1% would significantly soften the wage hike's predicted 2.6% negative impact on GDP.

Alternatively, a firm can improve unskilled labour productivity by at least 8.4%. This would be a more challenging option.

It is true that the more the individual worker produces, the more he/she would be worth to the job market, and thus the real wage of workers should increase.

This can be done in many ways _ by better education and training; by varying incentive schemes and last, but not least, by more industriousness and efficiency on a worker's part. The more a worker produces, per head, the more wealth he/she creates for the society. And then it is only fair that he/she should be paid higher wages.

In the end, real increases in wages should reflect true economic value and not be a result of government policies.

So what should the government do?

Perhaps an "easier" option is to focus on increasing "overall productivity" as this would require only a 1% increase in efficiency. However, an 8% increase in labour productivity should also be feasible, but will require much more effort.

The government should provide incentives to upgrade machinery, such as allowing for an accelerated depreciation scheme for new machinery, raise tax deductions for R&D activities, and promote labour training.

One of the key insights from this study is that an abrupt one-time increase in wages will impose huge negative impacts on the economy.

Thus, to maximise the "good" and minimise the "bad" and the "ugly", it is necessary that the wage increase should be gradual. We propose that the tripartite committee should provide a five-year wage forecast based on medium-term productivity growth and inflation projections. The estimated wage increase would anchor firms' wage expectations and facilitate production planning.


Chedtha Intaravitak is Research Fellow at Thailand Development Research Institute.

About the author

Writer: Chedtha Intaravitak