Minimum wage: Blessing or a curse?

Minimum wage: Blessing or a curse?

Workers last January wanted a rise in the minimum wage to 360 baht per day, but did not achieve that goal. (File photo)
Workers last January wanted a rise in the minimum wage to 360 baht per day, but did not achieve that goal. (File photo)

The minimum wage is, and has been, a controversial topic among economic experts and the public.

On one side of the spectrum, neoclassical economists claim it is counterproductive in terms of employment as it increases employers' overheads and serves as a slap on the wrist to the invisible hand of the free market.

Those at the other extreme argue that the exploitation of workers needs to stop, and that a high minimum wage would provide fair remuneration for employees as capitalists have benefited for far too long from wage levels at the lower end of the economy.

Policy analyses from the TDRI appear in the Bangkok Post on alternate Wednesdays.

Anyone who is not looking through an ideological filter knows the truth lies somewhere between the two.

Thailand has a minimum wage and increasing this is long overdue. It was bumped up in April and now another increase is on the cards as the issue has been tabled for discussion by the tripartite committee in charge of such matter. The committee must find a solution that satisfies all parties involved, which is a challenge.

To deal with this, a process of automatisation is reportedly being considered.

Minimum wages exist to stop the exploitation of workers and provide them with adequate income to afford a decent living. That means enough food, clothing and a place to live. The term "living wage" has been coined in recent years to describe a minimum wage that achieves precisely that.

Guaranteeing a fair living for workers can disadvantage the economy in some ways and benefit it in others. One of economists' biggest fears is seeing employers transfer their increased labour costs completely on to consumers, which would increase the cost of living, call for further increases in the minimum wage, and create spiralling inflation. Economists refer to this as the "wage-price spiral". This can cause severe problems for the economy, especially if a government were to automatise hikes to the minimum by directly correlating it to inflation by linking it, for example, to something like the Consumer Price Index (CPI).

Thailand has adopted the minimum wage, trying to reap the benefits for the economy and protect workers at the lower end of the scale. The country passed the first minimum wage law in 1973. A tripartite committee was formed and comprised representatives from the government, employers and employees to secure a fair division of influencing voices in the process.

The minimum wage was regulated and centralised until 1998, when lawmakers shifted the regulation to a decentralised state. The decision was to let a national committee suggest a minimum wage, but then let sub-committees at the provincial level determine a minimum wage that reflects the costs in each province. This decision was intended to benefit provincial investment and direct resources from cities to rural areas.

Then in 2013 the regulation of setting an individual minimum wage level for each province was abandoned. That year, the minimum wage was set at 300 baht for all provinces, causing unemployment in underdeveloped provinces. However, apparently the unemployment level was lower than expected, reflecting the past exploitation of workers and raised affordability by employers.

It is also worth mentioning that the minimum wage, when raised at a national level, tends to affect SMEs the most as they cannot react to wage changes as efficiently as large enterprises. After a few years passed, the minimum wage was again raised in 2017, resulting in different thresholds for each province.

The latest raise was implemented this April. The current minimum wage ranges from 308 baht to 330 baht. However, the committee is already meeting to find a fair number for the next hike.

The problem with determining a "fair" minimum wage is that it could be reasonable when it is issued but not so when the economy develops, and in Thailand the economy grows at a relatively quick rate. The pace at which political decisions made, due in part to a slow bureaucracy, cannot keep up with the growth of the economy and the inherent growth of inflation.

Therefore, certain countries with various stages of development decided to directly link their minimum wage to inflation. The measurement of choice is mostly the CPI. Sometimes other measurements are chosen, such as the cost of living allowance (COLA) or the Retail Price Index (RPI). Some countries add other variables to their calculation to fit it better to their economic situation, such as GDP growth, or measures of productivity to give workers a piece of the pie considering they cooperated in creating economic momentum.

Luxembourg directly uses CPI to increase its minimum wage. If the CPI reaches a threshold of 4%, the minimum wage will be increased by a corresponding amount. Some of the problems that were mentioned earlier could also negatively influence the economy, especially the wage-price spiral that could, if directly linked to inflation, get out of hand very quickly in times of extreme inflation growth. Luxembourg doesn't have, and has never had, this problem as it has a very stable economy with inflation equally under control.

Obviously, Thailand is not Luxembourg, but they share a common denominator.

In Thailand, inflation is stable because it is controlled by the Bank of Thailand (BoT). The BoT takes measures to keep extreme inflationary growth at bay. This would make Thailand a splendid candidate for applying automatisation to minimum wage increases, especially since political decisions are inherently made slowly.

The growth of inflation is inevitably connected to economic growth, therefore handing a share of prosperity to workers. The use of inflation alone is not enough to make it a fair share of economic growth, however, so an indicator representing productivity growth should also be included. Labour productivity would be one available indicator, among others that could be considered.

A range of variables portraying other aspects of the economy should be available to adapt the minimum wage formula to the individual nature of each province. The committee should also consider releasing an hourly and monthly minimum wage, giving equal treatment to part-and full-time employees.

Automatisation also works in Cyprus, Belgium, Malta, the Netherlands, Poland, Malaysia, Indonesia and parts of the US. As Thailand's economy sits somewhere in between, it could well work here, too.

Max Neu studies at the Free University of Berlin and is interning at the Thailand Development Research Institute (TDRI). Kwankamon Thanadkah is a researcher at the TDRI. Policy analyses from the TDRI appear in the Bangkok Post on alternate Wednesdays.

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