As a proper economist, I always use real data and solid research work in analysing an issue. This is the principle I adhere to when analysing minimum wage increases, which were proposed as a key campaign policy by major political parties who contested in the March 24 election.
The two top contending parties promise to raise daily minimum wages from the current level of about 330 baht to 400-425 baht -- a 20–30% increase. The question is whether it can be done without destroying the economy. Some critics say that it will cause hyperinflation, while many are concerned that it will trigger massive lay-offs.
The answer to the question lies in the movements of "Unit Labour Cost" -- a key economic notion that many readers may not be familiar with. As the name suggests, the Unit Labour Cost (ULC) measures the labour cost for producing one unit of product. When the ULC index rises, it means a product is more costly to produce. This means manufacturers would get less profit and goods become more difficult to sell. Also, the economy is becoming less competitive in the world market. As such, let's look at the movements of the Thai ULC over the past 10 years.
From the graph, it is clear that raising minimum wages does not materially affect the country's production efficiency in the long run as manufacturers can always adjust. Even the massive 60% minimum wage increases in 2012 did not result in a serious dent in the efficiency level. Before the 2012 raise, the ULC index stood at around the 94 level and peaked at about 110 after the increases. One might notice that the average ULC jumped up much less than the minimum wages increase -- that is because only a fraction of workers receive minimum wages. However, within one short-year, industries can bring the labour cost level back to below 100 level. But this is not entirely a happy story. Many SMEs were not able to withstand the new high wages. Only big manufacturers came out as winners as they quickly replace workers with machines that greatly improve their efficiency. It might surprise readers that big manufacturers actually hired more workers after the 60% minimum wage hike.
Can this miracle of efficiency adjustment happen again, and can the winning political party fulfil their minimum wage promises -- a win-win outcome? I doubt that very much, for two specific reasons.
First, the world economic environment is not the same. Around 2012, the world economy was quickly recovering from the Lehman Brothers crisis of 2010, particularly China. Around that time, China's Gross Domestic Product (GDP) was growing at about 8% annually. The world was waiting for Thai products. All Thai manufacturers had to do was to quickly improve their efficiency to remain competitive by mechanisation. That's why big manufacturers did more hiring during that period. But now, the world economy is weakening day-by-day. The recent reversion of the US yield curve is a sure sign of an upcoming economic recession.
This is serious. It can be clearly seen from the graph that the ULC index level has risen by more than 5% in the first half of 2018. Surely, this is not because Thai workers suddenly become lazy. It is because the demand for products dropped by 5%, but manufacturers still keep their workforce numbers unchanged. If we look at the the full-year data for 2018, I am certain that the ULC index would be more disturbing in the second half, as demand continues to decline. What do these all mean? It means that Thai manufacturers now bear approximately a 10% increase in the ULC because of weak demand. Adding another 10-15% ULC hike through higher minimum wages could deal a deadly blow to many manufacturers.
Second, there is not much room for further labour efficiency improvements to counter another round of big wage increases. To survive in the world market, Thai manufacturers performed a second miracle by further improving labour efficiency to counter a 10% appreciation of the baht after 2013. With two rounds of efficiency improvements -- the first one for 2012 wage hike and the second one for exchange rate hike -- how much more efficiency can the manufacturers squeeze out?
If the new government raises minimum wages, one will not see massive inflation. But one will see massive layoffs and a wave of factory shutdowns. If we look at the ULC graph again, it suggests that Thai manufacturers are currently employing between 5-10% too many workers. Adding another round of big wage increases could only spell disaster to all parties concerned. While Thai workers do need a good raise, is there really a solution to the wage problem? Theoretically, yes -- but it isn't a win-win solution.
As mentioned above, Thai manufacturers are faced with two challenges -- weak demand and the baht's appreciation. If Thai consumers are not drowning in household debt, I would recommend an easing of monetary policies to stimulate domestic spending. However, with current household debt levels, such measures will inevitably cause another financial crisis. The other option is to address the baht's appreciation. Again, this is not a win-win solution.
There is another far-fetched solution -- that is, restructuring the manufacturing sector, through, let's say, the 4.0 initiative. However, can this really be realised? I still have huge doubts about the scheme, because the problem that many fail to realise is that Thailand's human resources are still not qualified to ensure the scheme's success. Re-educating and retraining will take a minimum of 5-10 years, and time is a luxury that Thailand cannot afford.
I fail to see how raising minimum wages could be realistically done under current circumstances. Forget the campaign promises. It is more important to save Thai manufacturers from rising costs, which stem from weak demand and the baht's appreciation. Let me repeat. Time is a luxury that Thailand cannot afford.
Chartchai Parasuk, PhD, is a freelance economist.