Thailand Adopts Nationwide Minimum Wage Policy Amid Controversy
January 30, 2013
From January 1 of this year, Thailand’s employers must pay all employees at least 300 baht (about $10) a day. If they don’t, they will face six months in jail and/or a 100,000 baht fine for not complying. The 300-baht minimum daily wage policy, the fulfillment of a 2011 election campaign pledge by the ruling Pheu Thai Party, has been piloted in seven provinces since May 1, 2012 (including Bangkok), with much debate and division among employers, labor unions, government ministries, and academics about the actual and perceived impact of the policy on the economy, productivity, small- and medium-sized enterprises (SMEs), and inequality.
For employees, the government, and labor unions, the hope is that in a time of economic growth (5% predicted for 2013) and low unemployment (0.6% at the end of 2012), increased income for workers will boost consumption and force productivity gains and innovation. This will then drive a more balanced, modernized, and competitive economy and help Thailand avoid the much-dreaded middle-income trap. Indeed, one of the commonly stated goals of the new minimum wage is that it will push Thai workers to raise their own skill levels in preparation for increased labor competition with the opening of the ASEAN Economic Community (AEC) in 2015. Advocates of the policy also anticipate that the modernization of Thai businesses and increases in productivity will lead to a reduction in the level of geographical disparity in Thailand, with fewer workers forced to move to Bangkok for higher wages.
There are fears on the part of some employers that increased labor costs (the new minimum wage applies to every employee in Thailand, regardless of age, sex, industry, or nationality) will affect already struggling SMEs and could lead to employee layoffs or even force some SMEs out of business. This could, in turn, negatively impact employment, increase unskilled workers’ vulnerability, raise the cost of living, and worsen poverty in the country. Many employers fear that Thailand’s international and regional competitiveness will be negatively affected by increased labor costs, which could trigger Thai businesses to employ greater numbers of informal labor. Migrant workers from Thailand’s neighbors, particularly Cambodia, where the daily minimum wage is $2.03 and Burma (also known as Myanmar) where the daily minimum wage is 58 cents, are expected to come in even greater numbers, attracted by higher wages. In fact, some Cambodian factory owners are complaining that they are now facing a labor shortage as locals move to Thailand for better wages.
The National Economic and Social Development Board estimates that the new policy raises Thailand’s average wage by 22.4 percent, and in certain provinces, such as Tak, Surin, and Phayao, represents a nearly 70 percent increase. The wage hike is expected to hit SMEs in labor-intensive industries – agriculture, tourism, and manufacturing – the hardest, and many academics and business association groups argue that the increase to 300 baht happened too fast and did not allow time for businesses to prepare. Of the 7,063 jobs that were lost due to company closures between April 1 and December 25 of last year, five companies (that together account for 1,762 of these jobs) cited impact from the minimum wage policy as the reason for folding. On the other hand, the permanent secretary of Thailand’s Ministry of Labor stated that workers’ productivity increased by 12 percent last year due to the policy, compared to an estimated average growth of 2-3 percent without the policy.
The reality is that the impact of this “policy-driven” raise in labor cost is likely to affect industries and businesses differently depending on their labor-intensity, profitability, and margin for increased productivity. This impact disparity is already being felt on the ground. One owner of an SME printing business in the town of Mae Klong in Samut Songkram province explained that the minimum wage increase will not impact his business because he says he can save costs elsewhere in his operations and is willing to pay a higher wage to keep his skilled workers. He is, however, concerned for SMEs that do not need skilled workers, like fisheries. For them, he said, the new minimum wage for an unskilled worker is just too expensive. But, according to this businessman, the government and businesses are focusing on the wrong problems by worrying so much about the minimum wage. For him, the costs of inputs for his printing business, like paper, ink, and gasoline, which are more expensive and harder to get for provincial SMEs, is what is making his business vulnerable, not the change in wages. He added that the issue of expenses related to logistics, such as the cost of gasoline and quality of infrastructure for moving goods, is what the government should pay more attention to if it wants to help Thai entrepreneurs.
Arguing that many SMEs cannot support the costs of the new minimum wage, private sector bodies such as the Federation of Thai Industries, the Chamber of Commerce and the Thai Bankers’ Association have called for the government to set up a compensation fund for Thai businesses (particularly for SMEs) to alleviate the impact of the wage hike. The government has rejected that idea, but is already implementing a number of support measures, including:
- Reducing employers’ contributions to the Social Security Fund from 5 to 4 percent
- Cutting fees paid by small- and medium-sized hotels by 50 percent
- Establishing skills training clinics and increasing the state budget for seminars
- Reducing the withholding tax for SMEs from 3 to 2 percent
- Reducing corporate income tax from 30 to 20 percent by 2013
These measures are a good start, but don’t alleviate the need for a more global economic policy required to really move the Thai economy to the next level. Both private and public investments are needed in key areas such as education and training, infrastructure and energy, and research and development. The role of the government in shaping a global business environment that will be more supportive of SMEs, and in preparing the Thai economy for the upcoming regional integration into the AEC, is what can make the wage policy beneficial or harmful to the Thai economy and define the role Thailand is ready to assume in the region for the coming years.
Sarah Alexander is a program fellow for the Economic Development Programs, Véronique Salze-Lozac’h is the Foundation’s director for Economic Development Programs, and Arpaporn Winijkulchai is a program officer, all based in Bangkok. They can be reached at [email protected], [email protected], and [email protected], respectively. The views and opinions expressed here are those of the individual authors and not those of The Asia Foundation.
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