The 300 baht minimum wage hike: equalising incomes or destroying SMEs?

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Terence McDowell
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3 The 300 baht minimum wage hike: equalising incomes or destroying SMEs?

nationwide concerns over rising costs for entrepreneurs against widespread cheers from

Despite the attempts of the business and industrial sectors to halt a further increase

1 3 The 300 baht minimum wage hike: equalising incomes or destroying SMEs? A 300 baht minimum wage was already in place in seven pilot provinces in 2012, amidst nationwide concerns over rising costs for entrepreneurs against widespread cheers from workers. Despite the attempts of the business and industrial sectors to halt a further increase in the minimum wage, the policy went into effect on January 1 st How the new policy will impact the country will likely to be known soon. 10 Outstanding SituationS In The Year

2 Overall picture of Thailand s labour market Thailand s labour market relies heavily on cheap labour. One reason is that the Thai economy is export led and must maintain competitiveness by keeping costs low, including labour costs. Meanwhile, the majority of Thailand s export products are made to clients orders. Such exports do not leave many benefits for the Thai economy. Neither do these orders improve labour productivity, manufacturing innovation or technology. These reasons contribute to why Thailand remains in the category of a middle income country. 1 Discussions on the minimum wages are not new. The low minimum wages have long left workers with insufficient income to meet their costs of living. However, raising the minimum wage would increase the costs of production and impact on the prices of goods and employment rates. There may as a result of any wage increase be lay offs by some low margin businesses that could not shoulder the increased expenses. Populist policy for workers The Pheu Thai Party s election platform on a 300 minimum wage hike was highly controversial from the beginning, with both strong support and strong opposition. Although the party amassed a large number of votes from the 38 million workers, the wage increase policy implementation was delayed by the great floods at the end of 2011 that affected half of the country and badly damaged the industrial sector. The Government, as a result, announced the implementation of minimum wages to 300 baht in only seven provinces at first, namely Bangkok, Nonthaburi, Pathumthani, Samut Prakarn, Samut Sakhon, Nakhon Pathom and Phuket. A nationwide implementation of the minimum wage only began on January 1 st This biggest increase in wages since 1973 however came with a condition that there would not be another raise for at least 2 3 years. A study found that the increase of minimum wages from 245 to 300 baht per day, an increase of 22.45%, has had different effects on different industries. In large scale industries which account for about 50% of all industries, labour costs make up only % of production costs, while in small and medium size industries that account for the other 50%, labour costs account for 10 30% of production costs. Meanwhile, labour costs account for 30 35% of production costs in the agricultural sector, 30% in the transportation sector and 3 5% in retail and wholesale businesses. The total number of workers in the formal sector currently numbers million workers. 2 Support and Opposition Before April 1 st 2012 Opposition from employers to the minimum wage increase was to be expected. However, labour unions surprisingly added to voices of dissent as Chalee Loysoong, Chairperson of the Thai Labour Solidarity Committee, demanded that the government immediately raise the minimum wage to 300 baht across the country, and not just in the seven provinces, as promised before the election otherwise he would organise a demonstration and file a case at the Administrative Court. Mr Loysoong reasoned that the Government should raise wages for labourers across the country as it has raised salaries for civil servants. 3 On the other hand, entrepreneurs presented data on the negative consequences that a wage increase would place squarely on owners of small and medium enterprises (SMEs) that may even cause many of them to shut down and others to move their production bases to neighbouring countries such as Cambodia, Vietnam and Myanmar. 4 A group of forty two businesses 100 Thai Health 2013

3 Minimum wages before being raised to 300 baht on January 1 st 2013 Provinces Originally After April 1 st 2013 raise Phuket Bangkok, Nakhon Pathom, Nonthaburi, Patumthani, Samut Prakarn, Samut Sakhon Chonburi Provinces Nakhon Si Thammarat, Angthong Chumporn, Pattalung, Loei, Satun, Srakaew Prachuab Kirikhan, Yala, Samut Songkram, Surat Thani Narathiwat, Udorn Thani, Ubon Ratchathani Originally After April 1 st 2013 raise Chachaoengsao, Saraburi Ayutthaya Nakhon Nayok, Pattani Rayong Trat, Lampoon, Nongkhai, Buen Karn Phang nga Kamphaeng Phet, Uthai Thani Ranong Kalasin, Khon Kaen, Chainat, Suphanburi Krabi Chiangrai, Nakhon Sawan, Buriram, Phetchabun, Yasothorn, Roi Et, Sakon Nkhon Sakhon Ratchasima, Prachinburi Chaiyaphum, Mukdaharn, Lampang, Sukhothai, Nongbua Lamphu Lopburi Nakhom Panom Kanchanaburi Pichit, Pitsanulok, Phrae, Mahasarakarm, Mae Hong Son, Amnat Charoen, Uttaradit Chiangmai, Ratchaburi Tak, Surin Chantaburi, Petchburi Nan Songkhla, Singburi Sisaket Trang Payao Source: Office of the Permanent Secretary to the Ministry of Labour, Bureau of Labour Economics, Office of the Central Wage Committee, Table displaying minimum wages according to the resolution of the Wage Committee. 17 October Outstanding SituationS In The Year

4 filed a case to the Administrative Court demanding the raise to be stopped, claiming that the Government had interfered with the function of the Central Wage Committee 5 and the move negatively impacted on the wage structure with a result that some businesses would cease to exist. However, the court denied their request. 6 Will the Raise Destroy SMEs? Anusorn Kraiwatnussorn, Assistant to the Labour Minister, said before the April 1 st wage hike that this policy would benefit 5.4 million workers and that translated roughly into 500 million baht more spending power per day. 7 This increase in purchasing power would send ripple effects across Thai society. However, the Central Wage Committee studied the impact of the hike in seven pilot provinces in June and found results similar to the survey by the Thai Chamber of Commerce and the Chamber Commerce Council of Thailand that more than 80% of SMEs bore the brunt of the hike in several ways. These included higher costs, decreased income, sales drops, lower competitiveness and inability to grow. Only about 17% of companies did not experience any effects. 8 Another study by Dhurakij Bundit University research center entitled 100 days of 300 baht minimum wage and effects on SMEs in seven provinces found similar results. 87.5% of the 638 SMEs surveyed in the seven provinces experienced a negative impact from the wage hike. 73.2% managed to cope with the impact whilst 14.3% could not cope and faced problems relating to rising production costs. In particular, 28.7% of SMEs in the manufacturing sector said that they had experienced more serious impacts than expected. Only 12.5% said that they were not impacted at all. Kiatanan Luankaew, Director of the research center, said that although most SMEs could cope with the impacts, many other risks remained including volatile politics, a depressed global economy and the rising costs of living. The wage hike would only make SMEs even more vulnerable and 130,000 SMEs may have to shut down or cease to formally exist over the next months if the Government didn t implement measures to mitigate damages. 9 Meanwhile, other provinces began to experience side effects from the hike in the seven provinces. Workers began to demand wage increases and became picky with work offers. Some workers moved to work in the seven provinces. Several factories in these other provinces faced labour shortages. Dilaka Latthapipat, a TDRI researcher, said that The wage increase, which doesn t come with increased labour skills, will cut companies profits. Many SMEs will disappear in the long run. In the end, only big companies will dominate the market. 10 Reducing Inequality and Changing Thailand into a New Economy? This is what some people expected to happen after April 1 st 2012 and again after January 1 st The clearer the signal of the Government s intention to go through with the policy, the louder the opposition became. Another poll by Bangkok University found that 64.3% of economists considered the policy to be misguided 11 but still other economists and the Government insisted the benefits outweighed the disadvantages. Kittirat Na Ranong, Deputy Prime Minister and Minister of Finance, said that the wage hike would help expand the economy due to increased purchasing power and reduce the economy s dependency on export. In a way, it encouraged entrepreneurs and workers to increase their own capabilities Thai Health 2013

5 One advantage of the hike that many academics agreed on was its equalising effects against the long existing inequality in Thai society. This idea is intimately connected with Thailand s current political climate. Yongyuth Chalaemwong, TDRI s director for Labour Development Research, was of the opinion that, although the policy has some negative effects, they were not as bad as predicted. On the contrary, the wage hike forced businesses to overhaul themselves in order to increase productivity. It also made the Thai economy more conscious of the use of wages to reduce economic inequality. 13 Nithi Iewsriwong expressed his approval of the policy and saw in such a policy the start of a new direction for Thailand s economic growth in line with the Meidnes Rehn theory of economics, named after the Swedish economist who developed it. 14 This theory proposed that in an economic system with large wage inequality, low technology businesses will depend on low skilled labors and pay them less than high technology businesses. However, this led to a vicious cycle of wage inequality. In the end, the economic system would have increasingly low productivity and experience lower standards of living. As a result, in order to escape this vicious cycle and become a high productivity economy, it was necessary to reduce wage inequality and such a system would automatically eliminate low productivity businesses. However, at the same time, it was important that the Government implement measures to increase the skills of workers while boosting economic growth with measures such as investments in infrastructures and social welfare. These measures would encourage growth in demands. While there would be an expansion and investment increase in high tech businesses, workers with improved skills would be required. In the end, productivity would increase along with living standards. 15 Sixteen remedial measures: useful or useless? Apart from presenting negative consequences, there was not much that the otherwise powerful business lobby such as the Federation of Thai Industries (FTI) and the Thai Chamber of Commerce could do to stop the wage hike due to popular support for the policy. As a result, industry then demanded that the government 10 Outstanding SituationS In The Year

6 implemented measures to mitigate the detrimental impacts on vulnerable SMEs. On January 8 th 2013 the Cabinet issued 16 remedial measures, namely: (1) Measures to increase liquidity/lower costs such as loans for hiring, loans for manufacturing, guaranteeing bank loans for existing and new clients. (2) Tax measures such as reducing social security contribution rates, cutting corporate taxes, making wage increases tax deductible, making employee training costs tax deductible, allowing tax exemption for machinery, reducing withholding taxes and fees. (3) Measures to increase labour productivity such as loans from a Skills Development Fund and mobile skills development clinics (6) Measures to increase revenues for certain businesses such as increasing rates allowed for meetings of government agencies. (7) Measures to promote sales such as organising caravans of cheap products to sell to workers at their work sites. 16 However, Thanit Sorat, FTI Secretary General, considered these sixteen measures insufficient to help SMEs. He said: Overall, these government measures help SMEs little. Many of the measures have little relevance or effects. For example, the cutting of fees is minuscule compared with the rising costs. 17 Wage Hike: A Means, Not an End Now that the wage hike is implemented countrywide, it will take a while before its positive and negative impacts become visible. Nithi Iewsriwong said that even though the wage hike can elevate Thailand to another economic level in the future, it must be accompanied by other measures. The government must pay attention to different viewpoints and promptly implement measures such as: Maintain the country s infrastructure advantage in logistics and high speed internet. 2. Allow foreign workers to access the same wages and benefits as Thais to prevent job grabbing and reduce exploitation 4. Increase productivity through skills development 5. Improve educational quality at all levels 6. Protect and rehabilitate local and national natural resources 7. The higher wage will cause the agricultural sector to lose workers resulting in widespread social impacts and market monopolisation by multinationals. The government must do more to ensure that independent farmers would survive with security equal to or better than workers in the service and industrial sectors. Another important aspect in response is changing the mindset of entrepreneurs. Thailand must now end its dependence on cheap labourers as a means to keep costs low and retain competitiveness. The country must now put emphasis on the quality or values added from the goods and cost effectiveness. The country should use the minimum wage as a mechanism to develop workers skills so that they could develop to their full potential and are paid accordingly, in line with the creative economic development policy. 19 In the end, the wage hike is not a goal as reducing inequality and improving living standards of workers depends on several factors. Increasing the minimum wage for workers without giving them the power to organise and additional leverage is no different from making repeated charity contributions. It is necessary to build a sustainable mechanism whereby the minimum wage reflects the labour reality without depending on politicians. Whether this Pheu Thai Party s populist policy will pave the way for such as system remains yet to be seen. 104 Thai Health 2013

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