While the world gave a sigh of short term relief after Washington’s fiscal cliff deal January 1st, Thailand introduced a controversial nationwide minimum wage. The policy is popular amongst Thailand’s workers, yet corporations and some government level departments have expressed concern about the policy’s potential impact on employment and Thailand’s economy in general.
Minimum wages are unpopular among “free market” thinkers because they are thought to interfere with the efficient allocation of labor. They argue that businesses will suffer as their wage costs are made unnaturally high (“unnatural” meaning anything not set by market forces), and businesses will pass on these higher input costs to consumers through higher prices, resulting in inflation. Some also argue that minimum wages hamper businesses by forcing them to pay more to their least skilled workers at the expense of those who are more valuable, productive or capable. As with several of Thai Prime Minister Yingluck’s policies, critics have labeled the minimum wage increase as a “populist” measure.
These worries have been frequently voiced as the debate in Thailand has intensified over recent months. Since last April, when minimum wage policies were rolled out in seven provinces, there have been several warnings from business leaders about the potential negative impact on Thailand’s economic performance. Taweekit Chaturacharoenkhun, the vice chairman of the Federation of Thai Industries (FTI) last week warned that between 5% and 10% of Thailand’s labor intensive industries would be forced to close down over the next three months. Already the Chairman of the FTI had been forced out over his failure to convince the government to abandon the policy.
It is not just private businesses and their lobby groups who are concerned. Prasan Trairatborakul, governor of the Bank of Thailand (BOT), expressed concerns late last year on the impact that the minimum wage could have on various companies. He also predicted that some companies would have to shut down their operations in face of the higher labor costs.
Of course, there are strong counter arguments to those worrying about the impact of Thailand’s minimum wage. Minimum wages exist in many economies, notably in the so-called bastions of free market capitalism: the U.S., the UK and Hong Kong. Better paid workers will have more money to buy goods and assets and to invest in their families’ education and life quality. In this sense, the minimum wage could boost Thailand’s domestic demand and real estate sales.
Thai companies can easily move to neighboring countries to take advantage of even-cheaper labor costs – particularly in Cambodia, where areas bordering Thailand have already seen a localized boom in factory activity. The Thai minimum wage is still only 300 Baht (roughly $9.86USD) per day, which still compares favorably to many countries – most importantly, China.
Meanwhile, Thai inflation rates, and in particular core inflation, which is currently just 1.8%, remain relatively low. There seems to be adequate room for any inflation related hit that the economy may take as higher labor input costs are fed through supply chains to consumers. Interest rates are currently 2.75%, suggesting also that there is room for increases in that area if inflation becomes a worry.
Despite dismissing the fears of Thai businesses, the government has proposed several measures to mitigate the impact of the minimum wage. These include a cut in the corporate tax rate from 30% in 2011, to 20% in 2013; access to low-interest government loans; rent reductions on state land being used for business purposes; and other reductions in fees.
The Thai government has been determined to push ahead with the minimum wage policy, so the following months will once again allow economists to study the impact of minimum wage introduction. Looking more broadly, it is clear that wage increases across ASEAN nations are popular, and that they are more realistic now given the breathing space provided by large increases in China’s wage levels over the last couple of years. As China’s working population peaks (some predict as early as 2015), cheap Chinese labor will no longer be smothering prospects of wage increases across ASEAN, even if the dragon’s superior infrastructure and economies of scale still provide challenges.