Raising welfare, labor productivity and unemployment effects of the minimum wage rise in ThailandBy Bangkok Pundit Apr 10, 2012 10:00AM UTC
In the 2011 election, Pheu Thai Party promised to increase the daily minimum wage to 300 Baht a day and that this would mean there would be a single rate across the country. At that time, the minimum wage was between 159 to 221 Baht – with the amount being higher in urban provinces and lower in rural provinces. After the election, the Puea Thai-led government stated they would proceed with this policy. In October, a tripartite committee of employers, employees, and the government approved an approximate 40 percent nationwide increase of the minimum wage starting from April 1, 2012 (implementation was delayed from January to April because of the flooding). Hence, from April 1, 2012, Bangkok, Phuket, and 5 other provinces surrounding Bangkok will get a daily minimum wage of 300 Baht. Thailand’s other 70 provinces were also to receive an approximately 40 percent increase as well on April 1, 2012, but will have to wait until April 1, 2013 to get a daily minimum wage of 300 Baht.
Dilaka Lathapipat, a researcher at TDRI, recently had an op-ed (PDF) in The Nation about this issue.
Caption: Figure 1 shows the inflation-adjusted national average minimum daily wage from 1986 to 2010 denominated in 2009 Thai baht. Since the minimum wage paid in Thailand is not indexed to inflation, it has been declining constantly in real terms after the 1997 economic crisis.
Dilaka then writes:
Considering the fact that minimum wages are set through a tripartite committee composed of representatives of workers, businesses and the government, the eroding real minimum wage clearly reflects the weak bargaining power of Thai workers.
An effectively implemented minimum wage policy can help lift the wages of those workers with the least bargaining power. Using historical data for non-agricultural employees, I estimated the wage effects of minimum wages, and present the results in Figure 2, which shows that increases in the minimum wage did indeed improve wages at the low end of the wage distribution.
As to be expected, the largest gains in wages occurred among workers in the lower wage percentile rankings. The greatest impact is seen around the 15th percentile of the wage distribution, where a 1-per-cent increase in the minimum wage is expected to raise wages there by around 0.87 per cent. The positive spillover effects are expected to reach as high as the 60th percentile of the wage distribution.
The above analysis shows that the welfare of workers who remain employed in the non-agricultural sector would improve. However, the impact on the overall welfare of low-paid workers also rests on a multitude of other factors. Raising the minimum wage by too much too quickly can actually end up hurting some groups of low-paid workers, which the policy is intended to help. The total earnings going to these workers could be lowered if too many of them are priced out of the sector covered by the minimum wage legislation or out of the labour market altogether
The study identifies the most vulnerable group of workers to be low skilled youngsters aged 15-24 with at most a high school qualification. It finds that a 10-per-cent increase in real minimum wages is expected to raise the unemployment rate for this group of workers from 4.1 per cent to 5 per cent, reduce their labour force participation from 89 per cent to 88 per cent and reduce their employment-to-population ratio from 85 per cent to 83.2 per cent.
The important message from this study is that increasing minimum wages from their current relatively low levels to the promised Bt300 per day across the country should be phased in more gradually.
BP: Then Commerce Minister, and now Finance Minister, Kittirat stated that once the minimum wage hits 300 Baht there will be no further increases until 2015. Hence, we have large increases for 1-2 years, but then no increases for 2-3 years. Given this, BP thinks it would make more sense for 10-20% yearly increases which will also increase the minimum wage to 300 Baht by 2015 as well. The problem for the government is that it promised to increase the minimum wage to 300 Baht immediately during the election campaign so there own rhetoric has made this politically difficult. Then again, BP does wonder whether if Puea Thai had promised during the election campaign to increase the minimum wage to 300 Baht within 3 years whether it would have
The Bangkok Post has an article on what Dilaka has written:
According to the study, the minimum wage hike would reduce income inequality significantly, particularly for low-income and unskilled workers in formal producing sectors. The study said the 300-baht minimum wage has no major effect on employment rates in the overview but it has significantly affected employment reduction in small and medium manufacturing enterprises (SMEs) with no more than 100 workers.
Many workers in these SMEs have moved into the agricultural sector and do not receive salary payments as they are working for their families. Some were forced to work in poorer conditions in informal private enterprises with less than 10 employees and are overlooked by government inspection.
The study said employment in SMEs would drop significantly to 70% from 81% as a result of the government’s 40% minimum wage increase policy.
BP: So it is SMEs with less than 100 workers that will be hit the hardest, but what sectors? From Dilaka’s op-ed:
The greatest job losses would likely occur in the small-scale manufacturing and hotel/restaurant sectors. These displaced young workers who remain employed would likely find jobs in the agricultural/ fishery sector, as well as in construction and other service sectors.
BP: Some sectors are more productive than others and their productivity has been increasing.
From a TDRI Study in 2012 on manufacturing:
BP can’t find a 2010 chart for all sectors, but you can see from the below chart the 2006 figures:
BP: Hence, for the large-scale manufacturing you are unlikely to see many large multinational manufacturing companies leaving. BP will look at that and other issues related to the minimum wage increase in latter posts.
btw, has anyone seen a single chart showing both minimum wage increases and labor productivity, like this one (page 4) up until 1995.