Domestic economy needs boost after wage move

Increase in minimum comes at time of crumbling export demand in EU and US

By setting January 1 - yesterday - to impose the new minimum wage nationwide the ruling Pheu Thai Party has tasked itself with strengthening the domestic economy amid crumbling export demand. Yet, it must act fast to contain the fallout, or workers and the economy as a whole will fail to reap the full benefits.

Workers in Thailand weren't the only recipients of a pay hike yesterday. Workers in Malaysia and Vietnam were beneficiaries of similar moves within the region.

The debt crisis in the euro zone and economic stagnation in the US have bruised the export sectors of all Asian nations, with the extent depending on their exposure. Thailand, which sends about a quarter of its overseas shipments to the two markets, eked out a 2.3-per-cent increase in exports to US$211.41 billion (Bt6.48 trillion) for the first 11 months. This was far behind its original growth target of 15 per cent for the whole year.

The growth target for this year has been set at 9 per cent, but Thailand may suffer another disappointment, as there are fears the Europe will fall into a deep recession. This will weaken the recovery outlook for the US even though a partial deal to prevent its economy falling over the "fiscal cliff" was reached yesterday.

Weak export outlook aside, politicians in Thailand and other Asian countries are being forced to address growing social tensions in lower-income levels. By implementing the new minimum wage rules on January 1, Malaysian politicians aim to catapult the country into the high-income league of nations by 2020. The Vietnamese government, meanwhile, backed its course with a survey, which showed that the 2012 wage could cover only 60 per cent of workers' expenses.

Raising the minimum wage is part of the Pheu Thai Party's grand scheme to rebalance the economy, under which the domestic sector, which drives 30 per cent of gross domestic product (GDP), would play a bigger role. Upper middle-income earners already enjoy tax incentives, while farmers are supported by government subsidies. With more money in their pockets, these low-income workers will enjoy more purchasing power. Theoretically, higher incomes would encourage workers to work harder and this would promote productivity. With higher income, they would require fewer unpopular populist policies.

Some academics, particularly those at the Thailand Development Research Institute (TDRI), cheered the wage hike, given the slight returns workers have had from economic prosperity. Yet, employers in Thailand, like their counterparts in Malaysia and Vietnam, are grumbling. And TDRI academics are fretting that the sudden increase in costs will put many small and medium-sized enterprises (SMEs) out of business. The wage hike will trigger higher Social Security Fund contributions and other salary-based perks.

Some employers may adjust to this by laying off some workers, to maintain expenses, so while most workers will enjoy higher pay, some others may lose their jobs. Of the 11.7 million salaried workers in Thailand in 2007, some 7.5 million or 64 per cent worked for small businesses, the National Statistical Office says. Notably, these SMEs do not fully benefit from the corporate income tax cuts, as their profit margins are skimpy to begin with.

TDRI research showed that the policy could shrink the economy by 2.5 per cent annually during the first three to five years and throw one million people out of work. Industries would deploy modern machinery in their production process and spend more on RD (research) and upgrade labour skills. Labour-intensive industries are more likely to shift production to states with lower labour costs. In Asean, Myanmar now enforces the lowest monthly wage - 15,000 kyat or below US$18 (Bt550 baht). TDRI prefers a step-by-step approach.

Out of six requests, the Cabinet next week is expected to consider only a step-by-step increase to ease the burden for employers. The Federation of Thai Industries had hopes the government would assist employers by paying them 75 per cent of the wage differential in the first year, 50 per cent in the second year and 25 per cent in the third year. That would be about Bt50 billion. Only the SMEs in 70 provinces, included in the Social Security system, which employ 2.2 million workers, would be eligible.

It remains to be seen how the government will act on this and how employers will react. The only caution is that poor implementation would limit the merits of this policy. Given that many SMEs are a key cog in the supply chain of several industries, if they collapse it could set off a chain reaction and derail the government's economic rebalancing strategy.

Comparative wages

With a minimum daily wage of Bt300, Thailand remains mid-tier among selected Asian nations.

Country/city MDW (US$)

Myanmar 0.58

Cambodia 2.03

Vietnam* 3.20 (3.76)

Jakarta 2.95-5.38

Shanghai 4.00-7.90

Thailand 6.99 (Bt222)-9.45 (Bt300)

Manila 9.72-10.60

Kuala Lumpur** 9.81

Singapore None

Hong Kong 28.87

South Korea 31.80

Japan 65.78-85.36

Notes: The rates are as of June 2012

* $3.76 as of January 1 in rural and urban districts of Hanoi, Ho Chi Minh City and other big cities

** As of January 1, 2013

Compiled by The Nation

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Article source: http://www.thethailandlinks.com/2013/01/02/domestic-economy-needs-boost-after-wage-move/