The bottom line for business

Debate continues as to whether the looming wage hike will force companies to close or raise people’s purchasing power enough to compensate.

One of the most debated issues of 2012 has undoubtedly been the government’s intention to hike the daily minimum wage to 300 baht nationwide on Jan 1,2013.During the 2011 election campaign, the Pheu Thai Party promised blue-collar supporters that if voted into power, it would ensure “living wages” are paid, improve their standard of living and reduce inequality in society.

Staying true to its pledge, the Pheu Thailed government raised the daily minimum wage in April 2012 to 300 baht in seven provinces  Bangkok, Nonthaburi, Pathum Thani, Samut Prakan, Samut Sakhon,Nakhon Pathom and Phuket. At the same time, wages were raised by 40% in the remaining 70 provinces but still below 300 baht. From Jan 1,2013, these provinces will see another increase to 300 baht, raising total labour costs for some firms by as much as 85%.

Business operators, especially members of the Federation of Thai Industries (FTI),have heavily criticised this policy, saying it will bring about adverse effects on labourintensive industries and small and mediumsized enterprises (SMEs).

Thailand has 2.9 million SMEs generating annual revenue of 1.9 trillion baht.

“The nationwide daily minimum wage rise to 300 baht will have a drastic effect on businesses, especially those in labour-intensive industries and SMEs with 100-300 staff,” said Thaveekij Jaturajarernkul, the FTI’s vice-chairman for labour issues.

He said the most affected sectors will be footwear, garments, textiles, leather,furniture, ceramics and seafood.

“Labour-intensive industries will have only three options¬† close down, move abroad or operate illegally by paying less than the minimum,” said Mr Thaveekij,adding that only large firms will have the resources to relocate, while SMEs will be forced to close down.

Businesses remaining in Thailand will simply pass on their higher labour costs to consumers,making Thai goods uncompetitive. The FTI also argues the government’s corporate tax reduction will not help to counter the negative effects of rising labour costs. It is demanding more compensation including better access to capital for SMEs.

While many in the business community do not support the wage hike, the nonprofit Thailand Development Research Institute (TDRI) think tank offers a more nuanced take on the potential impact.

Yongyuth Chalamwong, a labour expert at the TDRI, agreed that labour-intensive industries and SMEs employing unskilled labour will be affected, and many may even have to close or relocate if they cannot adapt. A domino effect of wage increases is also expected, with those now receiving just over 300 baht demanding higher pay too. This could in turn cause Thailand to become a less attractive destination for foreign manufacturers than other Asean countries that pay lower wages.

But despite such immediate effects, Mr Yongyuth maintains the wage hike will raise the purchasing power of low-income earners. Real wages will increase by 11-12%,while workers in the 70 provinces not subject to the wage increase earlier stand to gain more than those working in and around Bangkok due to the relatively lower costs of basic goods in these areas.

On average, workers’ incomes in 25 provinces, mainly in the North and Northeast,have barely increased at all over the past decade, he said. Of Thailand’s 39 millionstrong labour force, only 15 million are employed in the formal sector and eligible to receive the daily minimum wage. Of these, 3 million are civil servants who already earn higher wages, leaving 12 million to benefit from the government policy.

Nevertheless, Mr Yongyuth cautioned that the national economy could be adversely affected if labour productivity does not increase in line with the wage hikes. A TDRI study showed the nationwide 300-baht minimum wage could cause economic growth to shrink by 2.5% from baseline projections over the next 3-5 years if labour productivity does not rise by at least 8-9%. Baseline gross domestic product (GDP) growth is projected at 5% per year.

“Labour productivity must show 8-9%growth to offset the negative impacts on macroeconomics. If this fails to happen,then the country’s GDP will contract,thereby triggering negative consequences,”said Mr Yongyuth, adding that average productivity growth in Thailand is 3-4%per year.

Assuming other factors are unchanged,the research showed if GDP growth shrinks by 2.5%, then consumption and investment will contract by 2.47% and 2.79%, respectively, from baseline projections.

As well, exports are projected to shrink by 2.35% and public spending by 4% from baseline projections.

Productivity tends to be lower in labourintensive industries that use unskilled workers. Since these manufacturers lack the capital to spend on technology to replace human labour, their production costs will increase, leading to higher prices and reduced export competitiveness. In contrast, if productivity increases to the target level of 8-9% annually or an average of 8.4%, then the wage hike’s effect on GDP will be nil, the research showed.

Additionally, consumption and investment will increase by 0.13% and 0.35%,respectively, from baseline projections.Exports would see a smaller contraction of 0.34%, while public spending would increase by 1.11%.

Given these two contrasting scenarios,Mr Yongyuth urged both businesses and the government to ensure that labour productivity increases.

He said companies in the seven provinces that already saw their minimum daily wage increased to 300 baht immediately took measures to improve their productivity, which has increased by 8.7% from the normal average of just 3-4%.

“This is a positive sign, but it does not mean productivity elsewhere will rise as well. Unless both short- and long-term action is taken, chances are that productivity will actually fall,” said Mr Yongyuth.

Immediate measures companies can implement on their own include freezing new intake and laying off both unproductive and higher-paid workers.

“Firms can also increase the functions and responsibilities of the remaining workers such as having them multitask,”said Mr Yongyuth.

Other short-term measures include reducing non-labour costs in the production process such as improving efficiency by reducing manufacturing defects and cutting down on utility bills.

In the medium and long term, companies will have to restructure the production process by employing more skilled workers,upgrading technology and designing and developing higher-value brands. Intangible inputs such as human resource management training will also be needed on a consistent basis.

Mr Yongyuth said the government will also have to implement measures designed to ease the effects of the wage hike and allow firms to adjust.

“There is no automatic mechanism for translating the gains of the beneficiaries [the workers] into compensation for the losses of the employers,” he said.

Last month, the cabinet agreed to form a committee led by Deputy Prime Minister Kittiratt Na-Ranong to come up with remedial measures for affected businesses under recommendations of the Labour Ministry and the FTI. The FTI for its part has suggested setting up a special fund to offer loans to SMEs at only 1% interest to help ease their financial constraints. Company and employee contributions to the Social Security Fund should also be lowered to 3% from 5%, and tax waivers should be included.

How much the new committee will be willing to listen to such suggestions remains to be seen.

“There is no automatic mechanism for translating the gains of [the workers] into compensation for the losses of the employers