The Minimum Wage Two Step

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So people are now worried that the promised Minimum Wage hike to THB 300 per day / THB 15,000 for university graduates isn’t going to happen, and I cant help wonder why people are shocked.

I completely support Thai workers and would love to see their earnings and wealth grow across the board, frankly even the proposed new levels are shockingly low compared to what Westerners and even some sectors of Thai society can earn, but despite what is promised in elections there is no quick and easy fix to the income disparity gap, which this policy was touted to address.

Thailand is a major manufacturing hub and if we look at the products being produced here today compared against say 10 years ago then we can see that Thailand is moving up the value chain, slowly but surely.Thailand has moved on from making plastic toys & umbrellas to high tech crystals, electronic components and cars, but even within these high tech  and advanced sectors such as semiconductors most of the processes that take place in Thailand do so because they are very labour intensive.

These large high tech firms such as Western Digital, Samsung, Minebea, Ford, GM employs tens of thousands of people at their plants in areas like Rayong, Ayutthaya and Bangpa-in and due to the intense competition (from very low unemployment especially in industrial estates) few of them can attract workers at minimum wage alone, so packages with higher salaries and additional benefits such as health insurance etc have become the norm.

But this should not lead one to think that these large (mostly foreign) firms will be unaffected by a wage hike because despite paying more than the current minimum wage, the amounts paid still tends to be less than what’s being proposed, and these firms know that they will still have to offer more than the minimum wage to attract the best new staff. Regardless of size a wage hike is a direct, immediate hit to the bottom line, with no associated increase in productivity.

Remarkably some of my customers in these industries have mentioned that they are now looking at the possibility of offsetting this wage hike through more automation and employing fewer people. However, in today’s economic climate not everyone, especially local SME’s are prepared for such significant capital expenditure.

How will local SME’s involved in low margin labour intensive industries such as garments and textiles manage this cost burden when so many of them are already having to close the factory doors?  Some of these firms, even very large firms such as Hana Microelectronics have publicly discussed eyeing overseas markets in reaction to news of this proposed wage hike.

So like it or not, for now, Thailand’s competitive advantage is labour cost, and will be until such time as more value is added in Thailand to foreign and local businesses via local skills and local innovation.

This can only come through investment in people and education.  Its not a quick, sexy, fix to the problem and it doesn’t win elections (here at least sadly), but its what Thailand needs for long term growth, what they don’t need is a sudden departure of many major foreign manufacturers so it’s hardly surprising to hear of a slightly new twist to the new minimum wage policy, what the Government and employers will have to be careful of now is how Thailand’s protest happy workers will react if they don’t get what they feel was promised to them…

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