Minimum wage rise to be offset by skills boost, kinda, maybe, eventually…

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I can see the argument which has been presented by government spokesmen, the ILO, and several others recently.

They say that a wage hike could lead to unemployment but this would be quickly absorbed by the market which is already complaining about a labour shortage.

My take is this: OK higher minimum wages will certainly lead to redundancies and less recruitment (sorry graduates), and yes if those who have lost their jobs are then trained in the skills which industry actually requires, then it could certainly maintain Thailand’s position as an attractive manufacturing destination and if done well, it could even help the Kingdom move further up the value chain. This of course is something which everyone wants to see, as this will mean more wealth creation throughout society. Perfect, perhaps…

But the fact is, as the World Bank recently reported, Thailand’s not insignificant manufacturing sector is still mostly low skilled labour intensive assembly work, even in the high tech sectors, and the real magic still happens overseas. The World Bank also reported on the constraints that Thailand’s industrial sector faces and must address if it is to move forward, namely:

  1. The technical, language and soft skills of the factory labor force.
  2. The quality and volume of science and engineering skills.
  3. The physical infrastructure in and around the industrial estates. Clearly also there is room for adding to the capacity of the transport infrastructure connecting production nodes in the urban region to the port of Laem Chabang as well as the capacity of the intra-city network in Bangkok.
  4. The ICT infrastructure lags behind that of Korea, Taiwan (China) and Singapore and this could be constraining firm productivity.
  5. Living conditions, services and amenities in the satellite cities do not induce some white collar and skilled workers to shift from Bangkok and this inhibits the seeding of clusters in promising locations close to but outside of Bangkok.
  6. Research, problem solving and technology development capacity at universities needs strengthening so as to stimulate links with the business sector.

If you are going address minimum wages then you must also address these constraints. The World Bank also helpfully made some suggestions here too,

The region should aim to build capabilities in a number of areas –In the manufacturing sector, autos, textiles and food processing are the most promising. In services, logistics, marketing, design and publishing could become important sources of growth and co-create value with manufacturing activities. Their prospects would be enhanced through localized clustering that boosts productivity and innovativeness.

The future of each of these industries will depend upon technological excellence and innovation. The auto industry will have to find a niche in light trucks, motorbikes, and small cars that are increasingly fuel efficient, and the local electronics industry might be oriented to serve the needs of the auto sector. Textiles and garments need to increase competiveness through greater emphasis on new materials serving other sectors, such as automotive, construction and medical services and through better design. The food industry needs to mobilize the techniques of bioengineering and other disciplines to upgrade the entire supply chain and focus on innovations in products, packaging and marketing.

Thailand’s business climate could be improved. The weaknesses – and recent deterioration – have been documented by the World Bank’s Thailand Investment Climate Assessment report and other reports on competitiveness.

Localized clustering and innovation that would promote sustainable growth are within reach. Whether this occurs will depend upon four factors, assuming of course that the business climate encourages investment.

A well articulated and strongly championed government strategy for the development of the Bangkok urban region that emphasizes the role and functions of clusters and wins the active support of other major stakeholders.

Major local firms – and a pool of smaller firms augmented by start-ups with innovative products or services – must set the pace and with policy encouragement, make technological advances central to their competitiveness. This calls for a major shift in the strategy and objectives of managements and improved managerial skills. Ultimately it is the management of Thai firms that will determine whether the Bangkok urban region becomes a home to innovative clusters of firms.

Existing and new firms will need all the help they can get from two sources. First, two or three universities in the Bangkok urban region must achieve levels of excellence in teaching and S&E research comparable to the best in Asia if not the world. In particular, they must focus on engineering and bioscience departments that can cater to the needs of the leading industries and become a source of entrepreneurship as well (Audretsch 2008). Efforts by universities, when matched by a change in attitudes of management, can together accelerate the tempo of technological change and push Bangkok’s industrialization to the next level. Second, managers and entrepreneurs will need assistance from providers of finance, of research, of design and other services. These are adequate but they must become world class.

Lastly, Bangkok must ensure that public amenities, services, housing and transport infrastructures receive sustained attention and financing. The quality of life will be vital to retaining a large talent pool, attracting investment and sustaining the tourist industry.

It is not just the livability of Bangkok that is critical, but also the livability and urban attractiveness of the smaller cities in the Bangkok urban region that are likely to be the nodes for new local industrial clusters. If these cities are to play the roles expected of them, then they too must provide services, amenities and infrastructure sufficient to draw and retain a class of knowledge workers who currently are unwilling to forsake Bangkok. This transformation of secondary cities will require local leadership, and better planning, governance, financing and effective inter-jurisdictional coordination.

It is through such a combination of initiatives that Bangkok will become an urban mega region that can sustain rapid growth and compete with other dynamic regions in Asia.

Its quite obvious to me that these constraints can’t be removed overnight. So what can be done and what is being done?

Well good news industry, you can relax, the Government’s Department for Skill Development will provide training courses via their E-Services which launched today.

Looking around the website I tried to find some information on the courses on offer and found news of the following courses: English language, Thai cooking, Thai massage, autobody repair, welding, mobile phone repair, Thai desserts, how to use soil as a construction material, Malaysian language and employment opportunities, parquet floor installation, hand spa, computer repairs, airconditioning repairs, tailoring, mechanical electronics, post natal care using Thai herbs and massage, Chinese language, metal turning, computer programming and Korean language.  I guess some could be very loosely defined as ‘engineering or science’…

The other argument I hear is that firms will be encouraged to invest in more automation, which will also help with the Baht valuation. OK this makes sense too, manufacturers could bring in more automation to offset the higher wage bill and those firms with sufficient levels of free capital likely will take advantage of the strong Baht to do so (leading to unemployment) but the fact is the automation option was also available to these manufacturers in their home countries before they left to set up their factories here. So the question on this front is will the Kingdom’s competitive advantages and various investment privileges that are available be sufficient incentive for manufacturers to refrain from looking overseas?

I don’t know, but I sincerely hope that this is not the extent of the training and policy measures that will be provided to offset the increased minimum wages, but even if it’s not, I just can’t see how pain can be avoided should be this policy be introduced next year.

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