The Wage Hike Debate: fair or foul?

Business owners, on the most part, were not popping their champagne corks at this news as a rise of anywhere up to 100% in wage cost would mean lower profit margins for those who are fortunate, and threat of bankruptcy for others less so.

By | Thu 26 Apr 2012

When the Yingluck Sinawatra government surged into power, surfing the crest of its populist wave, the majority of Thais were elated: promises of computer tablets per child, low interest loans from government banks, giveaway credit cards to farmers, a 7.7 billion baht women’s funds and the crowning peak, the minimum wage hike from, in some provinces, as low as 150 baht per day, to a standard minimum of 300 baht per day nationwide.

Business owners, on the most part, were not popping their champagne corks at this news as a rise of anywhere up to 100% in wage cost would mean lower profit margins for those who are fortunate, and threat of bankruptcy for others less so.

Since the government declared at the beginning of the year that the implementation of the wage hike would be achieved in two steps, firstly a 40% hike on April 1st of this year and the completion of the process on 1st January 2013, inflation has already risen by 3.4%.

The general consensus is that the minimum wage in Thailand, which has hardly increased over the past decade, must be upped to improve the quality of life for labourers. The lack of consensus comes from debate over the timeframe, level of increase as well as lack of information and support from the government.

Newly arrived Anan Bogvornnavarak, Chief of Chiang Mai’s Labour Protection and Welfare Office shares the private sector’s concern, “Our office has been very busy with visits from business owners who are afraid that they are not going to survive this policy,” he said. “Few countries in the world have upped their minimum wages at this level and speed. The government hasn’t published any information to share with the public about what impact they anticipate from its implementation. From what I understand, the government’s thoughts are that with more money in more pockets, more money will be spent and the economy will thrive. This thinking seems to be rather shortsighted, but at the end of the day the government has to prove to us that they were right and they have a responsibility to pull off their campaign promises.”

The fact is the government has no idea what is going to happen. There has been no research, no analysis and no debate. “We thought that groups such as the Chamber of Commerce, the Federation of Industries and even our own Northern Handicrafts Manufacturers and Exporters Association (NOHMAX) would be consulted,” says the group president Premreudee Kullasu who is also owner of Cotton Farm, a bussiness which employs over two dozen. “But instead the government announced it as fait accompli, we were told that we had to survive, that is

Up to 95% of businesses in Thailand are small and medium sized enterprises (SMEs), these relatively low-profit margin businesses are the backbone of the economy, and the most worried about the hike. While the government’s efforts to help businesses include a personal income tax reduction from 30% to 23%, which will be decreased again to 20% within a year, as well as its offer of temporarily lower social security fees by 2% each for both employers and employees (both of whom currently pay 5% each), SME business owners are not impressed. “If you are a huge business making profits of tens or hundreds of millions, then the tax break can help mitigate some of your increased wage costs,” said Premreudee. “However, these businesses tend to be more machine-heavy anyway. Now, you look at many of Chiang Mai’s businesses in the handicrafts business, apart from raw materials, most of our expenses are in wages, sometimes up to 75%. We don’t make millions in profit and a 10% reduction in income tax is negligible.”

“The first minimum wage was set in Thailand in 1973 at twelve baht per day,” explains Anan, who sympathises with both workers and business owners. “The International Labour Organisation sets a guideline that suggests an employee earns enough to support him/herself as well as a spouse and child. This never happened in Thailand, our minimum wage has always only covered the living cost of one. I understand why the government feels the need to intervene.”

Initially, in 1973, the minimum wage was set by the government, but in 1998 a new law was passed in which minimum wage was set by each province. Five representatives each from the government, labour unions and the business sector would propose a minimum wage, according to inflation and the economic situation in each province. The proposal would then be sent to the central government to approve. There were pros and cons to this system, some provinces such as Phayao, which sits at the bottom of the list found that their low cost attracted investors, and other provinces such as Phuket, benefited from an influx of much needed labourers.

While the provincial system still stands on paper, and the April 1st wage hike is yet to be uniformed nationwide _ Chiang Mai’s minimum wage stands at 251 baht per day, up from 180 baht per day on March 31st _ by January next year the government will ask each province to agree to the new national standard of 300 baht per day (for Chiang Mai, the wage hike will increase by 60% over twelve months). Provinces, by law, can reject this, claims Anan, though he is still unclear what happens if they do.

“Of course this is a good thing,” says Ongart Kittikhunchai, president of the Chiang Mai Federation of Industries, “people need to earn more money, and when they do, money will filter down into the economy, but the time frame is what worries us most. People will lose jobs, unemployment will rise, businesses will go under and SMEs will be the hardest hit. The positive is that unskilled workers will be pressured to learn new skills to become more competitive, production will rise because businesses will be forced to become more efficient and Thailand can start selling more valued products focusing on quality rather than cheap labour. If we can overcome the initial shock, if businesses can get creative, then within five to ten years Thailand could become a developed country.”

Ongart goes on to say that Cambodia has already opened up a new industrial estate in anticipation of an exodus from Thailand and many businesses are casting their eyes to other neighbouring countries. However, for Thailand to put itself into a strong position in anticipation of the implementation of the ASEAN Economic Community in 2015, these steps must be taken.

“The government has a huge fund to help develop and up skill employees,” says Ongart. “The Department of Skill Development (¬†offers free courses in a variety of fields, but I just wish they had done this 3-5 years ago, or give us 3-5 years to prepare, so that we would be more ready.”

While Ongart, whose business Sun Sweet turns over 1.2 billion baht a year, has the luxury of feeling positive, others in a more precarious situation are not so confident.

“Many business owners are scrambling to find ways to mitigate this increase in operational costs,” said Premreudee. “Many manufacturers have had to make their employees redundant and will now pay them per product rather than per day. This will mean that many workers will now be outside the system. They will have to pay for their own social security and there will no longer be any protection for them under the labour law, this will open them up to exploitation. Another method being used to mitigate rising cost is to cut extra benefits to employees, so if you used to give a bonus at the end of every year, buy three uniforms for your staff, pay for their lunch and petrol, then you will have to cut these benefits in lieu of higher pay.”

“It is not that simple,” warns Anan, “if these benefits were already contracted, then an employer can not remove them without the agreement of the employee. Basically whatever benefits have been promised in a contract will have to remain and the wage increased unless employees agree to the cut. If employers do not comply with the law then they can be put in jail for up to six months or fined up to 100,000 baht. The best solution is to try to negotiate with your employees, ask them to make some sacrifices to help the business survive. Whatever you do, just make sure it is legal.”

Anan also adds that the 300 baht is a minimum wage for unskilled labourers but urge employers to consult the labour office as to skilled labourers. Some jobs have minimum wages set as high as 510 baht per day. The Department of Skill Development can certify skill levels which guarantee a higher salary. Motorcycle mechanics at top levels can up their minimum wage to 445 baht per day and top level massage therapists sit at 510 baht per day. It is worthwhile for unskilled labourers to join these free courses to gain higher ranked certificates which will make them eligible for more pay.

“I think that this will be the beginning of the end for a certain Asian way of life which we have enjoyed here in Thailand,” added Anan. “For many employers, their employees are akin to family. Staff often look at business owners as a father or mother figure, in many cases people don’t work just for money, but for the feeling and sense of community. I think that those days are going to be over soon, unions will strengthen and we will go the European Union way. What is interesting is that Thailand’s unemployment rate sits below 2%. Employers are struggling to find qualified employees, so hopefully with the wage hike there will be more pressure for employers to hire skilled staff and this will mean that more labourers will seek to improve their skills. This will, I hope, increase productivity and as long as the inflation isn’t too high, the entire economy can prosper.”

“I was looking at the National Economic Development Plan recently,” adds Premreudee. “The plan normally offers a ratio for growth per sector, for many years in advance. The plan takes all things which affect the economy into consideration and is the guideline for all past governments to implement their policies. But this government has completely ignored the plan and are simply pleasing their voters without having any clear direction. Is our future economic path up to the whims of each party and government?”
“I have a feeling that the government will be reviewing all this over the next three to six months,” adds Anan. “If the economy is badly affected, I hope they will not force the next step of the hike. We shall wait and see.”

The wave of populism is powerful indeed and if the government is right with its insistence on the timeframe and scope of implementation of its policy, then Thailand will reap great benefits from it. However, we all know how destructive a wave can be and let’s hope that we are not inundated by the weight of this policy to the point where it all comes crashing down on our collective heads.