The most debated economic topic of the month must be Pheu Thai Party's campaign promise to raise the minimum wage to 600 baht per day by 2027, from the current minimum wage of 354 baht.
Naturally, most criticism is on the negative side. The Joint Standing Committee on Commerce, Industry and Banking went as far as to say the raise, even implemented gradually, could hike business operating costs by up to 70%.
Others say that high wages would cause rampant inflation and drive away foreign investors to low-wage countries like Vietnam. Some businesses say they might shut down their factories/shops. All these are knee-jerk reactions rather than careful analysis of the issue. Thailand actually had a historic minimum wage hike in 2012 when the daily minimum wage was raised from 215 baht to 300 baht, a 40% increase.
The minimum wage hike was done in two phases. The first phase was an increase in seven major provinces including Bangkok and Phuket on April 1, 2012. The other 70 provinces got their wage hikes on Jan 1st 2013.
Economic collapse? Runaway inflation? Massive lay-offs? Business closures? Social upheaval? GDP growth rates were 7.2% in 2012 and 2.7% in 2013. Inflation, instead of rising as the Bank of Thailand warned, declined from 3.8% in 2011 to 3% in 2012 and further declined to 2.2% in 2013. Unemployment remained constant at a low level of 1.2% in both 2012 and 2013.
A study by the Puey Ungphakorn Institute for Economic Research in 2016 concluded that 2012's wage hike resulted in (1) stable aggregate unemployment; (2) no contraction in weekly working hours; (3) no significant effect on small and medium enterprises; (4) large industrial firms taking up job losses from micro-enterprises; and (5) positive effect on hourly wage distribution, ie, lower wages get higher raises.
There are three key reasons why the unprecedented minimum wage hike of 2012 did not result in economic disaster as economic theories suggested and most scholars expected. First, only a small percentage of workers earned the minimum wage. In 2011, a year prior to the large minimum wage increase, the non-agricultural sector was paying an average daily wage of 411 baht, far higher than the statutory minimum wage of 215 baht. When the government raised statutory minimum wage to 300 baht in 2012, most industries were unaffected.
Second, the labour market was tight which prompted the country to import 1.95 million foreign workers to supply the labour force. Even with a 40% higher minimum wage, there were effectively no lay-offs. Third, the economy was on a high growth path with 4.9% growth in private consumption and 9.5% growth in exports of goods and services.
From the 2012 experience, it is clear that fear and panic overruled quality reasoning. Before we determine the labour market and economic conditions of 2022 to see whether the economy is ready for another big round of minimum wages, I would like to discuss Japan's "Income Doubling Plan" from the 1960s.
For those who think Pheu Thai's minimum wage plan is crazy, Japan's Prime Minister Hayato Ikeda's "Income Doubling Plan" looks even crazier. The programme was initiated in the fall of 1960. He aimed to double the incomes of all Japanese workers, not just those on the minimum wage, within 10 years.
Bureaucrats, particularly those in the Ministry of Finance, refused to cooperate. The plan called for rapid economic growth of 9% during the first three years and 7.2% for the remaining period. For bureaucrats, the main concern was that excessively high growth would produce super-high inflation and a disastrous balance of payments deficit.
The actual results of Mr Ikeda's Plan were astonishing. The average inflation rate during the plan was 5.45% -- the highest in 1962 at 6.9% and lowest in 1964 with 3.8% -- while GDP growth rates averaged 10.4%.
Half-way through the Plan, Japan's per capita income almost doubled from US$475 in 1960 to $929 in 1965. By the end of the plan in 1969, Japan's GDP size had increased 2.44 times and its per capita income was $1,685, paving its way to become a world-leading economy.
The secret of this plan was not to double wages by force to induce more consumption, but to change the core industry from light industry such as textiles to heavy industry such as automobiles. Only then could high GDP growth targets be achieved. The lesson from Japan is that higher wages are a by-product of higher economic growth, not the other way around.
Do readers notice an important point of communication here? Prime Minister Ikeda could have called it his Great Structural Change Plan. But the title would be too superficial for ordinary Japanese to support. The Income Doubling Plan (Shotoku Baizo Keikaku) would send a direct and clear message to the entire nation.
Now, let us check the labour and economic conditions of 2022 to determine whether we are ready for another big statutory minimum wage hike. The conditions to be examined are: (1) actual average daily wage in 2022, (2) current labour market tightness, and (3) economic growth prospects.
As of September 2022, the average daily wage in the non-agricultural sector is 604.8 baht (Bank of Thailand data). Obviously, this is substantially higher than current statutory minimum wage of 354 baht, and already higher than the 600 baht minimum wage proposed in the campaign.
Labour market conditions are even tighter than in 2011 as 2.7 million foreign workers, 10% of non-agricultural sector employment, are employed and the unemployment rate is 1.3%. GDP growth is projected to be 3.2% this year with 3-4% growth prospects for 2023. All three conditions are similar to those of 2011 which means that the Thai economy and businesses as a whole would be able to tolerate a big minimum wage hike.
I have gone further to do mathematical simulations of the actual impact of minimum wage hike on total wage costs. From my simulations, I find that 15% of total workers earned the minimum wage.
A minimum wage hike according to Pheu Thai's plan would raise the total wage bill by 5% per annum, of which ordinary wage earners would get a 4.4% raise and minimum wage earners would get 11.2% raise: not a 70% rise in wage bills as some fear. Pheu Thai plans to achieve the 5% rise in average wage costs by pushing the Thai economy to grow 5% per year. As I said before, a higher wage is a by-product of an expanding economy, not the other way around.
