Output rise key to keep pace with costs

And the private sector should not be left to its own devices in this regard, as it requires a revolution in basic education, and not just more training for the existing workforce.
“They’re in shock,” Siam Commercial Bank chief economist Sutapa Amornvivat said, seeking to explain the growing noise over the policy.
“Most of the manufacturers in the seven provinces [where the policy first takes effect] are indeed using semi-skilled and skilled labourers, who generally [already] earn more than Bt300 a day. Yes, some of them would be hit the hardest with an unskilled workforce, like those in the textile, shoes and plastic-products industries. Thailand’s low unemployment rate in the past years is an indicator that the impact would be felt greatly in the short term,” Sutapa said.
For short-term adjustment, she foresees a cut in overtime payments as the first way to cope with higher wage costs.
Under the government’s policy, the minimum wage in Phuket has risen from Bt221 to Bt300, and in Bangkok, Samut Prakan, Samut Sakhon, Pathum Thani, Nakhon Pathom and Nonthaburi from Bt215 to Bt300, or about 40 per cent above the level following the hike in January last year.
A Bank of Thailand study, submitted to the Thailand Development Research Institute (TDRI), suggests that the policy could raise unemployment in the formal sector by 4.5 per cent, as some 600,000 to 700,000 workers may be laid off as part of manufacturers’ adjustment.
The National Statistical Office’s unemployment rate was as low as 0.8 per cent in January, echoing high demand for labour as a whole and shortages in some industries. Just recently, small and medium-sized enterprises in automotive-supporting industries announced plans to recruit 50,000 workers, despite impending higher wages.
The central bank’s study also suggests that private investment will shrink by 1.7 per cent as a result of the policy, while inflation could increase by 1 percentage point because of higher purchasing power and demand from low-income earners. Growth in gross domestic product could be slashed by 1.7 percentage points, according to the study.
TMB Analytics noted in its research that the actual cost to manufacturers would depend on the number of workers and each operator’s ability to pass on the burden to consumers, amid competition from foreign manufacturers.
It estimated that the average labour cost of SMEs was 16 per cent of overall production costs, while that of large manufacturers with higher bargaining power was 13 per cent.
The Federation of Thai Industries has also shown deep concern over the effect of the policy on SMEs, which account for 90 per cent of the manufacturing industry. It estimated that their average labour cost was 16.2 per cent of production costs. Rates vary, however, with the labour-intensive automobile industry’s cost at only 10 per cent, thanks to pricey machinery, while that of the textile industry is 20 per cent.
Most economists are concerned about the minimum-wage policy’s effects on inflationary pressure and long-term productivity.
While the Bank of Thailand will closely monitor whether low-income earners spend more after the wage hike, TMB Analytics said food prices would be the first to rise. This in turn will hurt low-income earners, whose food costs account for a higher proportion of their income.
Siam Commercial Bank’s Economic Intelligence Centre expects the wage policy to result in an immediate rise of 0.8 per cent in the Consumer Price Index. However, if productivity can keep up with the higher pay, this effect will be absorbed, it said.
The impact on SMEs in some industries will be huge, and this demands short-term measures to help them adjust to the new wage environment. Still, Sutapa said, the measures should not last long, or there would be no incentive for them to increase productivity.
The TDRI and the private sector see the need for more training for the existing workforce, to help raise productivity.
In the long term, the World Bank expects to see an overhaul in the education system, as better education is the only way to ensure higher skills and to support further investment.
Released on March 21, the World Bank’s “Leading with Ideas: Skills for Growth and Equity in Thailand” report suggested connecting schools to the labour market, more investment in teachers, particularly in mathematics, science, English and information technology, more teaching scholarships, linking education institutions and training centres, improving the quality of primary and secondary education in disadvantaged communities, and streamlining functions across all education agencies.
These possible solutions have been presented to the National Economic and Social Development Board.
“Thailand is a good place to do business, as it has quality infrastructure and is attractive to investors,” said Hana Brixi, senior economist and lead author of the report. “However, countries that can only offer multinational partners a cheap and disciplined workforce will be overtaken by those that have better-educated and trained workers. Skills shortages have become Thailand’s biggest obstacle to doing business.”