Wage appreciation should reflect productivity growth

Unskilled labourers from Bangkok and neighbouring provinces will get a Bt9 increase, with their minimum daily wage going from Bt194 to Bt203. This new minimum wage, which takes into account an inflation rate of 5 per cent this year, will take effect on June 1st. Is this wage adjustment justified or fair enough?

Some labour leaders do not think so. They argue that inflation in April already exceeded 6 per cent so it is not right for the tripartite labour committee to use the 5 per cent inflation rate as its baseline. Also, food prices and the prices of other basic necessities have been going up tremendously. Futures oil prices have already surpassed US$120 (Bt3, 833) a barrel. Unskilled labourers, now totalling about 500,000, will have a hard time feeding their families. Poor working Thais spend about 30 to 40 per cent of their incomes on food alone.

As a result, labour leaders are demanding a wage hike to Bt233 across the board. If this demand is not met, they threaten to stage a labour rally on May 20.

The Bt2 to Bt11 wage adjustment reflects the government's stance that it does not want to see an increase in real wages, or nominal wage hikes ahead of inflation. The wage adjustment to improve the living conditions of wage earners and domestic consumption simply goes in tandem with the rate of inflation. There are fears that, as Jun Trinidad of CitiGroup pointed out the other day, "an upward shift of the real wage without a corresponding rise in productivity will only worsen future inflation".

Investments in Thailand have been weakening sharply since 2005. We faced a political crisis in 2006 and lived under a military-backed government in 2007, during which time foreign investments were being diverted to other countries such as China or Vietnam. Without investment to upgrade equipment or operations, labour productivity growth in Thailand has not been increasing. In economic terms, wage increases must reflect productivity growth otherwise a hike would worsen inflation over the long term.

Thailand is now facing the twin problems of low economic growth and high inflation. Earlier this year, most economists, including officials at the Bank of Thailand, were more concerned about the prospects of a weak economic growth rate, believing that inflation should be brought under control so that monetary stimulus could be implemented in the second half of the year. Now with food and oil prices rising sharply, the concern appears to have shifted more toward inflation. Now there is a prevailing view that interest rates must remain unchanged throughout the year. Interest rate movements must go up. A stronger currency is more warranted this time round to bring prices under control.

The concern over inflationary pressure is reflected in the Bank of Thailand's move to consider relying on headline inflation, which incorporates food and energy prices into the basket of inflation index, rather than core inflation in its monetary policy management. Headline inflation is a more accurate index to manage monetary policy.

With the latest round of minimum wage increases that go in line with inflation, there is less of a threat that the increases will trigger pass-through costs to businesses. At the same time, the government is adopting price controls on basic commodities, amounting to 300 to 400 items, to help cushion wage pressure. However, it has few options when it comes to tackling the fuel price increase, which has to be left to market forces.

At the same time, taxi drivers in Bangkok have also been calling for an increase of their starting meter rate from Bt35 to Bt40. Civil servants also want a pay rise across the board, though the Finance Ministry has cautioned that it is facing budgetary constraint.

We are now living under a difficult time due to the prospect of higher inflation, which is a regional and global phenomenon. To bring inflation under control without hurting economic growth is the most difficult task facing this country's economic policy-makers. All in all, since Thailand does not have to import food or rice like other neighbouring countries, it should be able to weather this round of inflationary pressure.