The Impact of Raising the Minimum Wage on Wages and Employment

opinion March 12, 2012 00:00


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ONE of the major election campaign promises of the Pheu Thai Party is the Bt300 daily minimum wage policy aimed at alleviating financial difficulties and raising the welfare of low-wage earners.


 It is a known fact that the Thai economy creates a vast number of low wage jobs. As of 2010, around 20 per cent of non-agricultural labour was below the minimum wage. This figure would most likely be much higher if we included all the agricultural and other informal employees in the economy whose wage rates are not reported.
Figure 1 shows the inflation-adjusted national average minimum daily wage from 1986 to 2010 denominated in 2009 Thai baht. Since the minimum wage paid in Thailand is not indexed to inflation, it has been declining constantly in real terms after the 1997 economic crisis. Considering the fact that minimum wages are set through a tripartite committee composed of representatives of workers, businesses and the government, the eroding real minimum wage clearly reflects the weak bargaining power of Thai workers.
An effectively implemented minimum wage policy can help lift the wages of those workers with the least bargaining power. Using historical data for non-agricultural employees, I estimated the wage effects of minimum wages, and present the results in Figure 2, which shows that increases in the minimum wage did indeed improve wages at the low end of the wage distribution. As to be expected, the largest gains in wages occurred among workers in the lower wage percentile rankings. 
The greatest impact is seen around the 15th percentile of the wage distribution, where a 1-per-cent increase in the minimum wage is expected to raise wages there by around 0.87 per cent. The positive spillover effects are expected to reach as high as the 60th percentile of the wage distribution.
The above analysis shows that the welfare of workers who remain employed in the non-agricultural sector would improve. However, the impact on the overall welfare of low-paid workers also rests on a multitude of other factors. Raising the minimum wage by too much too quickly can actually end up hurting some groups of low-paid workers, which the policy is intended to help. The total earnings going to these workers could be lowered if too many of them are priced out of the sector covered by the minimum wage legislation or out of the labour market altogether.
The study identifies the most vulnerable group of workers to be low skilled youngsters aged 15-24 with at most a high school qualification. It finds that a 10-per-cent increase in real minimum wages is expected to raise the unemployment rate for this group of workers from 4.1 per cent to 5 per cent, reduce their labour force participation from 89 per cent to 88 per cent and reduce their employment-to-population ratio from 85 per cent to 83.2 per cent.
The greatest job losses would likely occur in the small-scale manufacturing and hotel/restaurant sectors. These displaced young workers who remain employed would likely find jobs in the agricultural/ fishery sector, as well as in construction and other service sectors. Most of these jobs would be in the uncovered or informal sector of the economy, which pays lower wages than the covered sector. Without the characteristically large informal sector of the Thai economy to absorb these “hidden unemployed” workers, it can be expected that the unemployment rate would be raised much higher and labour force participation lowered further still.
The important message from this study is that increasing minimum wages from their current relatively low levels to the promised Bt300 per day across the country should be phased in more gradually. Empirical evidence using historical data indicates that the impact on employment and labour movement into the informal sector could be substantial, especially among low-skilled young workers, even though past minimum wage increases have occurred in a more gradual fashion (see Figure 1).
Large and sudden increases will very likely produce larger adverse effects than predicted in the study. In order to minimise the potential adverse impacts, the government must also clearly spell out measures to support businesses in the transition to higher wages, particularly the most vulnerable small- and medium-sized enterprises. The government must also address the important issue of displaced workers through giving them compensation and retraining them for re-assimilation into the labour market.
Thailand Development Research Institute