What you need to know
The proposals by the Move Forward Party and Pheu Thai will increase the minimum wage by between 33.5% and 78.0% by this year and 2027, respectively.
Thailand’s government-in-waiting has promised to increase the minimum wage by 33.5%, which could be a game changer for the economy and potentially enable Thailand to catch up with the Asian Tigers and Japan. In this article, I look at how increasing the minimum wage could be beneficial to Thailand’s economy.
Thailand’s minimum wage is currently an average of 337 baht a day. After winning the recent general election in May, the Move Forward Party said it would increase the minimum wage to ฿450 a day this year, fulfilling election promises. The party winning the second-most seats, Pheu Thai, promised to increase the minimum wage to ฿600 by 2027. Their proposals would increase the minimum wage by between 33.5% and 78.0% by this year and 2027, respectively.
I have been writing about how the low growth of Taiwan’s minimum wage has led to its economy stagnating. For this article, I apply some of the methods to analyze Thailand. I compare Thailand with a select group of Eastern European and Baltic countries. (For simplicity, this article will refer to them as Eastern European countries.) These countries used to have a similar level of economic growth as Thailand, but they have become advanced countries today. In the early- to mid-1990s, Thailand’s GDP per capita was on par with Poland, Estonia, and Lithuania, but while the economy of these countries have expanded quickly, the Thai economy has instead stagnated in contrast.
A faster growth in the minimum wage could enable Thailand to catch up with these countries.
Comparing Thailand with Poland
Poland is a country which has an economy similar in size to Thailand, and a large population.
In the chart below, Poland and Thailand’s GDP have been growing at a similar rate since the 1990s. Of note, Thailand’s GDP flatlined in the mid-1990s, resulting in its GDP falling behind Poland.
But despite the similar levels of growth, Thailand’s growth has a lot to do with population growth.
Since the mid-1980s, unlike Thailand, Poland’s population has stopped growing. In other words, Thailand’s GDP growth isn’t so much a result of every individual contributing more to the economy.
Since the mid-1990s, Poland’s GDP per capita has become about 7.5 times higher, while Thailand’s GDP per capita only grew about three times as high.
Similarly, Estonia and Lithuania had a GDP per capita of on par with that of Thailand by the mid-1990s. Today, it’s 10 times larger.
Economic growth is dependent on profit growth. While Thailand’s profits per capita were higher than those of Poland, Estonia, and Lithuania in the mid-1990s, growth has been slow since then, resulting in Thailand’s GDP per capita stagnating behind these countries as well.
It has been widely believed that for profits to grow, wages need to be suppressed. But the data shows that this isn’t the case. In reality, profits can only grow if wages and household incomes grow, which boost domestic consumption and enable businesses relying on the consumption to grow.
Indeed, Poland, Estonia, and Lithuania’s profits have been growing more rapidly as compared to Thailand’s, and so have their household consumption expenditures.
On the contrary, Thailand’s profits stagnated due to the slow growth of household consumption.
Similarly, compared with the three countries, Thailand’s household consumption expenditure stagnated because its total wages lagged behind.
The total wages in an economy is dependent on how fast its minimum wage rises. The stagnation of Thailand’s total wages has much to do with the slow growth of the minimum wage.
In the mid-1990s, Thailand’s minimum wage was similar to that of Poland, Estonia and Lithuania, but while the minimum wage in the three countries has grown to about seven to 10 times higher than in the mid-1990s, in Thailand it has only grown to about two times higher.
Prior to the mid-1990s, both Thailand’s minimum wage and GDP per capita (as seen above) were growing at the same pace as Poland’s (as can be seen by the similar gradients in their lines in the charts). But since Thailand started suppressing its minimum wage in 1995, Poland has overtaken Thailand in not only the minimum wage but also GDP per capita.
Thailand’s GDP per capita could have been on par with Poland’s if the minimum wage had grown as quickly as in Poland.
Average wage growth alongside the minimum wage. In Poland, Estonia, and Lithuania, the average wage has been growing much faster than in Thailand.
The average wage of these three countries has grown by five to10 times higher since the mid-1990s. Thailand’s average wages, on the other hand, only doubled.
Today, the minimum and average wages of the three countries are both about three to four times higher than Thailand’s. Similarly, their GDP per capita is about three to four times higher.
Wages and household consumption expenditure are key drivers of economic growth. The economies of Estonia, Lithuania, and Poland have grown much faster than Thailand’s due to a much faster wage growth.
In fact, Estonia and Lithuania have a higher GDP per capita than Poland as the minimum wage grew even faster in the two countries. According to the charts above, Poland suppressed the minimum wage for a few years in the 2000s, which resulted in the average wage, total wages, household consumption expenditure, and GDP per capita stagnating and falling behind Estonia and Lithuania. It was only in the mid-2010s when Poland significantly increased the minimum wage that the wages, household consumption expenditure, and economy started catching up again. In 2019, Poland’s ruling party, the Law and Justice (PiS), promised to increase the minimum wage by 90% in four years if it were to win the parliamentary election.
The chart below shows that higher economic growth tends to follow higher growth in profits, wages, and household consumption expenditure. Estonia grew the fastest, and saw its total wages, household consumption expenditure, profits, and economy grow by about seven to nine times between 1995 and 2015. Thailand grew the slowest and saw its total wages, household consumption expenditure, profits and economy grow by only two to three times.
In Thailand, underpaid workers can’t afford to spend more on domestic consumption, leading to slow growth of business profits. The result is a stagnant economy growth much slower than Poland, Lithuania, and Estonia.
The solution is an ambitious minimum wage policy.
Wages, household consumption expenditures, profits, and economic growth are strongly correlated with one another. In a correlational chart as below, the relationship becomes clearer. In a wider set of Eastern European countries including Latvia and Slovakia, those with higher average wages have higher GDP per capita as well. The minimum wage, total wages, household consumption expenditure, and profits also tend to be higher.
The rapid growth in wages in these countries was possible when they sought to quickly democratize after breaking away from the Soviet Union or divorcing themselves from Soviet control in 1991. Due to lack of trust in Russia (what was left of the Soviet Union) and the limits that Russia placed on European imports, these countries re-orientated their economies towards markets in Western Europe. It helped that Western Europe was open to these emerging economies and the competition from Western Europe also meant these countries had to restructure their centrally-planned economy to make it more competitive and productive. The need to boost productivity and the desire to integrate with economies in Western Europe provided the impetus for the Eastern European countries to implement faster wage growth.
In the 1980s, Thailand experienced a manufacturing boom in the 1980s. The share of the export-oriented manufacturing sector as a percentage of GDP doubled from 14% in 1986 to 29% in 1990. At the same time, foreign direct investment started flowing into the country after 1988, which meant that it needed more skilled workers as well. As a result, from the late-1980s to early-1990s, Thailand’s government stepped up to raise the minimum wage. But it didn’t last long. From 1995, the growth rates became much lower, and when the country sought the assistance of the International Monetary Fund (IMF) following the 1997 economic crisis, the IMF sought to place wage restraints on Thailand and specifically limited its minimum wage increases in 1998 to 2% to 3%.
The IMF later admitted that the restraints it placed during the crisis were too tight, which caused economic damage and resulted in private demand and consumption declining in the countries seeking its assistance. But the damage was done. Thailand chose to suppress the minimum wage for the next 15 years, resulting in the economy stagnating alongside household consumption expenditure and domestic profits.
Escalating household debt
Thailand is facing a double whammy. On top of its low wages, the household debt is very high — the second highest in Asia and 10th highest globally as a proportion of GDP. Unlike in other advanced Asian countries where housing mortgages make up most of household debt, the majority of household debt in Thailand however is related to consumption, which comprises two-thirds of the debt. Credit card loans and personal loans account for over half of a person’s total debt, which is as much as 10 to 25 times their monthly income. As 62% of Thai families do not have adequate savings, they are forced to go into debt simply to make ends meet. The average debt per person has risen to ฿520,000 in 2022.
Thailand’s household consumption expenditure is constrained not only by low wages, but by its expanding household debt.
In comparison, in Estonia, Lithuania and Poland, where wages have been growing rapidly, the household debt as a percentage of GDP is comparatively low and has been declining. In Lithuania, household debt makes up one of the least shares of the GDP globally.
As wages increase rapidly, households could spend more of their income on basic needs, instead of running into debt.
Another country worth noting is South Korea, which is similar to Thailand in terms of the size of the population and the manufacturing sector. Manufacturing comprises 25% of South Korea’s GDP and 27% of Thailand’s GDP.
South Korea’s GDP per capita used to be lower than Thailand. But since 1975, South Korea has overtaken Thailand and has grown much faster — largely due to fast growth in the minimum wage, as can be seen in the chart on the right.
In 1988, when South Korea introduced the minimum wage, its minimum wage of 111,000 to 1117,000 won (฿3,099) a month was just a thousand baht higher than Thailand’s ฿2,190. But South Korea has grown exponentially ever since, it has seen the minimum wage grow by 17 times — at a rate of 9% to 10% per year — while Thailand’s has increased by just five times. Today, South Korea’s minimum wage and GDP per capita are both five times higher than those of Thailand.
Like Thailand, South Korea and the International Monetary Fund (IMF) signed an agreement in 1997 placing limits on wage growth. The IMF intervention also made it easier for South Korean companies to retrench their employees, which led to rising unemployment rate and growing discontent among workers. But in South Korea, labor unions that emerged amid a wider struggle for political freedom and worker rights in the 1970s and 80s have been influential.
As businesses were wary of the IMF’s intervention, concerned that the country would lose competitiveness by “selling out strategic firms,” the bargaining power of labor unions increased, and they have been able to negotiate high wage increases since 1999. This is not what happened in Thailand.
South Korea has also become a global manufacturing powerhouse producing higher-value products. Thailand underwent a manufacturing boom in the 1980s and was on the verge of developing a higher-value manufacturing sector. But the country has become much less competitive since the government started suppressing wages in 1995.
To become a manufacturing powerhouse like South Korea, Thailand would need to rapidly increase its minimum wage. As the economy expands and revenue grows, the government and businesses will have more capital to invest in research and innovation. This will allow Thailand to shift to higher-value manufacturing, which generates higher profits.
With GDP per capita surpassing the US$20,000 threshold, countries like Estonia, Lithuania, and South Korea are considered advanced economies. To reach the threshold, it took Estonia nine years (from 2005 to 2014), Lithuania 13 years (2007 to 2020), and South Korea 12 years. Poland’s GDP per capita is expected to hit $20,000 next year.
On the other hand, Thailand’s GDP per capita is still below US$10,000, though it was on par with that of Poland in the early-1990s and even higher than that of Estonia and Lithuania.
The stagnation of Thailand’s GDP per capita has everything to do with the slow growth of its minimum wage. The chart below shows that the minimum wage barely grew since the 1990s. There was only one major increase in 2012, by 35% nationally to ฿300 a day after Pheu Thai won the 2011 election. In 2013, it was lifted in the provinces with a lower cost of living. Provincial governments in Thailand decide the minimum wage based on the cost of living.
The average wage escalated from 2012 to 2014 following the increase, as can be seen in the chart below.
The increases in the minimum wage and average wage from 2012 to 2014 led to a rise in domestic spending and profits, but the trend did not last long as the minimum wage stopped growing again.
In the chart below, the growth of Thailand’s household consumption expenditure follows that of the minimum wage and average wage. Up until the mid-2000s, they were all growing at a similar pace. The minimum wage did not grow much for a few years after 2008, but the average wage did, which sustained the growth of household consumption. The increases in 2012 and 2013 also boosted household consumption.
But the lack of growth in the minimum wage after 2012 and 2013 led to the stagnation of the average wage. Household consumption stopped growing for a few years as well, until the wages started rising gradually again, albeit slowly. (The dark purple line is the average of the average and minimum wages inclusive of both upper-end and lower-end minimum wages, and shows that the growth of household consumption also parallels their growth.)
With wages and household consumption stagnating, domestic profits and the overall economy have been struggling to grow.
In the next part of this article, I argue that the main beneficiary of Thailand’s low wages is the manufacturing exporters, but the low wages have led to a decline of private consumption and thus the profits of domestic businesses relying on such consumption.
TNL Editor: Bryan Chou (@thenewslensintl)
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