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Thailand Businesses in Turmoil Over Increase in Minimum Wage

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January of this year, the increase to 300 baht was fully implemented in all provinces. Japanese companies operating in Thailand are also affected as they are having difficulty securing labor.

 

BANGKOK – Tens of thousands of small factories across Thailand are battling for survival after the government raised the minimum daily wage.

Instead of making life better for ordinary laborers, as intended, the policy has had the opposite effect.

Small and midsize factories, especially in outlying areas, are reeling from the decision to enforce a minimum wage of 300 baht (930 yen, or $9). Many have had to close.

Thailand’s northern province of Lampang is famous for making ceramics. Yet, factories and workshops there are often empty of workers.

According to Wongchai Srithai, vice president of the Lampang Ceramic Association, the group’s membership has fallen by one-third, from 300 to 200 ceramics makers, in the past year or so.

“The number of workers has halved from 12,000. Small and midsize businesses and micro-enterprises are no exception,” he said. “They are grappling with whether to shut down their factories.”

The policy was a centerpiece of Prime Minister Yingluck Shinawatra’s campaign platform. Her administration took office after her party’s victory in the 2011 general election.

In the first phase of the minimum wage increase in April 2012, the rate was raised to 300 baht in seven provinces, including Bangkok, where it was already relatively high. It went up by 40 percent in the remaining provinces.

Then in January of this year, the increase to 300 baht was fully implemented in all provinces. Japanese companies operating in Thailand are also affected as they are having difficulty securing labor.

 

DECLINING COMPETITIVENESS

In Tak Province, in Thailand’s northwest, the situation is the same for garment factories. A 31-year-old man who started a sewing plant for children’s apparel five years ago closed his factory in May.

“This region depends on laborers from Myanmar, but as soon as the government decided to raise the minimum wage, workers started heading for the cities,” the man said. “We lost the advantage of low wages, orders decreased, and when we got rid of overtime to hold down personnel costs, we couldn’t process the remaining orders efficiently.”

Each province in Thailand used to set its own minimum wage, with more remote regions being cheaper. This was the source of rural industry’s competitiveness. The new system introduced by the Yingluck Shinawatra administration, however, is unusual in that it raised the minimum wage nationwide, regardless of each area’s stage of economic development or price levels.

The minimum wage in Lampang Province went up 81 percent from 165 baht between April 2012 and this past January. In Tak Province, it rose 85 percent from 162 baht.

Before April 2012, when the first stage of wage increases was implemented, the Dhurakij Pundit University Research Center surveyed 685 owners of small and midsize factories across Thailand.

It found that the smaller the company, the less room it had to absorb the effects of the wage increase, and 12.5 percent of respondents replied that they had been forced to close.

Roughly 300,000 companies run small, medium and micro factories in Thailand, and the survey results indicate the possibility that between 50,000 and 70,000 of them will be forced to suspend operations.

 

GOING UNDERGROUND

Some managers are trying to deal with the issue by shifting from labor intensive business models and introducing automated machinery and streamlined production lines.

Others, however, are apparently operating outside the law.

One example is the “underground concealment model.” In such cases, a company will lay off most of its employees at a factory but continue operating it.

The company then create a separate production facility that is not registered as a company and transfers the laid-off workers there, where they are forced to work for less than 300 baht per day.

The laborers, now officially unemployed, turn up because at least they have the offer of work, albeit for less than the minimum wage.

Another is the “outsourcing model,” by which a company will get its laborers, such as those who sew clothes, to take their sewing machines home, then terminate their employment contract and conclude an outsourcing contract for the work.

This way the worker is not covered by the minimum wage.

The policy is causing higher wages throughout supply chains, and prices for goods and services are beginning to rise as well.

According to Ministry of Commerce statistics, prices for food essentials such as vegetables, fruits and meats rose by 6 to 10 percent this past June compared with a year ago, striking a serious blow to low-income earners.

Kiatanan Luankaew, director of the Dhurakij Pundit University Research Center, said: “The policy weakens the small and midsize business enterprises that support the Thai economy. It’s reckless to raise the minimum wage nationwide in so short a time frame.

“Populist politics might attract votes, but the results are transient. Wages are not going up for a while, but inflation continues. Poor laborers may be the victims of this policy,” he added.

By RYOSUKE ONO

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Posted by on Oct 4 2013. Filed under Economy & Business. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.
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