Economy Likely Unfazed by THB5-22 Daily Minimum Wage Hikes Nationwide (Business Brief No.3722)

                 The National Wage Committee recently agreed to raise the daily minimum wage to THB315.97, on average, or a range of THB308-330 across the country, effective April 1, 2018. The new rates vary by province and are split into seven rates, versus the four rates seen in recent years, because a set of new variables have been used with the new wage calculations.

                As for the effect on the business and industrial sectors, we at KResearch have assessed that a 2.6 percent daily minimum wage increase will drive up costs in labor intensive industries by approximately 0.4 percent. Businesses that typically pay daily minimum wages slightly higher than the mandatory rate, or rely on semi-skilled workers, as well, will also be indirectly affected because they will likely have to increase wages for semi-skilled workers to maintain their rate premiums over unskilled workers in the current tight labor market. Given this, costs overall in the industrial sector may increase perhaps 0.3 percent. However, this additional cost burden may be alleviated somewhat if the government offers tax deductions of up to 1.5x on labor expenses.

                With regard to its effect on the economy, the daily minimum wage hike will not only help ease the hardships of workers burdened by a high cost of living, but also bolster household spending. However, the hike will increase labor costs to businesses, thus likely forcing them to pass on such costs (as well as probably other expenses) to their goods and service prices. KResearch projects that such prices will increase about 0.06 percent in 2018 as a result of the daily minimum wage increases.  

                  Although rising production costs, as well as goods and service prices, will inevitably inhibit GDP growth, such impact should be offset somewhat by the higher wages. Government controls on domestic prices should lessen the impact of the wage increase on economic performance overall, too. From this perspective, KResearch expects that the new wage rates will shave only about 0.02 percent off 2018 GDP growth. Since such a reduction would likely have little impact on the economy, we are therefore maintaining our 2018 projections for the Thailand economy at 4.0 percent growth and Headline Inflation at 1.1 percent.