Author: CHUNG Yoon Ngan
Date: 06-01-12 02:10
By Karl Wilson
June 1, 2012 - 11:21am http://www.chinadailyapac.com
Around Asia governments are introducing or raising minimum wages to address growing wealth gaps and stave off rising industrial unrest in a region that is leading global growth.
However, employer groups and businessmen are warning that rising wages are pushing up costs, especially for multinational companies that now have much of their manufacturing capacity in Asia.
Global companies have already been facing higher labor prices in China over the past year, despite a weak global economy, as workers demand a greater share of the country’s economic boom, a recent report in the Wall Street Journal said.
“In recent months, the pressure has intensified in countries across Southeast Asia that have marketed themselves as alternatives for companies seeking to escape China’s rising costs, leaving those companies now with fewer places to move,” the report said.
Management consulting firm Boston Consulting Group recently said that between 15 and 20 percent annual increases in wages on the Chinese mainland and other factors were rapidly eroding the country’s manufacturing cost advantage.
China is said to be targeting at least 13 percent annual average growth in minimum wage between now and 2015 as part of the government’s 12th Five-Year Plan (2011-2015) to stimulate employment.
Last month, Malaysia became the latest country in Asia to introduce a statutory minimum wage of 900 ringgit ($286) for its estimated 3.2 million low-income workers. Employer groups have warned that thousands of small to medium enterprises could go out of business as a result of having to pay the minimum wage.
In April, Thailand increased its minimum daily wage in Bangkok and six provinces to 300 baht ($9.75) a day from 180 baht. In the rest of the country, minimum wages increased by an average of 40 percent.
The move partly fulfilled a campaign pledge last year that helped propel Prime Minister Yingluck Shinawatra’s party to a majority win in national elections.
Vietnam has announced it intends to raise the minimum wage for state employees by about 27 percent to 1.05 million dong ($50) per month.
Taiwan’s move last year to increase the minimum monthly wage by 5 percent to NT$18,780 ($644) was seen as a key factor in the re-election of president Ma Ying-jeou for a second term.
Even in Hong Kong, long viewed by many economists as the world’s leading laissez faire economic model, the administration was forced last year to bow to pressure and introduce its first statutory minimum wage of HK$28 ($3.61) an hour.
“A minimum wage law is an important socioeconomic institution that sets clear principles for workers’ rights and basic living conditions,” says Armen Papazian, CEO of Keipr, a United Arab Emirates-based consultancy.
“The economic impact, however, depends on the levels of activity, business profits, and the price elasticity of domestic and export demand for goods and services affected by the new law.”
In some cases, in anticipation of a ruling to set a minimum wage, businesses prematurely raise their prices, citing higher costs of production.
Even though a wage and cost-push inflation is a possibility, most experts say minimum wages serve as a basic living standard benchmark and contribute to fairness and respect and are worth the effort.
Sangheon Lee, a senior economist with the International Labour Organization (ILO), says a number of studies carried out in Asia to measure the impacts of minimum wages showed the feared negative impacts of minimum wages on employment were “overstated”.
“There has been a number of theory-driven debates with questionable empirical studies on the pros and cons of minimum wages over the years,” he tells China Daily Asia Weekly.
“What has emerged, however, is some consensus that the impacts of minimum wages depend on how the system is designed and implemented.”
Lee says this is one of the reasons why developing countries in Asia are more pragmatic in their approaches, focusing on how to set and implement minimum wage in ways that will minimize any possible negative consequences.
Countries such as the Philippines, China and Vietnam, he points out, are in the process of reforming their minimum wage system.
“Interestingly, many Asian countries are seriously debating on how to escape the ‘middle-income trap’,” he says. “Recognizing the importance of boosting consumption demand (not just exports) and wages (which is needed for reducing inequality and improving social coherence), they are considering minimum wage as an effective policy tool.”
Lee however thinks that the existing system in many Asian countries leaves much room for improvement.
Recent studies by the ILO have found that minimum wages have a small negative impact on labor costs, which is not significant.
“There is evidence from advanced countries such as the United Kingdom and the United States that minimum wage encourages skill developments and motivates workers and hence increases labor productivity. Yet we are not aware of any systematic evidence for developing countries in Asia,” Lee says.
He confirms that some manufacturing companies have relocated or are considering relocating, either to low-cost centers within Asia or out of the region altogether. But the reasons behind this are not just labor costs but also technological and skill factors.
“Policymakers in Asian countries are aware of the fact that they cannot continue to rely on cheap labor to sustain growth,” Lee says. “At the end of the day, what matters is the relative labor cost in global competition.”
He adds that given the dismal economic situation in the US and other advanced countries and the contrasting, solid growth in Asia, it is not surprising to see changes in the relative labor cost in favor of advanced countries.
“There is little Asian developing countries can do about this,” he says. “I don’t think it is very useful to look at this issue solely from the perspective of rising labor costs in Asia.”
Professor Amitendu Palit, a visiting senior research fellow at the Institute of South Asian Studies at the National University of Singapore, agrees.
“A minimum wage may not be as counterproductive as many people fear,” he tells China Daily Asia Weekly. “It depends on how governments implement the policy.”
From a business perspective, he says, it is true that once a statutory minimum wage is introduced, a standard cost on the supply of labor is also set, which means costs cannot go below that level.
So minimum wage can increase the cost of production, especially in small- and medium-sized businesses.
Subsequently, some manufacturers will relocate to countries where wages are lower. In Malaysia’s case, for instance, some of the more labor-intensive manufacturing industries could move to countries like Cambodia, Vietnam, Laos or Myanmar.
However, one of the trends emerging from countries with a statutory minimum wage is an increase in casual employment, which does not require employers to pay for benefits such as provident fund, maternity bills and health insurance.
“For small businesses, this can add quite a lot to the wages bill,” he points out.
Many Asian economies, Palit adds, already have large informal labor markets that float from one job to another. In that situation, a minimum wage has no impact.
“So what you could find is that there are more job openings for casual workers and less for full-time workers,” he says.