I’m not an advocate for most of the Pheu Thai Party’s madcap plans, not least its populist $14 billion “digital wallet” handout scheme, which is now gaining momentum. But its recent decision to raise the daily minimum wage quite considerably, by as much as 14 percent, to 400 baht ($10.80) from October, does make sense. Factor in, too, that it will be a nationwide raise, not province-based. And Pheu Thai wants to increase it by even more, to as much as 600 baht, by 2027.
To understand why it makes sense, lend an ear to some of the criticisms quoted in a recent Nikkei Asia article. According to the Joint Standing Committee on Commerce, Industry, and Banking, an umbrella business lobby, the wage hikes will hit labor-intensive companies the hardest, resulting in job losses and a hit to Thailand’s competitiveness compared to its Southeast Asian peers. The Employers’ Confederation of Thai Trade and Industry reckons higher wages could chase manufacturers out of Thailand and into countries like Vietnam and Cambodia, which have younger workers. Alternatively, the Federation of Thai SMEs argues that a higher minimum wage could mean that Thai employers hire cheaper migrant workers from Myanmar, Laos, and Cambodia, which could drive up unemployment.
Like it or not, Thailand will have to depend on migrant workers from here on. Unemployment will be a bygone concern very soon. By conservative estimates, Thailand’s working-age population will decline from around 49 million to 38 million between 2020 and 2050. That’s a loss of around 400,000 people each year. Put differently, the size of the workforce will be a third smaller in 2050 than it is today. And estimates suggest that labor demands will surge in the coming decades, requiring even more workers than Thailand currently has.
Thailand is facing major demographic problems. Currently, there are twice as many over-65s as under-14s. By 2050, there will be just 7.8 million children and 21 million retirees; almost 40 percent of the population will be 60 and over. The median age of the population is now 38; it will reach 51 by 2050. Thailand’s fertility rate is now between 1.08 and 1.16 and falling, so it will never return to the reproduction rate (2.1). There were only 485,000 new births in 2022, the lowest in 70 years.
Bangkok has some interesting ideas about how to raise maternity rates, such as subsidized IVF treatment. Quite frankly, these initiatives won’t raise fertility rates enough; Thailand is still urbanizing, the female labor participation rate is still relatively low (lower than in Vietnam, for instance) and the share of the native population aged 15-44 (who do the child-bearing) is declining. Even if you could double or triple the number of births now, you’d have to wait 20 years for them to enter the workforce. Thailand doesn’t have that long.
Automation might help, but most assistance will come from the millions of migrants Thailand needs to attract from Cambodia, Laos, and Myanmar. These three immediate neighbors already provide the majority of all migrant workers in Thailand. Plus, all three neighbors will see their workforce increase in size by 2050 – by around 8.1 million people combined, by my estimates. Since that’s not enough people to compensate for Thailand’s shrinking workforce, Bangkok would be wise to start recruiting migrants from elsewhere, too. Think of the Philippines, which could have 28 million more workers by 2050.
So, whether Bangkok raises the minimum wage now or not, Thailand and its low-cost, low-skilled sectors will depend on migrant labor. Moreover, a better minimum price for low-productivity labor will make Thailand even more attractive now for migrant workers, especially if it wants to attract migrants from outside mainland Southeast Asia (which it should). Indeed, Thailand will face stiffer competition from Japan, South Korea, China, and even Europe for Southeast Asian migrant talent. Even if some unscrupulous employers don’t pay migrant workers the minimum wage, a wage hike should lead to wage inflation for them.
Indeed, wage inflation is going to happen regardless of whether a wage hike happens now or in two years. Losing 400,000-odd people from the workforce each year – unless you can replace all of them with cheaper migrants – means no more surplus labor, so the workers will call the shots. There’s an argument to be made that locking in a hefty wage increase before the demographic collapse really starts to bite in the next few years spares employers an even sharper shock in the near future. Indeed, you could say it’s a canny move by Pheu Thai to make the promise of another hike in 2027, making wage inflation somewhat controlled.
That’s the production side. What about consumption? The most consumption-intense section of its population (people aged between 15 and 44) is going to decline, from around 21 to 15 percent between now and 2050, by my estimate of United Nations data – and that’s a declining percentage of a declining overall number! In an ideal world, you’re going to replace these workers with migrants (for production). However, migrant workers typically consume a lot less in their host country because they either save for home or send their money home. Plus, the graying ranks of Thais of working age will have to become much thriftier to fund the retirement of their parents.
With that in mind, any government would want to massively increase Thais’ ability to consume (meaning they need more money) before the number of those in their twenties and thirties shrink and are replaced by migrant workers. Indeed, the race is now on to make Thailand’s native-born population richer and higher-value-added before most of the low-end jobs are taken by thriftier foreigners. Less than 40 percent of Thais are in wage jobs, so better pay might improve this, too.
One can understand (sort of) why Pheu Thai thinks it’s wise to spend $16 billion on a cash-hand scheme. Last week, the cabinet agreed to add $3.3 billion to the fiscal budget, which will mostly be generated by loans, potentially raising the national debt to nearly 70 percent of GDP. However, that $16 billion would be better spent as a corollary to the minimum wage increase, perhaps as a short-term tax exemption for companies impacted by higher wages or as a government-backed contribution to the wage hike. Another option would be to put the whole $16 billion into the government’s microcredit scheme.
Peter Warr recently argued on this topic that price controls, like minimum wage hikes, “are distractions from what is most needed.” Instead, he wrote:
The solution is to raise the productivity of labor. Skill levels must be upgraded. Education reform, including adult retraining, is a vital part of that process, but it takes time and is costly, not to mention politically difficult. Business efficiency must be improved by reducing red tape and public infrastructure must be continuously upgraded.
Yes, but! There are now ample studies that find boosting wages also boosts productivity, and you can have higher wages as well as all these other things. But even if that wasn’t true, the argument overlooks consumption. As a percentage of GDP, private consumption (or “households and NPISHs final consumption expenditure”) is low in Thailand, according to World Bank data. It’s around 55 percent, the same as in Vietnam but lower than in Malaysia (58 percent). That said, private consumption has been growing quite nicely of late: it rose by 6.9 percent in the first quarter of the year, compared with the last quarter of 2023, and compared to overall economic growth of 1.5 percent.
Consumption, not production, is Thailand’s real demographic cliff. Theoretically, Bangkok can attract enough migrants to solve the production side of its demographic problem, although migrants don’t really help with consumption. However, it’s impossible for Bangkok to increase the percentage of 15-44-year-old Thais in the population within the next decade or so. The productivity-obsessives are basically arguing that export sectors need to be prioritized over domestic consumption, but that’s a huge gamble on globalization not collapsing anytime soon – and flies in the face of the self-sufficiency drives of most countries.
The Pheu Thai-led government might not have the best answers for dealing with all of this, but at least it seems to understand the problem. Unfortunately for Thailand, other super-aging or soon-to-be-super-aging countries also going through a demographic crisis – Singapore, Japan, China, and much of Europe – are too dissimilar to offer many examples of how to act.
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