Rising cost of living drives up minimum wages across Asean

THE minimum wage is climbing upwards across much of South-east Asia – in line with workers’ broader calls for higher pay, as the cost of living mounts worldwide.

“Sustained inflationary pressure is driving wage growth across the region as households and workers acutely feel the pinch in the erosion of real purchasing power,” Selena Ling, chief economist at OCBC, told The Business Times.

She noted that the South-east Asian economies with minimum wages in place – which make up almost all of Asean, except for Singapore and Brunei – “have seen growing demand for higher or faster wage adjustments to try and keep pace with inflation, especially after the last 2 to 3 years during the pandemic, when wages stagnated”.

Thailand announced in late August that the national daily minimum wage would go up by an average of 5 per cent from October – the first such increase since Jan 2020. The new rates range from 328 baht to 354 baht (S$12.61 to S$13.62), up from the current 313 baht to 336 baht. 

Laos bumped up its minimum wage by 100,000 kip (S$8.91) a month from Aug 1, with another raise due by May 1 next year. The Philippines saw regional wage hikes kick in over several phases in June, while Vietnam’s minimum wage went up by an average of 6 per cent in July.

The pace of increases, however, may not be enough to satisfy labourers in the region.

Enraged by fuel subsidy cuts, protesters in Indonesia are demanding higher minimum wages, Reuters reported last week. And, with efforts to review the minimum wage in Myanmar stymied since 2018, more workers are now eyeing emigration to neighbouring countries such as Thailand and Malaysia, according to Yangon-based Frontier Myanmar.

Cambodia last month opened its regular review of garment, footwear and travel goods wages, as policymakers gathered to set the increment for 2023. But unions are already calling for a raise of more than 10 per cent, to US$214, the Khmer Times reported.

“Most countries decided to hike minimum wages to raise workers’ purchasing power amid the surge in living costs, especially in food and energy,” said Maybank economist Lee Ju Ye. She noted that the wage adjustment in the Philippines was intended to help restore minimum wage earners’ purchasing power for basic goods, including fuel.

Yet, other than inflation rates, policymakers will also take into account domestic factors such as the tightness of the labour market and the ability of small businesses to afford minimum wage increases, remarked Khoon Goh, Asia research head at ANZ.

Since wage levels are typically set at regular intervals, Goh does not expect to see fresh minimum wage hikes beyond what has already been announced, but added that “we are likely to see further upward pressure on wages” in the public and private sector, given inflation.

“Low-paid workers will gain from the higher minimum wage increase, but there will also be some further spillover effect into higher wage brackets as the minimum wage increase will be used as some sort of benchmark for salary adjustments,” he added.

Said OCBC’s Ling: “If the higher wage costs are not passed on to end-consumers, then corporate profit margins may be squeezed and firms or countries may become less competitive.

“If they are passed on to end-consumers, then it would add to inflation, which in turn may fuel greater demand for faster or higher salary adjustments.”

Lee and Maybank senior economist Chua Hak Bin wrote in a report in end-August that Thailand’s earlier wage hikes, in 2012 and 2013, “did not result in a surge in inflation” as businesses absorbed the higher costs amid stiff market competition at the time.

But, with producer price index increases outpacing overall inflation, they warned that the cost pass-through impact to consumers may be less modest this time around.

“The minimum wage hike will add to the cost burden on sectors that are labour-intensive, such as agriculture, retail, accommodation and food services, manufacturing, and construction,” Lee reiterated in an email to BT.

“This may result in some cost pass-through to consumers, as companies are already struggling with surging costs of raw materials and energy.”

Ling noted that foreign direct investment (FDI) and trade flows could also be affected in economies with higher minimum wage levels, “depending on the pace of wage increases”.

But, given the uneven levels of economic development in South-east Asia, the chances of minimum wages being pegged to uniform standards across the bloc appear nil.

“For instance, Malaysia and Indonesia may be more closely benchmarked to each other for wages, whereas Vietnam, Cambodia and Laos may compete more for the labour-intensive manufacturing industries,” Ling told BT.

Still, she also pointed to other business considerations - such as infrastructure, taxes and the availability of skilled manpower - that will also be top of mind for investors.

Meanwhile, Lee from Maybank cited factors such as reforms to attract FDI, like Indonesia’s Omnibus Law, “that will attract more investments into this region in the medium and long term”. She also noted that the cost of labour “remains much lower compared to China”, especially in markets such as the manufacturing sector in Cambodia and Vietnam.

“Despite the hike in minimum wages around the region, the supply chain shift into Asean will likely continue with the diversification away from China,” she said.

Similarly, ANZ’s Goh told BT that the global economic situation poses a bigger risk to regional growth than increases in the minimum wage.

“While labour costs are set to rise throughout the region, the impact on competitiveness will ultimately depend on how much productivity growth is able to be achieved”, he said, adding that it “depends on how much businesses are able to move up the value-added chain”.