THE FORMULATION PROCESS OF THE NATIONAL

MINIMUM WAGE POLICY: A CASE STUDY OF

THAILAND AND INDONESIA

BY

MR. RATTHAVEJ CHUENJINDA

A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF

THE REQUIREMENTS FOR THE DEGREE OF MASTER OF

ARTS IN INTERNATIONAL RELATIONS

FACULTY OF POLITICAL SCIENCE

THAMMASAT UNIVERSITY

ACADEMIC YEAR 2015

COPYRIGHT OF THAMMASAT UNIVERSITY

THE FORMULATION PROCESS OF THE NATIONAL

MINIMUM WAGE POLICY: A CASE STUDY OF

THAILAND AND INDONESIA

BY

MR. RATTHAVEJ CHUENJINDA

A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS FOR THE DEGREE OF MASTER OF

ARTS IN INTERNATIONAL RELATIONS

FACULTY OF POLITICAL SCIENCE

THAMMASAT UNIVERSITY

ACADEMIC YEAR 2015

COPYRIGHT OF THAMMASAT UNIVERSITY

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Thesis Title THE FORMULATION PROCESS OF THE

NATIONAL MINIMUM WAGE POLICY: A

CASE STUDY OF THAILAND AND

INDONESIA

Author Mr. Ratthavej Chuenjinda

Degree Master of Arts

Major Field/Faculty/University International Relations

Faculty of Political Science

Thammasat University

Thesis Advisor Assco. Prof. Attakrit Patchimnun, Ph.D.

Academic Years 2015

ABSTRACT

International production networks are the means through which multi-

national corporations (MNCs) keep competitive in business by fragmenting the value

chain according to locational advantages. As MNCs allocate their investments in the

most effective places in accordance with the locational advantages, in a barrier-free

environment in terms of tariffs and non-tariffs, the costs of labour should be one of

the major factors in determining the comparative advantage of each location over the

long term.

The purpose of this research is to study the factors that influence the

formation of the minimum wage policy as one among other stimuli for international

trade especially in terms of foreign direct investment by exploring the relationship

between the power structure of political institutions and among players in the field of

minimum wage policies formulation. This research takes the formation of the

minimum wages rate and minimum wage policies of the observed countries of

Thailand and Indonesia as the units of analysis.

Keywords: Minimum Wages, Political Economy, Policy Formulation, Power

Structure of Political Institutions

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ACKNOWLEDGEMENTS

I owe an enormous debt of gratitude to my supervisor, Assoc. Prof. Dr

Attakrit Patchimnan whose encouragement, guidance and support from the initial to

the final phases enabled me to develop a deep understanding of the subject. I also

would like to extend my gratitude to Dr. Attasit Pankaew and Dr. Pichit

Ratchatapibhunphob, members of the thesis committee for their contributions and

valuable advice. This is not to forget all the teachers from the Master of International

relations program (MIR), Thammasat University for all the knowledge they have

provided.

Mr. Ratthavej Chuenjinda

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TABLE OF CONTENTS

Page

ABSTRACT (1)

ACKNOWLEDGEMENTS (2)

LIST OF TABLES (6)

LIST OF FIGURES (7)

CHAPTER 1 INTRODUCTION 1

1.1 Literature Review 2

1.2 Research Questions 8

1.3 Hypotheses 8

1.4 Objective of the Research and Methodology 8

1.5 Significant of the Research 9

1.6 Target Population and Sample 10

1.7 Chapters 10

1.8 Theoretical Framework 10

1.9 Research Questions 11

CHAPTER 2 HISTORICAL DEVELOPMENT OF MINIMUM WAGE

POLICIES 12

2.1 The Minimum Wage and Overview of the Economy of Thailand 15

2.1.1 Economic Trends of Thailand 18

2.2 The Minimum Wage and Overview of the Economy of Indonesia 19

2.2.1 Economic Trend of Indonesia 22

2.2.2 Trends in Labour Productivity for Indonesia 23

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CHAPTER 3 THE ASPECT OF POWER STRUCTURE ON BEHAVIORS IN

RELATED INSTITUTIONS 25

3.1 Official Institutions and Unofficial Institutions 25

3.2 Electoral System and Political Behaviors 29

3.2.1 The Non-Proportional Representative System 29

3.2.2 The Proportional Representative System 29

3.3 Political Dominance versus Economic Dominance 30

3.3.1 Political Dominance 31

3.3.2 Economic Dominance 33

CHAPTER 4 THE ACTIVE FACTORS THROUGH THE LENS OF THE

POWERS STRUCTURE THEORY 36

4.1 Thailand‟s Minimum Wages: Institutional Structure and Recent

Evolution 36

4.2 Indonesia‟s Minimum Wages: Institutional Structure and Recent

Evolution 42

4.3 The Three Formulation Methods for Minimum Wage Policy 45

4.4 Electoral Vote and Its Influence 54

4.5 Trade Unions‟ Influence 55

4.6 Relevant Laws and Legislative Influence 56

4.7 The Pros and Cons of Utilizing Minimum Wage Legislation in the

Government‟s Strategic Planning 58

CHAPTER 5 RESULTS AND CONCLUSIONS 61

REFERENCES 64

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APPENDICES

APPENDIX A Unskilled Worker Competitiveness: Thailand vs.

Indonesia 69

APPENDIX B Cross Countries Cost of Living Index: Thailand

2009-2015 75

APPENDIX C Inflation vs. Minimum Wage Increases: Thailand

2009-2015 76

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LIST OF TABLES

Tables Page

4.1 Indonesia‟s Monthly Minimum Wage by Province 44

4.2 Method of Minimum Wage Setting 46

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LIST OF FIGURES

Figures Page

2.1 Trends in Minimum Wages for Thailand 18

2.2 Trends in Labour Productivity in Thailand 1991-2009 19

2.3 Indonesia‟s Minimum Wage in Real Terms 1988-1995 20

2.4 Trends in Minimum Wages in Indonesia 22

2.5 Labour Productivity in Indonesia 2000-2013 23

4.1 Growth of Nominal Minimum Wage in Thailand 1998-2010 39

4.2 Growth of Real Terms for Minimum Wages in Thailand 1998-2010 40

4.3 Labour Market Trends in Thailand 41

4.4 Thailand‟s structure for minimum wage setting ( 1) 49

4.5 Thailand‟s structure for minimum wage setting (2) 50

4.6 Indonesia‟s structure for minimum wage setting at provincial level ( 1) 52

4.7 New formula proposed by Jokowi‟s government – Indonesia‟s structure for

minimum wage setting at provincial level ( 2) 53

4.8 Wage Competitiveness Adjudged for Labour Productivity Growth 2011-2014 60

1

CHAPTER 1

INTRODUCTION

The national minimum wage policy has a long history and has been

widely accepted by public opinion. For policy makers it is a popular tool to improve

the circumstances of the poor relative to the rich. The necessity to periodically raise

the minimum wage to keep with the cost of living, however, has led to controversy as

to how high to set the rates as a non-optimal minimum wage may lead to involuntary

unemployment, worsening the welfare of workers who lose their jobs.

The function of the national minimum wage is to enhance the welfare of

the lowest-wage labour. Yet economic theory indicates that the demand for labour has

a negative relationship with the price of labour. For developing countries where

foreign direct investment plays a major role in employment, an inequitable minimum

wage may push such foreign investors to allocate their resources – be it some parts of

the supply chain or the entire production base – to a more competitive location.

Many East Asian countries compete with each other to attract

international production network investment. Also, how much a country can attract

international production network is influenced by the development in economic

infrastructure such as material processing, supply logistics, information and

telecommunications management, finance, manufacturing, marketing and end-product

distribution. East Asian countries that commit to attracting more investment focus on

the development of aforementioned economic infrastructures. These circumstances

enable multinational corporations (MNCs) to search for the most cost-effective

location for each block of product.

However, the cost of labour is still a major factor in determining

comparative advantage. A location with a comparative advantage is able to produce

goods at the minimal cost and is specific to each location; thus, comparative

advantage plays a role in attracting MNC investment together with other factors such

as legal person taxation, ICT management, the infrastructure relevant to logistics, and

the geographical location of the web of international production network in the

region. This is especially since economic integration among East Asian countries is

2

reducing the barriers and costs of economic factors‟ mobility. As economic factors‟

mobility reduces cost, the cost of labour, governed directly and indirectly through

minimum wage policies becomes more important in relative terms.

In the case of Thailand, when it first adopted the minimum wage policy in

1973 the country used different rates for each province. However, the Pheu Thai Party

adopted a nationwide minimum wage policy on 1st January 2013 dubbed the “300-

baht minimum daily wage policy” – a fulfillment of their 2011 election campaign

pledge. This policy caused debate and division among labour unions, government

ministries, academics and employers. The vertical leap in minimum wage prompted

some MNCs especially in labour intensive sectors to look to relocate their resources

in the supply chain for risk diversification.

Indonesia, in the same vein aggressively promoted minimum wage policy

and important labour policy since 1990s. In 1990 alone, the level of minimum wage

tripled in nominal terms and doubled in real terms. However there is no national level

of minimum wages, with each provinces setting its own minimum wage annually.

One Thing to note is that the penalty for noncompliance was relatively small, only

Rp100000 which equivalent to around 250 baht, regardless of the number of workers

in firm that were receiving less than the minimum wage. As a result, the examination

of formal sector wages shows substantial noncompliance of companies with minimum

wage legislation of at least 10-25% of formal sector workers.

1.1 Literature Review

Minimum Wage: Measures and Industry Effects

In Gramlich‟s study of the private non-farm sector, he suggests that the

minimum wage has a significant effect on the average wage but that only half of the

increase in the average wage was a first-order effect of the minimum wage. The other

half is due to the indirect effect on wages above the minimum. In other words, the

minimum wage policy not only affects the industries that utilize the least-skilled

labour but also affects the average wages in the industries that utilize higher-skilled

labour as well.

The effect of minimum wage policy on the rate of employment in

3

Gramlich‟s work, however, was not as straightforward. It is suggested that the

national minimum wage rates have greater effect on developing countries when

compared to developed countries due to the lower wage average of the former.

However, many manufacturing industries are concentrated near resources or near

regional population centers and these could be considered as a pulling factor that must

be taken into account for foreign direct investment.

Nussbaum and Wise in their study of the five low-wage industries of

textiles, apparel, leather, and furniture, discovered that for all the manufacturing in the

developed countries, the minimum-wage measure had no significant effect either on

average wage or on employment and man-hours but for developing countries the

minimum wage measure had a significant effect in raising the average wage and in

reducing employment and man-hours in the low-wage industries. The minimum wage

measure has significant effect on the average wage in high-wage industries but not on

employment and man-hours. For the long term effect of the minimum wage measure,

as employers observed repeated legislative adjustment of minimum wage rate, the

long-term adjustment of production units such as plant relocations may take place.

Kaun‟s study suggests that the minimum wage may worsen the long-term

employment trends in developing countries relative to the developed countries in low-

wage manufacturing industries.

In conclusion, the greatest effect of increasing the minimum wage was in

the low-wage industries, but the long-term effect is most apparent in developing

countries.

Thailand Development Research Institute Report # 101 March 2014:

Impact of the 300-baht minimum daily wage policy

The Thailand Development Research Institute predicts the effects of the

300-baht minimum daily wage policy as follows:

Sectorial Effects

Expected Positive Effects:

- According to the Bank of Thailand, 3.2 million labourers will benefit

from the raise in the minimum wage with those most benefitting in the

construction industry, retail, food, and textiles, respectively

4

Expected Negative Effects:

- The Office of National Economic and Social Development Board

specifies that the nationally raise of minimum wage to 300 baht will

affect the manufacturing industries, agricultural industries and service

sector. The sectors that will take the heaviest blow are textiles,

clothing, leather and wood products. These are all labour-intensive

industries. The employers in these industries will mostly use migrant

labour as a substitute.

The Bank of Thailand speculates that production cost and price will

increase. These affect real GDP and cause inflation. The most affected industries are

the plastic industries, construction and steel industries respectively.

The increases in minimum wages will result in a cost-push inflation

effect especially among SMEs. Since goods have to go through at least 10 industries

in the supply chain before they reach consumers, this will act as a inflation multiplier

which leads to a higher interest rate and which in turn reduces the capability to

compete in terms of international trade. The goods for domestic consumption are also

at risk of losing market share from goods produced in ASEAN which benefit from the

free trade agreement.

The Office of Small and Medium Enterprise Promotion predicts that if the

minimum wage increases by 1 percent, overall production costs will increase by 0.16

percent. Thus if the minimum wage increases from 215 baht per day to 300 baht per

day, then production cost will increase by 6.5 percent.

The Thai Chamber of Commerce and Board of Trade of Thailand

speculates that in the short term SMEs will be most affected by the increases in the

national minimum wage. It is believed that 90 percent of SMEs will not be able to

handle the sharp rise in costs. In the long term, the cost of labour in Thailand will be

higher than other countries and Thailand will suffer a loss of attractiveness for foreign

direct investment. The higher production cost will push the prices of goods produced

in Thailand in the global markets and enterprises may relocate their production bases

to countries with lower labour costs.

5

Gross Effect on Economy

The gross effect of the 300-baht minimum daily wage policy is speculated

toas follows:

1. Economic activities slow down more than the boost in domestic

demand.

2. Supplement pressure on inflation rate.

3. Vulnerable sectors will divert burden to consumers by increasing

prices.

4. Export is the main growth engine of Thailand thus the long-term effect

according to the „big push‟ theory is uncertain.

5. In the scope of AEC, the increases in minimum wage to 300 baht will

not significantly affect skilled labour but may greatly impact the

mobility of capital and the relocation of production bases.

Minimum Wage and Changing Wage Inequality in Indonesia

The results of the study show that rises in minimum wage do play a

significant role in reducing wage inequality in Indonesia. However, they are

accompanied by the number of hours worked per week for those who make roughly

the minimum wage. Moreover, the increases in minimum wage are accompanied by a

decrease in the probability of employment in the formal sector. These potential

negative effects can work to nullify the overall benefits that may occur from the

increase in minimum wage. If policy makers are concerned with battling wage

inequity in Indonesia, then marginally raising minimum wages may serve as a more

effective tool as the increase at the bottom of wage distribution overall outpaces the

loss in wages from people transitioning to the self-employed sector. However, further

study is needed to assess whether minimum wage legislation is truly an effective tool

for combating inequities between the rich and poor by studying the relationship

among wages, hours worked, and sector of employment.1

1 Kelly Bird and Chris Manning, “Minimum Wages and Poverty in a Developing

Country: Simulations from Indonesia‟s Household Survey,” World Development 36, no. 5

(2008): 916 - 933.

6

Minimum Wage and Social Policy

There are several minimum wage setting and enforcement mechanisms.

For example, Italy and Germany have hundreds of minimum wages which are

negotiated and enforced by unions under a strong contract law framework. In Japan,

each prefecture has its own minimum wage, which is recommended by a council of

interest groups, employers and workers representative in the area. Cunningham‟s

study shows that the minimum wage is burdensome to the fiscal deficit due to it being

tied in with other social expenditures such as the pension system. The best level for

the minimum wage depends on many factors such as the policy objective of the

government, other institutions in the country that can complement or substitute the

effects of the minimum wage, labour market conditions and macroeconomic

conditions in product markets. Some of these could not easily be put into formula.

East Asian Regionalism

Christopher M. Dent introduced four types of international production

networks within East Asia.

Platform Production for Regional Market (Type I): This type involves

minimal level input from international sources. Value-added activities are

concentrated in just one country and served by local suppliers.

International Vertical Production (Type II): International sources are in a

uni-directional manner. As these production webs do not involve mutual exchanges or

co-operation between the core firm and the local and international suppliers, there is

no interaction amongst supplier firms.

Sub-Regional Production Network (Type III): Production networks in this

type are concentrated in a particular trans-border zone, often involving just a few

countries or economies. These international production networks may be strengthened

by socio-cultural links or by exploiting economic complementarities between

contiguous border zones.

Regional Production Network (Type IV): This type operates on a high

level of network interaction between firms from multiple countries across the region.

It applies to larger MNC producers in sectors such as electronics, computers,

automobiles and machinery industries. The most regionally integrated of the four

7

types.

Cross-border Production Network in Asia

Borrus, Ernst and Haggard explain in their article that although cross-

border international networks are mired in transaction and management costs for

operating the production networks especially in the cases of Types I and II because

the suppliers are loosely connected and are mostly independent, this is offset by other

advantages such as economies of scale, flexibility in operations, access to

information, and ability to focus resource on core competencies and so on.

Employment Function in Indonesia

The Indonesian economy has grown at a constant rate in the post-crisis

era. However, there is widespread discussion and concern regarding the slow

employment rate growth. In response to this issue, the government of President Susilo

Bambang Yudhoyono (SBY) at the beginning of its first term made a commitment to

halve the country unemployment rate from 10% to a lower figure by 2009. There is a

study which suggests that this requires the creation of 50 million jobs within five

years. By the time the president Susilo Bambang Yudhoyono began his second term

in 2009, the target number was not nearly fulfilled. This was partly due to the impacts

of the food and energy crisis in 2008 and the following global financial and economic

crisis. However, another widely-held perspective is that the post-crisis era in

Indonesia can be described as a period of overly generous labour legislation with an

aggressive pursuit of minimum wage and other provisions. The consequent rise in real

wages has adversely affected the investment climate. Additionally, the rapid rise in

real wages has also encouraged employers to switch to more capital intensive

technologies, reducing sectorial employment elasticity during the post-crisis period.

In fact, a number of studies attributed the slow growth of formal sector employment

during the post-crisis period to the rapid rise in real wages.

8

1.2 Research Questions

a) What affects the formulation of minimum wage policies in Thailand

and Indonesia?

b) What is the relationship and the degree of impact between these factors

and the minimum wage rate and other economic policies within the same context?

c) What is the possibility of narrowing the chances of derailing effective

minimum rates if presented?

1.3 Hypotheses

a) Political determinants will have more impact on the formulation of

minimum wage policies in both countries over economic determinants.

b) From the policy perspective trends, the closer the government is to

being a single party, the more monopolistic power they wield in the formulation of

minimum wage policies.

c) The patron-client system prevalent in both countries undermines the

possibility for the minimum wage rate to reflect real public satisfaction.

1.4 Objective of the Research and Methodology

This study attempts to understand the political impact on the formulation

of the minimum wage policies of the observed countries; thus, the result of this

research could be applied in determining the value and weight of each involved factor

to help design accompanying social policies to be more competitive for foreign direct

investment. This study will enable the better understanding of how political factors

play a part in the formulation of minimum wage policies and, as a result, direct

investment mobilization, and how states may resist such relocation through policies to

attract investment or to maintain the status quo. The results of this research can also

be utilized in public policy formulation and suggestions.

The study begins with a review of the existing literature on the

significance of minimum wage policy and existing minimum wage policies on the

9

observed countries. The formulation of minimum wage policies which result in

competitiveness and attractiveness in terms of foreign direct investment will be placed

at the center of this study. This study will eventually expand the study to be more

focused on the relationship between the raising of the minimum wage and the

particular circumstances on the political side of the spectrum. This study also

discusses the competitiveness of the minimum wage rate between each observed

country by comparing them on the real gross domestic product and eventually seeks

to illustrate rough orders of magnitude in the impact of the related factors on the

formation of minimum wage policy.

The information presented in this study is obtained from the existing

literature, and additional data is also given particular attention given the unique

characteristics of the observed countries‟ circumstances and their geo-economic

environment. This research was conducted through the analysis of existing documents

with the selected theories.

The purpose of this study is to understand how the involved factors affect

the formulation of minimum wage policies which result in advantages or

disadvantages in terms of competitiveness for foreign direct investment on a long-

term basis and how the state should react or tackle them. With an understanding of the

relationships and degree of impact for each factor we will be able to construct policy

recommendations for the observed states in order to be more effective and

competitive, and attract more investment from the international production network.

1.5 Significance of the Research

The purpose of this study is to understand how minimum wage policy

formulation reacts to the influence of players in policy making on a long-term basis

and how the state should react or tackle it. With an understanding of the relationship

and degree of impact for each factor we will be able to construct policy

recommendations for the observed states in order to be more effective and

competitive, and attract more investment from international production networks.

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1.6 Target Population and Sample

This research targets in this study are Thailand and Indonesia and their

national minimum wage policies are considered as independent variables. The

relationships, interaction and power structure among official institutions such as

executive units and legislative units and unofficial institutions such as religion,

languages, nationality and customs are considered dependent variables.

1.7 Research Questions

a) What affects the formulation of minimum wage policies in Thailand

and Indonesia?

b) What is the relationship and the degree of impact between these factors

and the minimum wage rate and other economic policies within the same context?

c) What is the possibility of narrowing the chances of derailing effective

minimum rates if presented?

1.8 Theoretical Framework

Two theories are used in this thesis. The first is the power structure

theory. This theory aims at generating an image of the relationships between official

and unofficial institutions. This theory is divided into two parts: the first part depicts

the general image of official and unofficial institutions. The second part generates an

image of the possible relationships between official and unofficial institutions under

different governance types and electoral systems. The second theory is the classical

explanation of supply and demand in the labour market. Also, the economic principle

of the minimum wage and its effect on the incomes of the nation and citizens,

inflation index and aggregate purchasing power are discussed.

11

1.9 Chapters

This thesis consists of five chapters. The first chapter introduces the

background leading to the examination of minimum wage policy formulation. Also,

the first chapter identifies the research questions, hypotheses, objectives of this

research and the methodology utilized through the writing of this thesis.

The second chapter explains the significance of the minimum wage policy

as well as provides a historical overview of Thailand and Indonesia‟s economies,

minimum wage policies in the past and their progression. In addition, the second

chapter highlights the trends of minimum wage rates for both countries in comparison

to the trends of their labour productivity.

The third chapter turns to the analysis of the power structure of official

and unofficial institution frameworks. Furthermore, this chapter also illustrates the

limitations in the balance of power between official and unofficial institutions

imposed by electoral systems. In addition, a discussion on the institutional structure of

official and unofficial institutions as relates to the formation of minimum wage

policies will also be detailed and the concepts of this framework addressed. In

addition, the application of a structural power framework is discussed with the unique

characteristics of Thailand and Indonesia.

The fourth chapter analyzes the active factors through the lens of power

structure theory.

Finally, the last chapter, Chapter 5, concludes this research by

summarizing its findings.

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CHAPTER 2

HISTORICAL DEVELOPMENT OF MINIMUM WAGE

POLICIES

The minimum wage is an attractive policy tool for poverty reduction and

social justice. It does not require significant direct government expenditure, is a

simple and visible way for the government to show its commitment to social justice

and supports those at the bottom of the income distribution, is easily targeted to the

poorest workers, and affects the labour market that government wants to intervene in.

Other social programs aim to reduce poverty such as direct cash transfers. Public

works have been utilized by various countries, but they have been proven inefficient

compared to the minimum wage policy due to the difficulty to target and monitor, the

imposition of high non-labour costs and the creation of political economy disputes. So

the self-targeting, low monitoring and market-focus characteristics of the minimum

wage policy make it an attractive tool for social protection. The rationale of the

creation of a minimum wage itself varies according to country, time, pressure group

and institution. Some of the initial motivations are: 1

1) Protection of the most vulnerable, meaning those with the least

bargaining power living in the most inhumane living standards are prime targets of

the minimum wage policy.

2) Poverty reduction, which identifies the most vulnerable as the poor and

those in need of a single minimum wage to allow for the most basic standard of living

quality.

3) Payment for input is another argument for minimum wage policy.

There was a court case in the United States in which it was argued that employers are

obligated to pay for the production of the human energy required to supply their

production. Thus, wages should be sufficient to cover the costs of food, shelter,

leisure clothing and other inputs required to create labour, and a minimum wage

should at least be equal to this cost and anything lower should be unacceptable.

1 Gerald Starr, Minimum Wage Fixing: An International Review of Practices and

Problems (Geneva: International Labour Office, 1993).

13

4) Fair labour standards: The international labour organization‟s charter in

1919 argued that all occupations and industries have fair wages. Ideally, collective

bargaining form all players in the field would identify a fair wage for each industry

(market price for labour). However, since some industries are unable to organize, then

a minimum wage rate set by the government‟s minimum wage policy should the

second-best solution. This concept extends to the bargaining of wages for all workers,

not just the most vulnerable.

5) Fair competition: Early employers in favor of minimum wages argued

that competition for factor inputs was unfair, as it would give certain employers an

unfair advantage in production costs and a minimum wage could promote fair

competition among entrepreneurs.

6) Macroeconomic objective: The minimum wage can also be used to

affect the entire wage distribution, which may lead to economic growth , inflation

control , or political gains.2

In the eyes of classical economists, the labour market is used as the

starting point for understanding the role of the minimum wage. The most basic view

of the impact of the minimum wage starts with a downward slope in the aggregate

labour demand curve. This phenomenon captures the decline in marginal returns to

labour with greater employment. A minimum wage set above that of the then market

price forces firms up the demand curve and reduces employment, either by reducing

their gross outputs or by substituting labour with other production factors.

Wage floors created by the minimum wage are likely to have influence on

the reduction of the dispersion of wages and guarantee a fair or living wage for the

poorest workers who retain their jobs. However, moving from the individual to

general household, income distribution or poverty is less straightforward. Even

though workers who retain their jobs are paid more, some workers lose their jobs –

some of whom may have earned near minimum wage before the minimum wage

policy was implemented. This leaves the net impact on the target population, the poor,

dependent on several factors. These factors are as follows:

The magnitude of accompanying job loss. If demand in the labour market

2 Wendy C. Cunningham, Minimum Wages and Social Policy: Lessons from

Developing Countries (Washington DC: World Bank, 2007), pp. 1-3.

14

has very low elasticity, the implementation of the minimum wage policy will result in

few job losses, implying a positive total transfer of income from fired workers to the

target population, the poor workers. However, in the case where a firm has monopoly

power and the market elastic of demand is high, the aggregate loss income from

workers who lose their job exceeds the gains from those who retain their jobs. An

elasticity of 1 implies that there are no net transfers. The redistribution of earnings

from those losing their jobs to those retaining them is 1:1.The structure of the social

unit. If all families had only one worker, the impact of raising the minimum wage on

poverty would not be ambiguous. Those retaining their jobs would gain, and if they

were pushed above the poverty line then poverty would decrease. Those losing their

jobs would be without income and fall below the poverty line. In real life, there is

often more than one worker in a family. These multiple workers in a family pool

riskand therefore one worker‟s loss may be offset by another worker‟s wages gain. As

the number of workers in a family increase, the impact of their income approaches

that of the market as a whole which is the net transfer to the poor households

depending on the elasticity of the market‟s demand for labour.

1) The overall social insurance context, or in other words, other policies

in poverty reduction framework. In most developed countries, the minimum wage

policy is only one element of the overall social protection system that includes an

unemployment benefit that replaces some fraction of the dismissed workers‟ wages.

Thus, under these circumstances, even in the case of the unitary elasticity of labour

demand, there are transfers from society to the poor workers which are usually

financed by progressive taxation. Developing and underdeveloped countries usually

lack systems that support the unemployed. Also, for the unemployed looking for their

first job, the severance pay system provides no protection.

The concept of a fair wage, however, is not defined in the classic model of

the minimum wage. Instead, the market adjusts to the policy intervention without any

consideration of welfare effects or social acceptability of the change. Therefore, even

though a higher minimum wage in most cases is desirable for society, the market may

not support it. This places minimum wage policy makers in a difficult situation in

determining the level of a minimum wage that maximizes social justice objectives

while minimizes the distortion of the market. This challenge is even greater in

15

developing and underdeveloped countries than it is in most developed countries.3

The minimum wage was first created in late 19th

century in New

Zealand and Australia, and within 30 years it had spread throughout Latin America

and the Caribbean. The idea of the minimum wage itself is based on two principles.

First is the fair wage principle, which is centered around the idea that each occupation

has a fair wage, which may differ from the level determined by the market.

Theoretically, bargaining between related groups would correct the market price of

each labour market, but that was not always possible. Thus, it was the government‟s

responsibility to set and enforce wage standards by creating minimum wage policies

so that each worker received his due wage. Second is poverty alleviation, based on the

idea that labour wages imposed by the market itself would not necessarily be at a

socially acceptable level. So, the minimum wage would ensure enough income for all

citizens to maintain a standard of living, regardless of occupation. Despite the long

history of the minimum wage, very little is known about its effectiveness in meeting

the two principles elaborated above. While minimum wage policies may increase

consumption by raising wages above their market level, they may also lead to job loss

through layoffs and decreased consumption. Even though minimum wage policies and

their usefulness in poverty reduction are uncertain, minimum wage policies have been

adapted as economic and political tools for political gain throughout history.4

2.1 The Minimum Wage and Overview of the Economy in Thailand

Thailand has adopted a minimum wage policy since 1973. When the

minimum wage was first adopted in the country, through the Ministry of Labour , the

minimum wage was only implemented in the four provinces of Bangkok, Samut

Prakarn, Nonthaburi and Pathum Thani at the common rate for each province of

around 0.35 US dollars. From 1973 to 1993 the minimum wage rate was increased 23

times, each time covering more areas of the country until it covered all provinces in

1989. Although the minimum wage rate for each province differed and the average

minimum wage rate for the whole country increased from 0.35 US dollars to about 2.9

3 Cunningham, pp. 10-17; Starr.

4 Ibid., pp. xi-xvi.

16

US dollars alongside the enactment of a related law that threatened punishment and

the fining of employers who paid below the minimum wage rates.

As for Thailand‟s economy from the early 1980s to mid-1990s, the real

per capita income growth adjudged every year. During the early 1980s, average

annual growth was more than 5 percent, partly thanks to the oil price hikes and global

recession during that period. In the early 1990s a series of stabilization measures and

structural reforms were implemented in order to rectify the chronic imbalances of the

economy since the 1980s. However, the resulting policy created to subside these

distortions led to fiscal imbalances, a rebalancing of the exchange rate, enhanced

incentives in exports and production, and an improved climate for investment. The

difficulties in reducing the economic imbalances were also associated with the two oil

hikes and the global economic recession at that time, a consequence of a sky

rocketing government budget deficit resulting from increased government

expenditures. Furthermore, after the collapse of the Bretton-Wood system, Thailand

bound its currency to the US Dollar. As a result, the Thai Baht became costly when

the US Dollar appreciated against other currencies during that period. In 1984,

Thailand started to use the basket of currency system.

In the second half of the 1990s Thailand‟s economy stabilized. The

external factors contributing to the stabilized economy and the faster growth rate were

the 1985 Plaza Accord which realigned major currencies following the depreciation of

the US Dollar. The Plaza Accord caused the Thai Baht to depreciate as the US Dollar

weighed heavily in the share of the currency basket. Another external factor was the

decline in the petroleum supply starting in 1986 and which remained low until the

first Persian Gulf War in 1991.

The external factors mentioned above benefited Thai exporters, especially

those in the manufacturing sector. Another crucial factor was a by-product of the 1985

Plaza Accord, namely, the relocation of multinational firms in Japan, Taiwan, and

Hong Kong. These firms chose Thailand as one of their major production bases. As a

result, large flows of foreign direct investment moved into Thailand during this time.

Manufacturing production also surged in response to growing exports and investment

demands. Thailand‟s stable political atmosphere also attributed to the growth of

Thailand‟s economy during this era. The relatively stable political environment

17

associated with General Prem Tinnasulanon‟s administration was followed by a

smooth transition to General Chatchai Choonhavan‟s government in 1988. However,

a coup d‟etat in 1990 threw out General Chatchai Choonhavan‟s government. A

period of instability followed the coup. After the coup was over, however, Thailand

resumed a moderately stable political environment, even though the political

administration was represented by a number of different political parties during the

period 1990-1997.5

From 1994 to 2011 there were increases in minimum wage rates on a

yearly basis, either on the 1st of January or 1

st of April each year although no province

was subjected to a raise every year. A specific time for annual raise was not written in

law but was usually on a once a year basis although in some years there was rarely no

increase. In 2001, Thailand tried to decentralize the power to set the minimum wage

to a provincial level, granting power to a provincial committee to set the minimum

wage rate for each province according to the economic and social conditions of each

area. Throughout 1973 to 2011 the average annual raise in minimum wage rate for the

whole country can be divided into three stages: the first stage was when the minimum

wage rates were below 3 US dollars, from 1973-1993, the minimum wage rates rose

exponentially at about 47 percent per year benefiting from economic growth and the

sharp development of the industrial sector from 1960 to 1992. The second stage was

when the minimum wage rates passed the 3 US dollar mark to 6 US dollars during the

years 1994 to 2009, the average increases in minimum wage rates at about 3.68

percent per year. The third stage was from the year 2010 to present, in November

2011 the minimum wage rates were raised to 8.6 US dollars in Phuket, Bangkok,

Nakhon Pathom, Nonthaburi, Pathum Thani, Samut Prakarn and Samut Sakhon. In

the October of the following year a nationwide minimum wage rate of about 8.6

dollar (300 baht) was implemented for the entire country. This nationwide minimum

wage rate, dubbed the “300-baht minimum daily wage policy” has caused much

debate among scholars and stakeholders as to whether it is suited to the characteristics

of Thailand‟s economy.

5 Piriya Pholphirul, “Competitiveness, Income Distribution and Growth in

Thailand: What Does the Long-run Evidence Shows?” International Economic Relations

Program, Thailand Development Research Institute, 2005.

18

In principle, the nationwide minimum wage rate is supposed to be a tool

to reduce poverty and income inequity and also to improve Thailand‟s position in the

production supply chain through encouraging more skilled labour and discouraging

low skilled labour and low value added production. However, Thailand Development

Research Institute predicted that the 300-baht minimum daily wage policy could end

up supplementing income disparity due to the fact that this minimum wage rate is not

applied to the majority of people working in the agricultural sector and employees of

small-medium enterprises. Despite the fact that these groups of people may not

benefit from the raising of the nationwide minimum wage rate, they will be subject to

the higher costs of living caused by the increased cost of industrial production.6

2.1.1 Economic Trend of Thailand

Figure 2.1

Trends in minimum wages for Thailand

Source: “Thailand Minimum Daily Wage Forecast 2016-2020,” Trading

Economic, accessed April 5, 2015, http://www.tradingeconomics.com/

thailand/minimum-wages/forecast

6 Thailand Development Research Institute, “Impact of 300-baht Minimum Daily

Wage Policy,” Report No. 101, March 2014.

19

Figure 2.2

Trends in Labour Productivity in Thailand 1991-2009

Source: S. Paitoonpong, P. Tasee and J. Sodasith, “Demographic Aspect of Workers

in Manufacturing and Impact on Productivity,” TDRI Quarterly Review 27,

no. 1 (2012): 8.

2.2 The Minimum Wage and Overview of the Economy in Indonesia

As for Indonesia, the minimum wage policy was adopted in the late

1990s, in a slower economic growth environment, after the Asian economic crisis.

The minimum wage policy was launched as a part of the poverty reduction strategy

programs (PRSP), and has become an important element in most government

programs since the economic crisis of 1998.7 In 1989, Indonesia began adopting new

legislation to regulate the outdated system of minimum wages that had been in force

in most regions since the beginning of the 1970s. In this new legislation the minimum

wage had to be set with reference to the cost of living and labour market conditions.

The initial goal was to put the minimum wage in line with the cost of consumption

bundle or minimum physical needs (KFM) by 1994. There were other broader

consumption bundles that focused on subsistence needs rather than just the physical

minimum, but this was eventually considered to be a more appropriate benchmark.

7 Kelly Bird and Chris Manning, “Minimum Wages and Poverty in a Developing

Country: Simulation from Indonesia‟s Household Survey,” World Development 36, no. 5

(2008): 916-933.

20

This consumption bundle is known as the minimum subsistence needs (KHM). These

consumption bundles are very similar among provinces in Indonesia; however, the

initial minimum wage before the new legislation varied greatly among provinces so

the provinces with lower average minimum wages experienced steeper rises. The

steep of slope declined gradually from 1990s onward.8

Figure 2.3

Indonesia‟s Minimum Wage in Real Terms 1988-1995

Source: Martin Rama, “The Consequences of Doubling the Minimum Wage:

The Case of Indonesia” (Policy Research Working Papers, World Bank

Group, 1999).

Indonesia does not utilize the nationwide minimum wage rate as in the

case of the third stage of Thailand. Instead each of the 26 provinces sets its own

minimum wage each year. This provides flexibility in the formation of the minimum

wage policy. Furthermore, over the past few years, Indonesia‟s political power has

become even more decentralized, resulting in a larger variation in local policies,

8 Martin Rama, “The Consequences of Doubling the Minimum Wage: The Case

of Indonesia” (Policy Research Working Papers, World Bank Group, 1999), pp. 864-881.

21

including those affecting the formation of the minimum wage rate.9 Indonesia has

sustained over a decade of economic growth and growth in wages and regular wage

employment continue to outperform most other countries in the world. To illustrate,

growth trends continue for regular employees, with 42.4 million people or 37 percent

of those employed are working as regular employees.10

On the legislation side the latest law in Indonesia that is used to oversee

the implementation of the minimum wage policy is the Labour Law Act No. 13 2003,

Article Nos. 88, 89 and 90 which state that the minimum wage can be determined at

both the provincial and district levels by the provincial governor, The minimum wage

rate determined by the governor based on the input from the provincial wage council

is implemented for the province and the minimum wage rate determined by the

governor based on input from the district wage council or city mayor is applied at the

district level. The governor usually determines the minimum wage once a year by

issuing the governor‟s decision letter. There could be several minimum wage rates

existing in the province, for example, both the minimum wage province (MWP) and

the minimum wage sectoral province (MWSP). While at the district or city level there

also might be the minimum wage district (MWD) and the minimum wage sectoral

district (MWSD). However, there is only one of these minimum wage rates that is in

effect for a worker at one time which depends on the district and the sector in which

each one works.11

9 Natalie Chun and Niny Khor, “Minimum Wages and Changing Wage

Inequality in Indonesia” (ADB Economic Working Paper Series no. 196, Asian Development

Bank, Manila, 2010), pp. 3-9. 10

“Indonesia Trends in Wage and Productivity, January 2015,” ILO, accessed

April 5, 2015, http://www.ilo.org/jakarta/whatwedo/publications/WCMS_343144/lang--

en/index.htm 11

“Minimum Wage in Indonesia with Effect” Wage Indicator, accessed August

4, 2015 , http://www.wageindicator.org/main/salary/minimum-wage/indonesia/

22

2.2.1 Economic Trend of Indonesia

Figure 2.4

Trends in Minimum Wages in Indonesia

Source: BPS, “The Labourer Situation in Indonesia: August 2014, Badan

Pusat Statistik, Jakarta, 2014.

* ILO staff calculations based on revised population weights and backcast for

2011-2014

According to the ILO:

While minimum wages noticeably increased between 2012 and 2014, average

wages have not maintained the same pace of growth. This trend highlights that the

minimum wage fixing mechanism is still the most predominant mechanism through

which wage increases are achieved in Indonesia. This situation has led to a

23

narrowing of the gap between average minimum wages and average wages over

time.12

2.2.2 Trends in Labour Productivity for Indonesia

Constant growth in annual labour productivity is essential for economic

stability as a whole to remain competitive. The majority of employees in Indonesia

work on the job for low wages but high man hours, and increasing productivity is an

crucial element to move forward, towards a more competitive and prosperous

economy.

Figure 2.5

Labour Productivity in Indonesia 2000-2013

Source: International Labour Organization, “Indonesia: Trends in Wages and Productivity

January 2015,” Asia-Pacific Decent Work Decade 2006-2015, ILO Jakarta Office,

Jakarta, n.d.

* ILO staff calculations based on data from the labour force survey and national accounts

from Badan Pusat Statistik for selected years.

Labour productivity, defined as GDP per employed person, has been

increasing gradually over time in Indonesia. The productivity of the Indonesian

industrial sector nearly doubles the productivity of the services sector and quadruples

that of the agricultural sectors. For example, between 2005 and 2009 productivity

12

ILO, “Indonesia: Trends in Wages and Productivity January 2015,” Asian –

Pacific Decent Work Decade 2006-2015 (ILO Jakarta Office, Jakarta, n.d.),

http://www.ilo.org/wcmsp5/groups/public/---asia/---ro-bangkok/---ilo-jakarta/documents/

publication/wcms_343144.pdf

24

expanded at an average annual rate of 3.3 percent. Between 2010 and 2013

productivity expanded by an average annual rate of 4.3 per cent. This trend has been

supported in part through investments in infrastructure, as well as structural changes

that created more employment in higher value-added industrial sectors and the

contraction of employment in lower value-added agricultural sectors.13

13

ILO, “Indonesia: Trends in Wages.”

25

CHAPTER 3

THE ASPECT OF POWER STRUCTURE ON BEHAVIORS IN

RELATED INSTITUTIONS

3.1 Official Institutions and Unofficial Institutions

The study and analysis of the gross behaviors of related institutions

consisting of official and unofficial institutions are crucial to the understanding of

policy making. The institutions related to decisions on minimum wage policies consist

of:

1) Official institutions such as political parties, electoral system,

constitution, structure of the parliament and interest groups.

2) Unofficial institutions such as religion, language, and nationality.

Both factors dictate the direction of choices and decision making for minimum wage

policies.

Official institutions are structural systems which reflect the components

that influence the behavior of political parties in the political system. The unique

characteristics of an official institution is that in the democratic system, their power

takes into account public satisfaction; the higher the level of public satisfaction the

more stable the official institutions. Public satisfaction also indicates the development

of politics and economy in the medium and long term. Unofficial institutions, on the

other hand, are components derived from the development of society through the

beliefs, faith or respect of the majority which could be either rational or irrational, and

could be developed from similarity or difference in the components in society,

through historical dynamics and development. The results of such development are

evident in languages, religions, and customs. Unofficial institutions explain the

factors that drive official institutions. For example, corruption in the political system

is a prominent part of political power in developing countries and underdeveloped

countries; thus, decision making and implementation of policies in these countries

have to be decided in a way that reduces the monopolization of power.

26

Gross institutions are the result of interactions between official institutions

and unofficial institutions, presenting themselves through various policies. These

policies reflect the summation of decision making and feedback or the effectiveness

of such decisions within limited budget. The improvement of gross institutions could

occur if the costs of negotiation between official institutions and unofficial institutions

decreases – these negotiation costs are otherwise known as transaction costs for

Nash‟s bargaining power of policies solutions or surplus from reaction between

official and unofficial institutions. In general, government policies are reflections of

public needs within that specific election system. Those policies distribute benefit

among interest groups regardless of religion, customs or languages. In other words,

these policies regard the existence of unofficial institutes and take them into account.

Political parties are the other prominent factor in the finalizing of

minimum wage policy. Behaviors of political parties differ depending on whether

they are systemic political parties or non-systemic political parties. The factors which

affect the behaviors of political parties are as follows:

1) The type of governance in which political parties operate.

2) Efficiency of policy competition among political parties.

3) Influence from unofficial institutions such as religion, languages, and

customs.

4) Public satisfaction or voter satisfaction either through electoral vote or

other means.

A systemic political party is an institution that promotes economic and

political development from the short to long term, has clear organization structure and

a clear pattern of administration, responds to public feedback and public satisfaction

toward minimum wage policies both before and after an election. Administration of a

party‟s budget has to be within the due process of law and approval of the party‟s

committees. On the other hand, a non-systemic political party is a social group;

however, a non-systemic political party as a grouping signifies the behaviors that

obstruct the development of economy and politics in medium term and long term. A

non-systemic political party is constructed under the boundaries of the law, but lacks a

clear power structure and pattern of administration. Non-systemic political parties rely

heavily on the patron-client system. Non-systemic political parties are usually

27

founded in developing and underdeveloped countries. Because of these limitations a

non-systemic political party cannot have any significant influence on the formulation

of minimum wage policies. Thus, ultimately, non-systemic political parties‟ aim to

join a coalition government for short-term beneficial gains.

Influence from interest groups is also one key factor in the formulation of

minimum wage policy. Interest groups in this context refers to a grouping construct

influenced by similarity or difference in unofficial institutions be it religion, customs,

language, or occupations, etc. The main purpose of an interest group is for the

beneficial gain of its group. There are various interest groups depending on the level

of development of the country and the difference in the institutional system. The

demand factor from the interest groups is considered to be an external push in

government policy making, so how influential interest groups are depends on the

policies‟ prospective trend and bargaining power of the interest groups relative to the

bargaining power of the government and other official institutions. However, the

range of outputs of possible policies must have elements that supplement political

parties and interest groups such as promoting the government‟s popularity, allocating

the national budget to supplement the utilization of resources of interest groups and,

lastly, these policies must proceed according to the law. Interest groups can be

divided into four categories:

1) Interest groups under economic, political and social development

frameworks.

Demands from interest groups in this category are dependent on the level

of development of either the economy, politics or society. For example, in developing

countries, interest groups in this category may demand policies which they believe

will elevate their group economic standing. These interest groups are usually spawned

from poor welfare, their demands are usually short term one and do not lead to

improvement in economy, society and politics in the long run. While in developed

countries interest groups in this category may demand policies that enhance

economic, political and social development over the longer term.

2) Interest groups under the governance framework.

Different types of governance affect the behaviors of interest groups

differently. For example, democracy provides the freedom of expression to interest

28

groups, while in authoritarian states government leaders are more concerned about the

stability and security of the state, thus allowing for far less freedom of expression,

activity and movement among interest groups.

3) Interest groups created from differences in unofficial institutions.

Differences in unofficial institutions influences what kinds of policies

interest groups demand. Since language, custom, religion and nationality are all

factors that affect the behaviors of interest groups between each other and on the

bargaining table, the wider the difference the harder it is for each group to cooperate

due to the different conditions for each group‟s satisfaction.

4) Interest groups under the power bargaining framework

The design in the structure of bargaining and the balancing of power

between each country directly affect the interest groups within this context.

Democratic countries with different sharing of power and structure between the upper

house and lower house verily affect how interest groups choose to approach official

institutions for bargaining.1

3.2 The Electoral System and Political Behaviors

The electoral system governs not only the behaviors of political parties

but also the behaviors of civil society. The electoral system in each country varies by

the rules and conditions of each location‟s contextual political development. The

stages of official institutions and influence from unofficial institutions such as the

dynamics in historical development are factors in setting the behaviors of players. For

these reasons, the electoral system in official institutions must also take into account

the importance and conditions from unofficial institutions as to whether there are

differences in nationalities, religious beliefs and practice, ideas and languages, for the

formation of the electoral process and method. For example, the proportional

representation system is suitable for countries with vastly contrasting ethnic groups

Thus, understanding of electoral systems is crucial to obtaining a clearer picture of the

1 Attakrit Patchimnan, แนวคดิทฤษฎีว่าด้วยเศรษฐศาสตร์การเมือง [Theory of Ideas for

Political Economy], 2nd

ed. (Nonthaburi: Parbpim Design & Printing, 2013), pp. 30-69.

29

behaviors of both official and unofficial institutions, as electoral systems both directly

and indirectly affect political development.

3.2.1 The Non-Proportional Representative System

1) The plurality-majority rule is an electoral system which only takes the

majority or minority into account to determine the result of an election.

This electoral system causes an imbalance between the portion of the

votes and real seats in parliament, resulting in the bigger party gaining

the advantage to win an election and create a single political party

government.

2) Instant-runoff-voting is an electoral system that takes the majority vote

to win an election, but this electoral system has a vote transfer system

in which the losing parties can transfer their votes to the competing

parties in the next round of the election.

3.2.2 The Proportional Representative System

The idea of the proportional representation system is that voters should be

able to vote for political parties both directly and indirectly. After the votes are

counted directly for representatives in that specific area, those votes from each area

are then pooled together to be counted at the national level for seats in parliament.

This electoral system provides a higher probability for medium and small parties to

win seats in parliament. It is considered more appropriate for unofficial institutions

with degrees of diversity regarding religion, language and nationality. Since smaller

political parties can have more seats in parliament, the aggregate policies from the

coalition government will have to reflect the needs of various interest groups and

improve the satisfaction level among them. There are three models for the

proportional representation system: 1) party-list proportional representation, 2) single-

transferable vote, and 3) mixed member proportional system.

In the party-list proportional representation system, voters vote directly

for their area‟s representative, then for the party-list. Representatives on the party-list

are the party‟s executives and have no gains or losses in the vote for representatives in

the area. Although the representative on the party list is not specific to any province,

30

this system could lead to policies that do not reflect the locals‟ demands because the

representatives on the party-list do not know the characteristics of their voters.

Single-transferable vote is an electoral system that allows for the transfer

of the votes for the highest representative candidate whose votes exceeded the

minimum votes required to secure a seat to the second favorite representative

candidate. This electoral system indicates the transformation of the deadweight loss of

proportional representation to the net benefits for society.

The mixed member proportional system lets voters vote for two houses,

one house for the plurality vote and the other house for the party list in that specific

area. This electoral system reduces the loss votes from the losing area‟s representative

candidates.

The structure of proportional representation is significantly different from

the structure of the plurality-majority or non-proportional system due to the former

allowing for representatives non-specific to any single area to acquire seats in

parliament, especially smaller and newer political parties. The tangible result of

proportional representation is the coalitions of representatives from various areas of

expertise, either with similar ideology or a proportional parliament consisting of

various parties with different policies perspective trend, which lead to fairness in

competition between larger and smaller parties.

3.3 Political Dominance versus Economic Dominance

There are two explanations for the pattern of behaviors of official and

unofficial institutions under the framework of governance. The first one is political

dominance and the second is economic dominance. Political determinants signify the

state-centric determination for minimum wage policy due to the unchallenged power

of single party government. In contrast, economic determinants signify the economic-

centric determination as regards minimum wage policies formation due to the forming

of a coalition government through the proportional representation system which

results in the distribution of interests and power among interest groups and greater

diversity of policies.

31

3.3.1 Political Dominance

The idea of political dominance in the shaping of the behaviors of players

under the governance framework is that the state is the dominant player in the game.

The analysis of the relationships between the state and other players should take

factors which relate to the structure of the state‟s power as units of analysis.

The first factor in this case is the electoral system. This type of electoral

system in most cases determines the distribution of power between government and

civil society through election. Non-proportional representation tends to lead to a

single party government. Policies produced from unbalanced bargaining power

between political parties and other players tend to end up being one dimensional and

only direct to some interest groups relevant to the stability and popularity of

government. However, the unchallenged nature of the single political party does not

necessarily result in the pattern of a non-policy centralized. In the case of developed

countries, because the existence of patron-client relationships in the long-term

perspective is fewer the average policies may get closer to a policy centralized. Such

an explanation cannot be attributed to developing and underdeveloped countries due

to the numerous patron-client relationships and abuse of power through corruption

and impeding the checks and balances system.

The second behavior signaling the presence of political dominance is the

utilization of parliamentary power instead of an institutional approach for

constitution. In principle, the constitution is the rules and boundaries for the

utilization of government power. However, in countries with no written constitution,

the government itself becomes unrestricted and the most prominent player in policy

making. This could be beneficial in developed countries because the gross institutions

are most stable. On the other hand, if the official and unofficial institutions are weak

such as in the case of developing and underdeveloped countries the abuse of

parliamentary power without restrictions from the constitution might promote policy

corruption.

The dominance of political power over judicial power, the third behavior,

is the circumstances in which, without a written constitution, judicial power has to

rely on political power. The existence of a single party government through a non-

32

proportional representation system and the lack of a written constitution are two

factors that lead to the authority of political power over that of judicial power.

The fourth behavior, the balance of power between the upper house and

lower house indicates the power equilibrium between the two. If the lower house has

significantly more power, the executive power will be more powerful in policy

formulation compared to the upper house. The reasons that lead to this circumstance

include the plurality-majority rule and an unbalance between official and unofficial

institutions. According to the theory of transaction cost economics, the imbalance

between institution/s power and political customs results in higher cost and wasted

resources.

An absence of central bank independency is another indication of the

dominance of the political determinant in economic policy making. The level of

central bank independency directly affects the monetary policy and gross economic

stability other than the government‟s fiscal policy. Thus, a low level of central bank

independency due to political intervention indicates economic policies that create

non-optimal income distribution. The tendency of political interventions in central

bank decisions are more frequent in developing and underdeveloped countries under

the umbrella of the patron-client system.

The sixth behavior for political dominant, the policy making is

centralization or the unitary system. Centralization is the executive power,

administrative power and decision-making involving the operating budget framework

centralized within the central government. Local governments then have to take

whatever decisions the central government deems appropriate for their operations.

This behavior for the most part, is present in developing and underdeveloped

countries because the structure of unofficial institutions obstructs administration and

strategic management. For example, widespread patron-client relationships from

decentralization in developing and underdeveloped countries urge the central

government to centralize the decision-making power from local government.

The last behavior is the behavior of interest groups shaped through

political influences. The behavior of interest groups is an important factor that

indicates the balance of power in the political system. A non-proportional

representative electoral system will create a single party government and single

33

dimension policies which do not reflect public satisfaction or feedback. This situation

results in a low level of participation and collaboration between central government

and various interest groups.

3.3.2 Economic Dominance

The idea of economic dominance in policy making follows the utilization

of scarce resources to maximize the benefits in the form of various policies that reflect

public satisfaction. The utilization of economic determinant factors in shaping

government policies may act as important tools in reducing the obstacles to

development in the form of political influence. Thus, the idea of economic dominance

comprises various factors in the institutional system that affect the behaviors of the

actors in the game. These factors are as follows:

1) The electoral system of proportional representation

Proportional representation is considered economic dominance. The

electoral system grants easier access to parliament‟s seats to the smaller political

parties and the possibility to join in coalition government, having the chance to design

and implement government policies. Therefore, the electoral system of proportional

representation reflects the electoral system that leads to a win-win payoff or non-zero

sum game. A single party government tends to create single dimension policies. A

coalition government, on the other hand, has greater tendency to create policies that

affect more interest groups with different sets of ideologies as the coalition

government is the result of the bargaining process between different groups with each

group based upon the voters of different identities in terms of languages, customs,

religion and beliefs.

2) Constitutional frames

The written constitution governing the boundaries of government power

cannot be easily changed by interest groups with access to political power but by a

more transparent process of public referendum. This type of constitution supplements

and promotes the decentralization of administrative power to local governments

which in turn boost policy efficiency through various local projects determined by

each district.

34

3) Equilibrium of power division

The equilibrium of power division is the equilibrium of power between

the upper house and lower house in the democratic system which comprises the level

of independence of each house to its counterpart. The optimal equilibrium of power

between the lower house and upper house makes for stronger and less influenced

players in the game. Less dependence between the two houses in terms of power

structure also factors in the optimal power equilibrium. The result is the stable

structure of official institutions and a good checks and balances process which

improves policy formulation and implementation. For the optimal equilibrium of

power, the structures of the upper house and lower house must reflect their origin

whether through election or selection process.

4) Level of central bank independence

To achieve a high level of independence for the central bank, the decision

making process for monetary policy or policy recommendations should be in the form

of a committee from various sectors. The structure of power has to be unattached to

political power and government influence. Under these conditions, the implemented

policies from the central bank will likely stabilize the economy as intended. The idea

of economic dominance is that the constitutional power is law not policies, and thus

government should not have the power to directly influence the benefits and payoffs

from monetary policies.

5) The decentralization system

Decentralization is the distribution of executive power, administrative

power and decision making involving the operating budget framework from the

central government to provincial governments and local governments. Provincial and

local governments then can set and implement their policies and allocate their

resources as they see fit within the limitations of the budget provided by the central

government. The decentralization system is a suitable for environment with a faint

presence of a patron-client system. It should also be under an official institutional

framework and have a clear cut power structure and transparent policy

implementation. The decentralization system is usually present in an institutional

structure with proportional representation and the optimal equilibrium of power

between upper house and lower house.

35

6) Interest group shaping cooperation

The behaviors of interest groups are another indication of the balance of

power in politics. Bargaining and demanding from interest groups are part of power

sharing in politics. The concept of economic dominance in these relationships

contends that players share information based on transaction costs to maximize profits

within resources limitations. In the economic dominance framework, the government

strategizes its policies for the spreading of risks and to supplement its advantages in

the electoral system and number of opposition parties. The factors that shape the

behaviors of interest groups in the economic dominance framework are:

6.1) The number of interest groups which have positive relationships

with the number of policies in the proportional representation

system. The proportional representation system creates diversity in

representation which betters the response to public demands.

6.2) Unofficial institutions such as religion, nationality, ethnicity,

language and customs, affect interest groups in the context of

ideology. For example, different religion groups demand different

policies.

6.3) The patron-client system factors in the activities of interest groups.

It drives cooperation among interest groups; however, power

corruption in the relationships between the public sector and private

sector is an inevitable adverse effect from the patron-client system.2

2 Patchimnan, pp.72 – 92

36

CHAPTER 4

THE ACTIVE FACTORS THROUGH THE LENS OF THE

POWER STRUCTURE THEORY

This chapter details the complex negotiation process for the minimum

wage under each country‟s power structure which introduces a great deal of

arbitrariness in the minimum wages set. Decision making responds more to

imbalances in bargaining power. To understand the power of each factor, it is best that

we first explore the structure in which these factors shape minimum wage policy

work.

4.1 Thailand’s Minimum Wages: Institutional Structure and Recent Evolution

Minimum wage policies have been a crucial element in the development

of Thai labour policy over the past decades since the 1980s. In 1972, the first

minimum-wage law was issued in Thailand, the Ministry of the Interior elected a tri-

partite National Wage Committee or NWC which consists of the government

representatives, employer representatives, and employee representatives to

recommend labour policy to the government and fix the minimum wage, which was

defined as “a wage rate which an employee deserves and is sufficient for an

employee‟s living.” The first minimum wage was set at 12 baht per day in April 1973

in Bangkok and three surrounding provinces (Samut Prakan, Nonthaburi, and Pathum

Thani). The factors used in wage negotiations are the cost of living. Since the

minimum wage law was in effect, it is continued to be set by geographic zone. By

1998, minimum wage policy was implimented over all 76 Thai provinces.

The 1997-1998 Asian financial crisis led to the reform of Thailand‟s

labour policy, and the Labour Protection Act of 1998 (LPA 2541) changed the

minimum wage formulation into a two-tiered system which focus on the different in

industry , the cost of living and economic in each province. However the different in

industries was later not taken into consideration, largely because it was too complicate

to administer. One of the LPA 2541‟s primary objective was to create new minimum

37

wage setting formular which consisted of the three key institutions: the NWC, the

Provincial Subcommittees on Minimum Wages (PSMWs), and the Subcommittee on

Technical Affairs and Review (STAR). Despite the introduction of the new system in

1998, there was no change in minimum wage until late 2001. Then in 2008, a new

reform (the Labour Protection Act of 2008 [LPA 2551]) further detailed the criteria of

wage adjustments, in practice however, it made no change in the level of minimum

wage. Finally the Yingluck government declared the single minimum wage rate

nationwide policy which by 2013 had set minimum wage throughout Thailand to 300

bath/day.

Throughout these periods, most of the rounds of negotiations to review the

minimum-wage level were typically triggered by trade union demands, the National

Wage Committee (NWC) or Provincial Subcommittees on Minimum Wages

recommendations, or government order. It is the duty of the PSMWs, the tripartite

subcommittees composed of government, employer, and employee representatives, to

recommend minimum-wage adjustments at the provincial to NWC, which then sends

these recommendations to the Subcommittee on Technical Affairs and Review

(STAR) for technical review. After this process, STAR submits its review and then

the NWC issues a final recommendation at the central level, which the Ministry of

Labour (the final deciding authority) then announces in the Royal Gazette.

The Ministry of Labour may ask the NWC to revise its recommendations,

it rarely interferes with the review process beyond its influence on the different

committees through its official representatives.

In 1998, the LPA 2541 (article 87) also stipulated that three main groups

of indicators on which to base minimum-wage adjustments: cost of living, employers‟

capacity to pay, and economic conditions. In theory, by relying on these criteria, it

would introduce some degree of effectiveness in the determination of the minimum

wage, a problem that is fairly common in most developing and underdeveloped

countries throughout history. In practice, however, every round of minimum-wage

negotiations often differs widely from the text of the legislation for various reasons.

First, the weight for each factors viewed by each members of the

committees was not pre-established. An interview with stakeholders in Sanz-de-

Galdeano, Del Carpio, and Messina‟s “Minimum Wage: Does It Improve Welfare in

38

Thailand?” suggested that the cost-of-living GDP are the main priority due to the

availability of these data. However, practically, negotiations take place rather

informally, and the criteria used may well vary across provinces and over time.

Second, the low rate of unionization and the large share of informal employment

severely limit Thai workers‟ capacity to coordinate efforts, which result in the

bargaining that was dominate by the other sides.1 During interviews with union and

employer representatives at the NWC, it was often expressed in Sanz-de-Galdeano,

Del Carpio, and Messina‟s interview that in some negotiations, both the

representatives from the employers‟ side and the representatives from the employees

side work in the same company.Also the employee representative are often not

prepare enough to discuss the matter in technical level which gives the upper hand to

the other sides. Thus the poor growth of nominal wage in figure 4.1 came as no

surprise. The real growth of the minimum wage cannot keep up with the annual

inflation rate (figure 4.2).

1 S. Paitoonpong, P. Tasee and J. Sodasith, “Demographic Aspect of Workers in

Manufacturing and Impact on Productivity,” TDRI Quarterly Review 27, no. 1 (2012): 3-11.

39

Figure 4.1

Growth of Nominal Minimum Wage in Thailand 1998-2010

Source: Ann Sanz-de-Galdeano, Ximena Del Carpio and Julian Messina, “Minimum Wage: Does

It Improve Welfare in Thailand?” IZA Discussion Paper no. 7911 (The Institute for the

Study of Labour, 2014), p. 7.

40

Figure 4.2

Growth of Real Terms for Minimum Wages in Thailand 1998-2010

Source: Ann Sanz-de-Galdeano, Ximena Del Carpio and Julian Messina, “Minimum

Wage: Does It Improve Welfare in Thailand?” IZA Discussion Paper no. 7911

(The Institute for the Study of Labour, 2014), p. 8.

41

Figure 4.3

Labour Market Trends in Thailand

Source: Regional Office for Asia and the Pacific, “Thailand: A Labour Market Profile ,”

Asian Decent Work Decade 2006-2015, International Labour Organization, 2013.

In late 2012, Thailand introduced a controversial nationwide minimum

wage. The policy is popular amongst Thailand’s workers, yet corporations and some

government level departments have expressed concern about the policy’s potential

impact on employment and Thailand’s economy in general. Minimum wages policies

are unpopular among those who believe in the ...2

2 James Parker, “Thailand Introduce National Minimum Wage,” The Diplomat,

January 11, 2013, http://thediplomat.com/2013/01/thailand-introduces-nationwide-minimum-

wage/

42

4.2 Indonesia’s Minimum Wages: Institutional Structure and Recent Evolution

Wages policy in Indonesia consists of two main policies:

(1) A wages policy related to the fixing mechanism of wages in the labour

market

(2) A wages policy which protects labourers at the workplace.

Systematically, the fixing mechanism of wages policy in the labour market consists of

(Act No 13/2003):

a) Fixing minimum wages (Article 88)

b) Determining wages through negotiation (Article 91)

c) Applying a wages structure & scale (Article 92 sub section 1).

d) Peninjauan Upah Secara Berkala (Article 92 sub section 2).

Meanwhile, the wages policy that protects labourers includes (Axt No

13/2003 Article 88 Sub section 3)

1. Minimum wages

2. OT or Overtime payment

3. Wage during absent

4. Wage for works not included in job description

The method of wage payment

1. Fines and deductions from wages;

2. Other matters that can be calculated with wages;

3. Proportional wages structure and scale;

4. Wages for the payment of severance pay; and

5. Wages for calculating income tax.

As for the negotiation wage process, in Indonesia the minimum wage is

stipulated for a single worker that has experience of less than one year. The fixing of

the minimum wage is done either at the province or district/city, by the governor,

based on recommendations from the wages council. Besides the minimum wage rate,

the governor also has to determine the provincial sector minimum wage rate (PS-

MW) and district/city sector minimum wage rate (D/CS-MW) which are set based on

43

agreement between the entrepreneurs and the trade union. So, the minimum wages

can consist of: provincial minimum wage rate, district/city minimum wage rate, PS-

MW, and D/CS-MW. Though Indonesia‟s minimum wage legislation was implement

since 1970s the national government had not been particularly active in the

formulation of local wage policies.

The Labour Law Act No. 13 2003, Article Nos. 88, 89 and 90 states that

the minimum wage can be determined at both province level and district level by the

province governor. The minimum wage rate determined by the governor based on the

input from the provincial wage council is implemented for the province and the

minimum wage rate determined by the governor based on input from the district

wage council or city mayor is applied for the district. The governor usually

determines the minimum wage once a year by issuing the governor‟s decision letter.

There could be several minimum wage rates existing in the province, for example,

both the minimum wage province (MWP) and minimum wage sectoral province

(MWSP). While at the district or city level there are also might be the minimum

wage district (MWD) and minimum wage sectoral district (MWSD). However, only

one of these minimum wage rates is in effect for a worker at a time which depends on

the district and the sector in which each one works.

The penalty for the noncompliance of the minimum wage laws is

relatively light when comparing to developed countries. The fine for breaking

practices in minimum wage legislation are only up to the maximum of 100000 rupiah

in 1997 , without considering how many workers in a firm that were underpaid.

Many practices are also left to the interpretation of the law enforcers which moral

hazard and bribes or patron – client relation between employers and local law

enforcers. Overtime the minimum wage law enforcement in Indonesian has increased

and is now an important tools to tackle the problem of work place conditions and

quality of life standard in 2000s. In 2000 – 2007 the more frequent enforcement of

minimum wage law has led to decreasing of wage inquity between the rich 1/10 and

the poor 9/10 in Indonesia.

44

Table 4.1

Indonesia‟s Monthly Minimum Wage by Province

Source: Badan Pusat Statistik, Statistik Indonesia 2015 [Statistical Yearbook of Indonesia

2015] (Indonesia: Badan Pusat Statistik, 2015).

45

4.3 The Three Formulation Methods for Minimum Wage Policy

The principle of minimum wage has been used in various countries

around the globe. The International Labour Organization (ILO) contends that the daily

minimum wage rate is the rate of daily income that will prevent labour to fall below

the poverty safety net and push the economy and society toward better economic

equality and fair wages. Each country that applied the concept of minimum wage to

their labour policy has different objectives, legal frameworks, government policy

formulation processes, policy implementation and target groups.3

We can divide the method used in minimum wage policy formulation into

three groups as follows:

1) Bargaining process: The formulation process is conducted through the

negotiation and bargaining between social partners. Then the result of such

negotiations is sent to the government or tri-parties to verify and legalize. These

processes are used at both the national level of minimum wage policy setting and the

industrial level of minimum wage policy setting.

2) Consultation process: There are official discussions between the

government and representatives from trade groups and representative from labourer

groups. The minimum wage is formulated after several discussions between the

government, employee representatives and employer representatives. These processes

could occur for both national minimum wage rate setting and sectorial minimum wage

rate setting.

3) Government legislated process: A one-sided decision from the

government without consulation from other players in the field. The whole minimum

wage policy formulation process is conducted by the government with no

involvement by social partners or private sector representatives.4

Furthermore, we can divide the levels of implementation of minimum

wage policies into four levels:

3 Tito Boeri, “Setting the Minimum Wage,” IZA Discussion Paper no. 4335,

Forschungsinstitut zur Zukunft der Arbeit Institute for the Study of Labor, July 2009. 4 Noppadol Buranatanang, Pornkiet Yangyeun and Somsiri Mhad-ar-daum,

“พฤติกรรมการก าหนดค่าจ้างของไทย,” [Employer‟s Behavior in Deciding Salary in Thailand],

Monetary Policy Documents, Bank of Thailand, n.d.

46

(1) National level

(2) Sectorial / Industrial level

(3) Enterprise level

(4) Occupational level

These differences in the methods of minimum wage policies formulation depend on

the structure of the labour market and the institutional power structure in each

country.5

Table 4.2

Method of Minimum Wage Setting

5 Noppadol Buranatanang, Pornkiet Yangyeun and Somsiri Mhad-ar-daum.

Process Country

1. Bargaining process The formulation process is

conducted through the negotiation

and bargaining between social

partners. Then the result of such

negotiations is sent to the

government or tri-parties to verify

and legalize. These processes are

used in both the national level of

minimum wage policy setting and

industrial level of minimum wage

policy setting.

Argentina Bangladesh

Belgium Colombia

Costa Rica Dominican

Republic Ecuador El

Salvador Estonia

Ghana Greece South

Korea Lithuania

Madagascar Mexico

Nicaragua Paraguay

Peru Philippines

Poland Thailand

Turkey Ukraine

Venezuela

47

Source: Noppadol Buranatanang, Pornkiet Yangyeun and Somsiri Mhad-ar-daum, “พฤติกรรมการก าหนดค่าจ้างของไทย,” [Employer‟s Behavior in Deciding Salary in Thailand],

Monetary Policy Documents, Bank of Thailand, n.d.

From these groups of policy setting process it is important to note that

Boeri 6found that the level of involvement of official institutions such as governments

has a negative relationship to the raising of the minimum wage rate when present in

the negotiation process. Countries that have government heavily involved in the

minimum wage negotiation process have low minimum wage increases in each

negotiation round when compared to countries that let the private sector sort the

negotiation process out by themselves. In the same vein, the European Foundation

found that the minimum wage rate compared to the average wage rate in Sweden, set

6 Tito.

2. Consultation process

The minimum wage is formulated

after several discussions between

the government, employee

representatives and employer

representatives. These processes

could occur for both national

minimum wage rate setting and

sectorial minimum wage rate

setting.

Albania Algeria

Australia Bulgaria

Burkina FasoCanada

China Czech Republic

France Guatemala

Hungary India

Indonesia Ireland

Jamaica JapanJordan

Kenya Latvia Morocco

Nepal Poland Portugal

Romania Spain Sri

Lanka United Kingdom

Vietnam

3. Government

legislated process

The whole minimum wage policy

formulation process is conducted by

the government with no

involvement of social partners or

private sector representatives.

Azerbaijan Belarus

Bolivia Brazil

Cameroon Chile

Ethiopia Israel

Kyrgyzstan

Netherlands New

Zealand Nigeria

Pakistan Poland Russia

United States Uruguay

48

by negotiation within the private sector is higher than that of the European Group,

which is about 60-70 percent of the average wage rate.

In Slovenia, the minimum wage in the industrial groups set by private

sectors is also higher that in the industrial groups that have their minimum wage set

by the government – about 55 percent of the average wage rate compared to 44.1

percent of the average wage rate of the latter groups. Montornes and Sauner-Leroy 7

found that institutional factors affect the behaviors of employers in minimum wage

negotiations. The private sector without government interference tends to use lay-offs

to reduce production costs while in the case of government interference in minimum

wage negotiations, the private sector cuts the wages of their employees to reduce

production costs. The European Foundation 8found that a minimum wage rate that is

relatively close to government compensation for unemployment encourages some

labourers to choose the government‟s compensation instead of receiving the minimum

wage from work such as in the case of Malta and Estonia which have such a

compensation system.

Thus, given current Thailand‟s political characteristics, even though

Thailand uses the bargaining process in minimum wage negotiations, the power

structure in the game of wage bargaining changes according to the relative power of

official and unofficial institutions. During the early stage of minimum wage

legislation, the minimum wage setting process was very centralized, involving only

the National Wage Committee and the government.

7 Jeremi Montornes and Jacques-Bernard Sauner-Leroy, “Wage-Setting Behavior

in France: Additional Evidence From an AD-HOC Survey,” Working Paper Series no. 1102,

European Central Bank, October 2009. 8 Andrea Broughton, “Wage Formation in EU,” European Foundation for the

Improvement of Living and Working Conditions, March 30, 2009.

49

Figure 4.4

Thailand‟s structure for minimum wage setting ( 1)

Furthermore, due to the prominent factor of Thailand‟s unofficial

institutions, especially the patron-clients system, the employees represented in the

committee in some case come from the same company as the employer‟s

representatives, which results in them being underpowered in most rounds of

minimum wage rate negotiations. In 2001 there was an attempt to revise this fallout in

wage negotiations by enacting other parties in the minimum wage rate setting process

in an attempt to decentralize power imbalances in negotiations from unofficial

institutions (the patron-clients custom) and the official institutions which have

negative relationships to the level of minimum wages (the government). These new

parties are the Provincial Subcommittees on Minimum Wages (PSMW) and the

Subcommittee on Technical Affairs and Review (STAR), which combine with the

National Wage Committee are the Tripartite Committee. Each party consists of the

same number of government officials, employer‟s representatives and employee‟s

Patron-Clients

System Government

National Wage

Committee

( employer

representative + employee

representatives + government officials)

50

representatives. Thus, on paper, the power structure in minimum wage negotiations

changes accordingly.

Figure 4.5

Thailand‟s structure for minimum wage setting (2)

It is the duty of the PSMWs, the tripartite subcommittees composed of

government, employer, and employee representatives, to recommend minimum-wage

adjustments at the provincial level to the NWC, which then sends these

recommendations to the Subcommittee on Technical Affairs and Review (STAR) for

technical review. After this process, STAR submits its review, then the NWC issues a

Government Trade Unions

Technica

l Affairs and Review

(STAR)

National Wage Committee

(NWC)

Provincial Subcommittees

on Minimum Wages

(PSMW)

51

final recommendation at the central level, which the Ministry of Labour (the final

deciding authority) then announces in the Royal Gazette.

Indonesia, on the other hand, utilizes the consulation process in the

formulation of its minimum wage policy. The characteristic of Indonesian labour

market differs among 34 provinces thus the setting of minimum wage varies between

each province. In 2015 the minimum wage in Jakarta was 2700000 which was 250%

that of Central Java. The decentralization in Indonesia in term of minimum wage rate

allows for each province to set the minimum wage rate according to its economic

condition. For example the provinces with sunset industries such as coal may pospone

the raise of minimum wage in the following year while the province where

consumption are stable can adjust its wage accordingly.9

In mid-October 2015, however, Joko Widodo‟s government proposed a

new formular for fixed minimum wage raise according to data from annual economic

input which undermines the role of labour unions, the governor and all other

stakeholders in minimum wage rate setting. The formula for the newly proposed

minimum wage raise is:

New minimum wage rate = Previous year minimum wage + (previous

minimum wage x (% annual inflation rate during the year + % GDP annual increase

during the year)

The above formula will not be applied to the eight provinces where the

minimum wage is still below the government-determined basic cost of living (KHL).

These eight provinces will instead get an extra 5 percent rise more than the above

formula every year for the next four years. The goal of this new minimum wage

formula, although not officially stated by Joko Widodo‟s government, is most likely

to ensure government presence in the livelihoods of people and to stimulate a good

investment climate for business.

9 “Indonesia: State Set for Stromy Minimum-Wage Negotiation,” The

Economist, October 1, 2015, http://country.eiu.com/article.aspx?articleid=1153548699&

Country=Indonesia&topic=Economy

52

Figure 4.6

Indonesia‟s structure for minimum wage setting at provincial level ( 1)

Governor (veto power)

Provincial Wage Council

Government authorities +

employer‟s representatives +

labour union representatives

District Wage Council + City

Mayor

Labour Union (weighted in local

election)

53

Figure 4.7

New formula proposed by Jokowi‟s government – Indonesia‟s structure for minimum

wage setting at provincial level ( 2)

Governor (no input

from other party

except economic

data)

Data from economic input using the following formula:

Previous minimum wage + (previous minimum wage x (% annual inflation rate during the

year + % GDP annual increase during the year)

Labour Union (input from union

most likely does not matter)

54

4.4 The Electoral Vote and Its Influence

Thailand has been using the proportional representation system since

1997. In theory, this type of representation system should lead to economic

dominance over government policy. However, in 2008 after the constitutional court

dissolved the People‟s Power Party, following a stroke of successful attempts to

remove them from governmental power, the new Pheu Thai party lost the vote to the

new Prime Minister Abisit Vejjajiva of the Democrat Party, their opposition totaling

198 votes against 235 votes, after the military provided discussions for leading

political figures a few days prior.

Thus, in the 2011 election, the Pheu Thai party needed more than half of

the total representative seats to prevent the same circumstances from repeating. This

condition led to the very aggressive competition of populist policies, especially in

providing benefits to the voters, including the nationwide 300 baht per day minimum

wage policy. Pheu Thai‟s rival party, the Democrats, at that time also proposed the

raising of the minimum wage by 25% within 2 years as their minimum wage

campaign. Plodpasop Suratsawadee, the deputy chief of the Pheu Thai party later

admitted that the nationwide 300 baht per day minimum wage policy was not possible

to implement immediately as promised.

Dr. O-ran Chaiprawat, Pheu Thai party‟s economic consultant stated that

the policy is impossible to implement without putting a dent in the government‟s

budget and economic stability. A few days later, Dr. Suchart Thada-Thamrongvech

reaffirmed that the policy would be implemented as had been campaigned. In the

policy statement of the council of ministers the wording had been changed from

“wage” to “income” which included other benefits such as interests, overtime

payments, leases, and the transfer of money from the private sector and government.

This resulted in conflict among the intellectuals in the Pheu Thai party regarding the

implementation of the minimum wage policy and the change of wording during the

declaration of the policy to the parliament signifying that the nationwide 300 baht per

day policy was mostly politicized. Later, the nationwide 300 baht per day minimum

wage policy was fully implemented in in January 2013. These circumstances display

the importance of voters in the formulation of minimum wage policies, as the

55

minimum wage policy, according to the Bank of Thailand‟s research on the behavior

of employers concerning pay raises, extends to workers who receive more than the

minimum wage as well due to the fact that employers refer to minimum wage rate to

adjust the wages of the higher skilled workers. Also, other welfare policies could be

substituted for the minimum wage such as the employer‟s and government transfers to

retirement funds and social insurance, or Jamsostek in the case of Indonesia.

For Indonesia, the local election is also an influential factor in determining

minimum wage policies, and the national election to a lesser extent, since the

Indonesian president‟s government does not play a direct role in deciding local

minimum wage rates. However, there is also competition or the bargaining of power

between central and local government. As the current structure of Indonesia‟s

minimum wage formulation stands, local governments have more control over

labourer‟s economic well-being as they contribute to both income in terms of the

wage policy and outcome in terms of taxation especially at the household level as

personal income taxes are also regionally variable while corporations are taxed at the

same rate at 25% for both domestic and international income sources. There was an

attempt to revise the 2004 law on regional government that enabled direct elections

for local government and also the latest attempt under Joko Widodo‟s government to

assert the central government presence in the eyes of the Indonesians, in terms of the

personal economy, by reconstructing the minimum wage structure to only be

determined by economic data and prevent employer representatives, workers unions

and even local government from influencing the minimum wage rate.

4.5 Trade Unions’ Influence

The bargaining power of a union is partly determined by the organization

of industries and market forces, the key economic factor influencing bargaining is the

alternative for the negotiating parties. However, workers and employers also have to

consider the costs of unionizing.

When the 300 baht minimum wage policy was announced, the Federation

of Thai Industries was the first to oppose the idea. Then several employers‟

affiliations followed. The members of most of these groups are also employers

56

themselves. Under Thailand‟s current minimum wage setting mechanism, bargaining

is dominated by employers and industrialists such as the Thai Chamber of commerce

and the Federation of Thai Industries while the national wage committee is dominated

by government officials. Considering these factors along with weak and scattered

labour associations, it comes as no surprise that the employers group would want to

bring the wage negotiation back to the usual mechanism. Then when minimum wage

policies were rolled out in several provinces, there were several warnings from

business leaders about the potential negative impact on Thailand‟s economic

performance. Taweekit Chaturacharoenkhun, the Vice Chairman of the Federation of

Thai Industries (FTI) warned in an interview in October 2013 that between 5% and

10% of Thailand‟s labour intensive industries would be forced to close down over the

next three months. Already the Chairman of the FTI had been forced out by his peers

over his failure to convince the government to abandon the policy.

In this regard, the situation in Indonesia is different. Different regions

of the country are characterized by pockets where the labour market is tight but

surrounded by areas where the labour market is slack. Thus, the balance of bargaining

power varies depending on the region. For example, in the area around Medan, which

is dominated by plantation agriculture, it has been increasingly difficult to find

workers for the peak season. While in other areas, the labour supply can be elastic.

Shortages are supported by evidence of rapidly rising wages (above the minimum

wage) in some areas and by improved working conditions in others. The effectiveness

of trade unions also differs depending on the regions. For example, labour unions in

Jakarta are more solidified, and also there is also the politics of scale where trade

unions in populated provinces can rally large masses of protesters in case they

consider the raise in the minimum wage to be too low.

4.6 Relevant Laws and the Legislative’s Influence

On the legislation side, the latest law in Indonesia used to oversee the

implementation of the minimum wage policy is the Labour Law Act No. 13 2003,

Article Nos. 88, 89 and 90 which state that the minimum wage can be determined at

both province level and district level by the province governor. The minimum wage

57

rate determined by governor based on input from provincial wage council is

implemented for the province and the minimum wage rate determined by the governor

based on input from district the wage council or city mayor is applied for the district.

The governor usually determines the minimum wage once a year by issuing the

governor‟s decision letter. There could be several minimum wage rates existing in the

province, for example, both the minimum wage province (MWP) and the minimum

wage sectoral province (MWSP). While at the district or city level there also might be

the minimum wage district (MWD) and the minimum wage sectoral district (MWSD).

However, there is only one of these minimum wage rates in effect for a worker at one

time which depends on the district and the sector in which each one works.10

The minimum wage law in Thailand is codified as part of employment

law, administered by the the Department of Labour, Protection and Welfare, and

stipulates working conditions such as the maximum work hours, holidays, sick leave,

minimum wage and severance pay. The laws, which may significantly affect a firm‟s

decision to do business in Thailand, also provide employers with flexibility in

managing labour, such as in staff recruitment processes, retrenchment policies and

employee transfers, work hours, holidays and sick leave. The law that supplements

and substitutes the minimum wage in both countries are the severance payment and

workers‟ compensation, both of which are present in the employment law of both

countries.

Enforcement of minimum wage legislation is still rather poor. The fine for

breaking practices in minimum wage legislation are only up to the maximum of

100000 rupiah in 1997 , without considering how many workers in a firm that were

underpaid. Many practices are also left to the interpretation of the law enforcers which

moral hazard and bribes or patron – client relation between employers and local law

enforcers.

10

“Minimum Wage In Indonesia with Effect,” Wage Indicator, accessed August

6, 2015, http://www.wageindicator.org/main/salary/minimum-wage/indonesia

58

4.7 The Pros and Cons of Utilizing Minimum Wage Legislation in the Government’s

Strategic Planning

The minimum wage policies in Thailand and Indonesia have been heavily

politicized, both at national level in the case of Thailand where the formulation

process is still quite centralized despite an attempt to partially decentralize in 2001,

and at the local level in the case of Indonesia, especially after the 2004 law which

granted Indonesians the ability to vote for their own local governor. However, the fact

that crucial economic policies such as minimum wage policy have been part of

election campaigning also has its advantages as explained by Patchimnan in

“Minimum Age Policy and Economic Development in the Long Run: The Case Study

of Thailand” as follows:

The pros of utilizing minimum wage

legislation in government‟s strategic

planning

The cons of utilizing minimum wage

legislation in government‟s strategic

planning

1. Utilizing minimum wage legislation

can be in the political interests of the

government. For example, the target

group who benefits from the minimum

wage legislation is the poor and those

who suffer from inequality in income

distribution. The poor are the

prominent factor in the vote counts in

elections.

1. Can be considered a populist policy

that leads to an unjust minimum wage

rate change; especially as concerns

unskilled laborers which heavily

affects the production costs of small

and medium enterprises.

2. The raising of the minimum wage rate

in industrial sectors that have high

elasticity for labor demand will risk

increasing unemployment which leads

to the migration of workers from the

formal sector to the informal sector,

resulting in the reduction of wages in

the informal sector. When labor supply

in the informal sector increases and

2. Utilizing minimum wage legislation

supplements the principle of

democracy as it reduces the weight of

inequity in income distribution.

59

3. A market system without external

intervention could potentially fall into

the hands of capitalists which may

result in unfair payment for the

poorest.

wages in the informal sector decrease,

workers in the informal sector will

eventually end up being the poorest

which will in turn negate the benefit of

the minimum wage policy in terms of

income distribution.

3. Potentially leads to a reduction in

labour productivity, a reduction in

production efficiency in the production

line and decreases in the county‟s

competitiveness in the global market.

Due to the increases in uneducated,

unskilled labourers flowing into the

labour market, especially if the

government does not implement public

policy in terms of education and labour

training both prior and simultaneously.

4. Current structure of minimum wage

legislation reflects the decentralization

and distribution of the power structure

in terms of policy making, from

central government to local or

provincial government. The utilization

of minimum wage legislation will

raise the level of efficiency of local

government in administrating their

local economic policies, especially in

the collection of income which reflects

long-term economic stimuli.

5. Utilizing minimum wage legislation in

government‟s strategic planning

reduces the risk of a failed state.

6. Minimum wage legislation creates a

new equilibrium between the demand

for labour and labourer‟s satisfaction

in the market in the case of global

recession or other circumstances in

which external/internal factors affect

the market adversely and shift the old

equilibrium.

60

7. Supplements the idea of political

reaches along with public access to

government welfare and especially

stimulates workers in the informal

sector to migrate into the formal

sector.

Source: Attakrit Patchimnan, “นโยบายค่าแรงขั้นต าและการพัฒนาเศรษฐกิจในระยะยาว: กรณีศึกษาประเทศไทย” [Minimum Wage Policy and Economic Development in the Long

Run: The Case Study of Thailand].

Figure 4.8

Wage Competitiveness Adjudged for Labour Productivity Growth 2011-2014

Source: “World Development Indicators September update 2015,” World

DataBank, accesses November 2015, http://databank.worldbank.org/

data/download/WDI_csv.zip

61

CHAPTER 5

RESULTS AND CONCLUSIONS

5.1 Results and Discussion

The principle of the minimum wage policy has been utilized by many

countries around the world to facilitate a fairer market and as a social safety net for

the poorest. For both Thailand and Indonesia the minimum wage increased almost

annually but when we deflated these raises with the inflation rate and increases in

consumer prices, then for the most part the real minimum wage rates are actually

lacking behind the cost of living, for Thailand from the 1970s until 2011 when the

minimum wage policy started to be politicized and in Indonesia from the 1990s until

2004 when local politics started to play a major role in shifting the bargaining power

of workers unions and shaping the balance of power in local minimum wage rate

negotiation.

For both countries there are two sides which determine the outcome of the

minimum wage rate: the economic side according to public interest theory and the

political side according to the power structure of political institution theory.

Regarding the economic side both countries share similar factors, albeit with different

weightings for each factor: economic growth, the ability of industries to pay, labour

supply, cost of living, inflation/unemployment rate and productivity. The political

side is where each country branches off. It is important to note, however, that there

are rarely any instances of the rise in the minimum wage rate in either country follow

the economic indicators of the previous year. Thus, economic determinants in this

case are most likely decorations on the negotiation table only. Therefore, the

determinants of the outcome of minimum wage policy setting weigh heavily on the

political side.

For Thailand the first component that influences the political side of the

formulation of minimum wage policy is trade associations such as the Federation of

Thai Industries and the Thai Chamber of Commerce. They influence the bargaining

process by sending their version of economic data to the government and also by

62

being involved directly in the bargaining process by having their members as

employers‟ representatives on the National Wage Council as well. The second

component that influences the formulation of the minimum wage policy is the

public‟s satisfaction towards public policy, derived from other public and economic

policies relevant to the satisfaction of both negotiating parties such as corporate

taxation. The third component that influences the minimum wage setting is the

choices of policy perspective trends which consist of the electoral system, the net

influence between official and unofficial institutions and, lastly, applicable or relevant

laws such as punishment for noncompliant employers.

As regards Indonesia, the factors which influence the political side of the

formulation of minimum wage policy are as follows: first is the influence of trade

affiliations, which vary depending on the characteristics of the labour market in each

province. The second component is the current public satisfaction for public policy,

derived from other public and economic policies relevant to the satisfaction of both

negotiating parties such as corporate taxation, provident funds, retirement funds and

severance payment and other government provided social welfare such as free

education, etc. The third component is the choices of policy perspective trends. In the

case of Indonesia, this is influenced by the decentralization of political power and the

structure of the minimum wage policy setting from start to finish within the provincial

level. The fourth and fifth components are the local trade associations and labour

union which have different levels of influence in the negotiation depending on the

characteristics of each province; for example, the worker unions in Jakata have more

bargaining power due to the number of members and the harmonization of the unions‟

political activities compared to worker unions in Yokkarta, which leads to different

increases in the minimum wage rate. The sixth component that influences Indonesia‟s

minimum wage formulation process is the local governor and local government as the

2004 law provides a decentralized political structure, and allows voters to vote for

their local governments while the local governor possesses the power to veto the

decision of the Provincial Wage Council and the District Wage Council, the minimum

wage policies setting of Indonesia were taken to the street.

63

5.2 Conclusion

Considering how the reaction between political players can change the

equilibrium of minimum wage formulation, and up until now impact economic data

such as inflation and cost of living are not as important as they are supposed to be, it

is no surprise to conclude that, at least in the observed countries, economic indicators

are quite insignificant, compared to political influences, when it comes to determining

the minimum wage policies. The fact that political decisions are dictating policy that

can impact the economic equilibrium undermining the possibility of achieving or

getting close to a general equilibrium in minimum wage rates in the first place,

especially in developing countries that need to always be competitive and attractive to

foreign capital. Thus, in order to narrow the derailing of the effective minimum rates,

it is suggested that the focus be put on the attempt to regulate political factors rather

than economic factors.

While these results, if applied to developed countries, may not always be a

problem due to the fact that minimum wage laws affect relatively few people.

64

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68

APPENDICES

69

APPENDIX A

UNSKILLED WORKER COMPETITIVENESS: THAILAND VS.

INDONESIA

Source: Regional Economic and Social Analyst Unit, “Wage in Asia and the Pacific

Dynamic but Uneven Progress,” Global Wage Report 2014/15, ILO Regional

Office for Asia and the Pacific, December 2014.

70

APPENDIX B

CROSS COUNTRIES COST OF LIVING INDEX: THAILAND

2009-2015

Y

Year

C

Consumer

price

R

Rent

C

onsumer

Price +

Rent

G

Groceries

R

Resturant

Price

P

Purchasing

Power

2

009

3

9.85

2

4.49

3

3.76

5

3.30

2

5.32

3

3.42

2

010

3

6.56

2

1.56

2

9.87

5

1.31

2

8.24

3

0.76

2

011

4

1.79

2

1.72

3

4.58

4

6.22

2

4.84

2

3.54

2

012

5

0.16

1

7.59

3

8.44

6

5.47

2

7.35

3

2.03

2

013

5

1.78

2

1.30

3

7.15

5

7.93

2

5.48

3

5.01

2

014

4

5.95

1

8.30

3

2.51

5

2.92

2

3.81

3

6.96

2

015 mid

4

2.75

1

3.58

2

7.87

4

6.91

2

3.76

5

7.34

Source: Calculation based on data from “Cost Living in Thailand,” Numbeo, accessed

September 19, 2015, http://www.numbeo.com/cost-of-

living/country_result.jsp?country=Thailand

71

APPENDIX C

INFLATION VS. MINIMUM WAGE INCREASES: THAILAND

2009-2015

Year Inflation index (1) Minimum wage %

change (2)

2009 + 1.9 1.1 (203)

2010 +3.7 +1.01 (206)

2011 + 4.2 +39.5 (300)

2012 + 1.3 0

2013 +1.7 0

2014 +1.3 0

2015 - -