The current debate over the increase in the minimum wage

Active participants in this discourse include not only policymakers and academics but also the public including workers, firms and investors, with much of the scrutiny focused on the justification and potential economic consequences of the policy.

First, there is the question of whether the increase is justified. Economically speaking, at least two factors must be considered here, namely productivity (is the work worth what workers are paid?) and inflation (is the pay hike needed to offset the rising cost of living?).

Here are the facts.

Since 2000, average growth of labour productivity has been 2.2 per cent per year while the average real minimum wage has declined by 0.3 per cent per year.

This implies that the nominal minimum wage has not kept up with labour productivity and inflation.

While the productivity of minimum wage workers may be lower than the average, it seems fair to say that there are economic grounds for a minimum wage hike.

However, it is necessary to seek the best way to adjust the minimum wage so that firms' ability to adapt and the impact on the economy are carefully taken into account.

Currently, the average daily minimum wage across the whole country is Bt176. Going to Bt300 nationwide represents a sudden rise of 70 per cent.

Since workers on the daily minimum wage account for only 3.4 per cent of the total labour force (1.3 million of 38.5 million), one may be inclined to dismiss the impact.

However, what indeed matters is the extent to which an increase in the minimum daily wage would affect the country's overall wage structure.

Given that labour accounts for 14 per cent of the total cost of firms, if other wages are also adjusted following the change in the minimum wage, the impact on firms could be more severe than anticipated.

The effect will likely be more pronounced for small and medium enterprises (SMEs), whose labour costs are relatively higher.

This matters given the large role of SMEs in the economy, particularly in terms of employment.

If left with no alternatives, in order to reduce production costs and maintain profit margins, firms may unavoidably need to lay off workers, leading to higher unemployment.

Another potential consequence that cannot be overlooked is the impact on inflation.

Firms can pass on their cost increases by marking up the prices of goods and services - a process easier done during a period of economic expansion.

Not only will inflation immediately accelerate, inflation expectations may also shift up, fuelling future inflation. Workers may demand higher salaries in anticipation of higher prices in the future.

Producers will raise their prices if they expect higher production costs due to rising wages in the period ahead.

Higher inflation will not only weaken the country's economic stability, but also its export competitiveness against other countries.

Foreign direct investment may also slow down because of an increase in production costs.

This will also be a concern in the context of the opening of the Asian Economic Community in 2015, as the country becomes less attractive to investors compared to others in the region, while regional labour may flow into Thailand in search of higher pay.

All in all, it is very important to find a minimum daily wage that is in line with labour productivity and the higher cost of living in order to improve the quality of life for the working population.

For policymakers, the challenge is to balance the advantages of raising the minimum wage with their potential economic costs.

In the long run, the country also needs to improve the skills of the labour force to move to higher-paid work while maintaining its competitiveness.

The views expressed in this column are the writer's own. ATIPONG SAIKAEW is an economist with the Monetary Policy Department, Bank of Thailand.