The Chicken & Egg problem – raise Minimum Wage first or Productivity?

 

The decision by the National Committee for Designating Minimum Wage on January 2nd to increase the minimum wage has left many in the garment industry dissatisfied. Union officials believed that the new minimum wage of K4800 was not enough to cover the increasingly high cost of living, especially in the cities. Instead, they advocated for a minimum wage between K5600 – K6600. Employers, however, argued that the rate increase was too high in light of the already heavy burden of maintaining a profitable business. This is a result of the high cost of land, frequent power outages and low labour productivity. Others worry that the increase in wages will affect the competitiveness of Myanmar’s garment sector globally, given that low wages have been the main driver of growth in the labour-intensive cut-make-pack (CMP) garment industry. In the next few years we will see if this gamble with the minimum wage succeeds in improving workers livelihoods or blunts the competitive edge that’s been driving Myanmar’s garment industry.

Myanmar has become increasingly popular among garment manufacturers as production costs and wages have risen in major garment exporters like China. Besides its competitive minimum wage, the primary reasons for this popularity are Myanmar’s preferential access to the EU market though reduced tariffs and its vast supply of unskilled workers. How increasing the minimum wage from K3600 to K4800 will affect Myanmar’s competitive advantage internationally largely depends on the productivity of its workers.

Myanmar has the second lowest minimum wage in the region with only the garment manufacturing giant Bangladesh being lower (See table). While wages are comparatively low in Myanmar, there is a simple reason that CMP garment factories have only trickled to Myanmar. A study by the Centre for Economic and Social Development shows that the productivity of Myanmar’s garment workers is considerably lower than its regional rivals.

Table 1 Compiled from statistics bureaus of respective countries

The garment sectors of Thailand, Malaysia, and Vietnam are six times more productive, than Myanmar’s garment industry. Even garment workers in the less developed Cambodia and Laos are 2 to 3 times more productive. This means that, despite Myanmar’s low wage, it is as profitable, if not more so, to remain in these other countries. In China, on the other hand the minimum wage has risen to a point where it is cost-effective to operate in Myanmar, as it’s low productivity is offset by its low costs. The result is a steady migration of factories moving from China to Myanmar. The risk associated with increasing the minimum wage is that it does not guarantee any increase in productivity, but raises wage costs significantly.

This could result in Myanmar losing the competitive advantage it needs to attract foreign investment in the garment industry. Instead, manufacturers will choose not to relocate or will instead move to a neighbouring country with higher productivity like Thailand or lower wages. Bangladesh is particularly attractive to garment manufacturers due to its lower minimum wage and higher productivity.

To retain Myanmar’s competitive advantage in the garment industry, the productivity of Myanmar’s garment workers will have to increase. Currently many garment factories in Myanmar use a system of bonuses to increase productivity and attendance, which provide a monetary incentive to meet production targets. While many of the larger factories are earning enough to accommodate the minimum wage and maintain their bonus system, this is not the case for local small to med factories. These factories will have to decrease the incentives offered for workers to meet their production targets. Productivity in smaller factories will most likely fall. The result will be a further erosion Myanmar’s regional competitiveness.

It is these smaller factories that will be most affected by the increase in the minimum wage, not the larger factories that supply international buyers. When a minimum wage was set in 2015, over 1,000 workers lost their jobs after its implementation. Although very few factories closed, the unfortunate few that did were small to medium sized factories owned by Myanmar nationals.

The low number of closures suggests that the minimum wage was a still at a level that factory owners considered competitive. While this previous experience indicates that a massive exodus of factories is unlikely, the higher minimum wage may act as a deterrent to prospective investors in Myanmar’s garment industry.

While no one can argue that the cost of living is not rising, continually raising the minimum wage in the absence of gains in productivity is not a sustainable solution. Instead, the immediate focus should be on reducing the cost doing business to a level comparable to Myanmar’s regional rivals to incentivise foreign investment in Myanmar’s garment industry.

Myanmar’s government is already taking steps to reduce the costs of doing business through tax breaks and the provision of necessary infrastructure. The National Electricity Plan aims to bring power to all of Myanmar by 2030, eliminating one of the most difficulty challenges for garment workers. Poor infrastructure is also a major cost to factory owners, which the government is attempting to reduce by attracting foreign investment. The Ministry of Transport and Communication is working with the JICA to improve Myanmar’s transport infrastructure and export facilities.

A regional minimum wage is also an option, garment manufacturing giants such China and Vietnam introduced different minimum for each region based on the the difference in the cost living. In Yangon where the cost of living is very high, a minimum wage K4800 per day may not be enough for workers to support themselves without working a large amount of overtime. In Pathein, however, the cost of living is lower, which makes it more feasible for a worker to survive on a minimum wage of K4800 per day. A regional minimum wage could potentially attract garment factories to industrial zones in smaller cities once the necessary infrastructure is built. Providing workers with a wage that they can live on while maintaining Myanmar’s competiveness in the cutthroat market, which is the international garment industry.

It is too early to say with any certainty if increasing the minimum wage will blunt Myanmar’s competitive edge. However, with reduced costs and increased productivity the garment industry could continue to be a strong engine for economic growth.

Author: Andrew Thomson

About the author:

Andrew has a Bachelor of Commerce degree from the University of Western Australia. This article was written as part of a research project on the garment industry in Myanmar that he was involved in while at Consult-Myanmar, a Yangon-based consulting firm. 

An edited version of this article was first published in Frontier Magazine (print edition) on 29th March 2018 under the title “Wage first, productivity later?”. To see the original article click here.

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