Implementing Minimum Wage in Myanmar: Good Intent but be Vigilant

The debates of enacting minimum wage law in Myanmar have been continuing in the past two years but there is still no definite outcome. Recently, President Thein Sein has informed Pyithu Hluttaw (House of Representative) that the government will propose a minimum wage policy at the end of June. Pyithu Hluttaw will then have 60-day period to debate and comment on the government’s proposal. On that basis, the government will decide the minimum wage before November. President Thein Sein’s initiative on minimum wage is seen as a crucial decision by the government ahead of the forthcoming general election in November.

Minimum wage is the wage floor of employed people. Minimum wage policy is controversial among economists. The advocates assert that minimum wage helps to ensure every employed person receives an income that is above the minimum cost of living. The difference between subsistence and a wage warranted by minimum wage becomes an enhanced incentive for workers. Moreover, minimum wage promotes fair competition in the labor market. The opponents argue that minimum wage causes higher labor cost that is not determined by demand and supply. Particularly, if the minimum wage for the un-skilled or low-skilled workers is set above market clearing wage (i.e., market equilibrium wage), it causes a higher unemployment rate for this group of labor supply.

Minimum wage can become a double-edge sword. Although the employed people are better off from the minimum wage, but it affects the employers’ affordability for wage payment. There are numerous empirical evidences in the developing countries that sudden introduction of minimum wage that is above employers’ payment ability had indeed triggered the closure of marginal firms. Thus, in Myanmar’s context, defining what are the appropriate levels of minimum wage across a spectrum of industries and in the Union territories across regions and states have to be supported by convincing empirical evidences. Equally important, as a latecomer in the increasing integrated world economy, Myanmar has to take into account of the following points as the terms of reference for setting a minimum wage policy.

First, Myanmar is still a low-income country according to the classification of the World Bank. The share of agricultural sector in gross domestic products (GDP) is higher than the share of industrial sector. This implies that whereas agricultural sector is endowed with abundance of labor and most of them are self-employed and their incomes are at subsistence, while industrial sector is still at rudimentary stage but it can certainly achieve a relatively high growth rate if there is sufficient capital. The present conditions in Myanmar can adopt Lewis model for promoting industrialization. In the nutshell, Lewis model depicts that industrialization is the development process of absorbing surplus labor from agricultural sector to industrial sector. As a consequence, industrial sector can maintain a competitive wage at subsistence level until surplus labor is exhausted. From this theory, it becomes apparent that the wage floor of minimum wage has to be the subsistence wage until surplus labor is exhausted. Minimum wage above the subsistence level induces unemployment in cities as a result of rural-urban labor migration. These unemployed migrants in turn cause the formation of informal sector or urban slums that exacerbate poverty and inequality.

Secondly, a profit-maximizing employer wants to pay a wage that minimizes total labor costs. That level of wage is known as efficiency wage and it is higher than market clearing wage. Market clearing wage is the market equilibrium wage but efficiency wage is higher than market clearing wage. Efficiency wage minimizes total labor costs because it induces a higher labor productivity that offsets the difference between efficient wage and market clearing wage. Put differently, the net gain of labor productivity from efficiency wage is higher than the wage differential between efficiency wage and market clearing wage, hence efficiency wage in fact brings down total labor costs. In this regard, if minimum wage was set above market clearing wage, then it becomes an incentive for the employees to raise their labor productivity. Conversely, if minimum wage was set at or below market clearing wage, there is no incentive for employees to improve their productivity. Worse still, the turnover rate instead will increase in this case, which consequently causes higher labor costs.

Thirdly, labor market is characterized by the asymmetry of information between employers and employees. As such, by paying the market-clearing wage, employers are unsure if they are able to retain their employees for a reasonable period. In order to reduce turnover rates, employers incline to pay efficiency wage so as to motivate their workers to remain in their firms. Furthermore, efficiency wage is also an incentive for the workers to raise their productivity. In this context, the concern for the employers is what is the appropriate level of efficiency wage. Efficiency wage is influenced by at least two factors. The first one is with regard to the wage paid by other firms. In other words, if other firms are paying a lower efficiency wage, then for the firm concerned there is only a need to pay slightly higher efficiency wage to motivate its workers. Equally crucial, an employee in the firm concerned clearly knows that if he or she is dismissed, the opportunity to receive similar wage is low. The second factor is the unemployment rate. A higher unemployment rate motivates firm to set a lower efficiency wage. In this situation, it is apparent for a worker to recognize that it is not easy to seek another employment opportunity that gives the same efficiency wage.

If Myanmar will adapt an outward-oriented development strategy—that has characterized the development process of most of the East Asian countries, it is crucial to set a correct level of minimum wage. Myanmar’s labor cost is lower in comparison with neighboring countries. According to the survey conducted by Japan External Trade Organization (JETRO), average wage of a factory worker in Yangon, Dhaka, Phnom Penh, Vientiane, Colombo, Da Nang, Chennai and Bangkok was $71, $99, $101, $111, $130, $137, $199, $363, respectively, in 2014. Thus, currently the wage of Yangon’s factory workers is considered as the cheapest in South and Southeast Asian cities.

Equally important, the outward-oriented development strategy has to be consistent with Myanmar’s initial conditions, viz., abundance of labor and cheap labor cost. Utilizing these advantages, coupling export-oriented development with labor-intensive industrialization is certainly a good and realistic policy choice. Considering this crucial perspective for promoting development in general and economic growth in particular, the setting of minimum wage policy has to take into consideration of the three crucial points that this article has illustrated.