LABOUR-MARKET ISSUES UNDER TRADE LIBERALIZATION .

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Asia-Pacific Development JournalVol. 14, No. 1, June 2007LABOUR-MARKET ISSUES UNDER TRADELIBERALIZATION: IMPLICATIONS FORTHAI WORKERSPiriya Pholphirul*This paper analyses the impact of trade liberalization on the labourmarket in Thailand. The impacts on wages, employment, gender roles,labour standards and protection, human development and unionizationare investigated. Such impacts vary among different sectors and indifferent aspects. The negative impact on workers, compared with otherstakeholders, is shown to be a major concern. Workers are shown tohave bad working conditions and low levels of protection and bargainingpower. Since a more competitive atmosphere resulting from freer tradeforces businesses to adjust their working environment, those businesseshave to consider upgrading their human resources, which will thereafterhelp those businesses to make cost-effective adjustments and enhancethe working conditions of labour. In order to cope with the internationalstandards resulting from trade liberalization, the labour protection lawof Thailand should be amended to include workers in the informal sector,such as home workers, part-time workers, subcontracted workers andtemporary workers. In addition, the labour protection law should belinked to the development of skills and work safety.I.INTRODUCTIONIn the last few decades, most developing countries have been living ina world characterized by the conjucation of three factors, namely globalization,rapid technical change and intense competition. An analysis of the current economicsituation starts with globalization; it then considers technical changes andcompetitiveness as they relate to the decisions of policymakers. Globalization hasgiven rise to concerns about its impacts and about the effects of the mobility of* School of Development Economics, National Institute of Development Administration, Bangkok,Thailand.41

Asia-Pacific Development JournalVol. 14, No. 1, June 2007capital on inequality, in particular about how globalization affects both capital andlabour. Workers are concerned about their incomes and job security: in otherwords, with the consequences of globalization and how much bargaining powerlabour has. Workers are greatly exposed to the uncertainties that may come alongwith globalization, and they are particularly fearful of “immiserisation” and thepossibility of unemployment. The main difference between the current era ofglobalization and earlier times is that, previously, both labour and capital wereequally mobile, whereas now, financial capital is more mobile while labour isremarkably less mobile.1 Diwan (2001, 2002) argued that there are two implicationsof globalization affecting capital and labour. First, the burden-sharing of negativeshocks between labour and capital is most likely unequal, and labour ends upbearing a larger burden. On the other hand, if globalization benefits certain sectors,labour benefits less in comparison. Second, in a world of greater mobility of bothfinancial and physical capital, labour for each country will have to compete harderto attract capital, leading to lower wages. 2 Currently, the existing degree ofglobalization is driven more by the opening of trade and investment of the respectivecountry. Detailed studies of trade liberalization are needed in order to investigatethose implications linked to production factors in the market.Also, in Thailand trade globalization or trade openness brought about bytrade liberalization has created both benefits and costs for the Thai economy, bothchanges and responsive reactions and both wider choices and social tensions. Itis possible that trade will produce a positive net gain on overall welfare, but it maynot be realized unless domestic structural adjustment takes place. As Thailandhas an abundant labour force, its labour force should gain from higher demand forlabour-intensive products owing to greater trade liberalization. However, its impacton income distribution is a cause for concern. To start thinking about the impactsof trade on labour, the following theoretical approaches in trade can be used:1Physical capital is also much less mobile and cannot credibly threaten to flee abroad easily.Thus, when we speak of the mobility of capital we mean the mobility of financial capital, while theinternational movement of physical capital would be related to the role of foreign direct investment orinvestment in the real sectors (Felipe and Sipin, 2004).2However, this argument has been given less credence since a number of studies explain thebehaviour of capital inflow as caused mainly by the productivity and economic performance of thecountries involved.42

Asia-Pacific Development JournalVol. 14, No. 1, June 2007(a) the Heckscher-Ohlin theorem (H-O),3 (b) the Stolper-Samuelson theory (S-S)4and (c) the Rybczynski theory.5For a number of reasons, the relationship between trade liberalization andits implications for labour in Thailand cannot be explained by using theoreticalpredictions alone. First of all, Thailand has gone through structural adjustmentsincluding the adoption of unprecedented economic reforms involving tradeliberalization, privatization of State-owned enterprises and deregulation of thefinancial and capital markets, all of which have caused fast and deep changes inthe Thai economy. Second, what the country did in the past was to launcha policy of promoting import substitution, which had been followed since the 1960s,and determined how its resources were used. Consequently, the remunerationof productive factors and the rate of investment were influenced directly by theorientation of the country’s industrial and trade policies. Moreover, the allocationof resources is sensitive to the structure of protection. As a result, the allocationof labour, including the return on wages, may differ. 6 Third, because Thailand, aswell as many other developing countries, has received large amounts of foreigndirect investment (FDI), the country tends to rely on foreign technologies by importingthem from developed countries, such as Japan, the United States, and those inEurope, rather than create its own technologies.3The H-O theorem states that, for a country that has a comparative advantage in the productionof goods that involve intensive but abundant labour, a relatively cheaper price should result. Thus,countries in which the labour supply is relatively abundant, especially various developing countriesincluding Thailand, should specialize in the production of labour-intensive goods and vice-versa forcountries whose capital supply or capital stock is relatively large (e.g. developed countries).4The S-S theorem was the first theoretical formulation to explain the effects of free trade onincome distribution among production factors. The basic result of the S-S theorem is that protectionismincreases the returns to a scarce production factor, such as labour in developed countries and capitalin developing countries. On the contrary, trade liberalization should increase labour wages in developingcountries and improve income inequality where labour is abundant. The opposite is expected toresult in developed countries due to capital abundance. In cases when a country faces a policy oftrade liberalization, inverse results would be observed. The return to capital falls by a larger proportionthan the price reduction of the imported good, at the same time that the return to labour increases,since the country specializes in the production of good A.5The Rybczynski theory claims that, with the production with labour-intensive goods, the growth oflabour employment should increase, thus creating more jobs. Therefore, given this theoretical prediction,had Thailand become involved in trade liberalization and produced more labour-intensive goods, theoverall wage earnings and numbers of workers employed would have increased.6Krueger (1998) argued that such a policy can distort relative prices by moving resources awayfrom activities in which the country has comparative advantages and by causing more production ofgoods of lesser quality but at a higher price.43

Asia-Pacific Development JournalVol. 14, No. 1, June 2007Nonetheless, how trade liberalization affects the different production sectorsdepends on a number of factors, for example the factor intensity of production(i.e. whether it is capital-intensive or labour-intensive), status of the technologyused (i.e. whether it is up to date or not) and structural changes within the industries.However, a number of studies have analysed the impacts of trade liberalization onlabour markets, such as job creation or job loss. Studies on the effects ofinternational trade exposure to job creation often focus on the effects at theaggregate level of employment and production, without distinguishing amongpart-time, full-time and overtime employment. More desegregated studies of tradeliberalization’s effect on wages, skill premiums, unemployment, job security andgender inequality have, however, received less consideration. The intention of thispaper is to explain the conceptual linkages of trade liberalization, such as theASEAN Free Trade Area and other forms of liberalization, on various labour-marketoutcomes in Thailand. It starts with an examination of the general issues of wageearnings and the share of employment before covering labour standards andprotection, the flow of labour through migration, human development, gender issuesand unionization. Also carried out were tripartite interviews with employers,employees and government officials in order to obtain more information about thelinkages. In the end, we discuss various policy implications of trade liberalizationon labour issues in Thailand.Table 1. Labour force by industry1995199619971998Total labour force32 75032 60333 19433 254Economically active population32 70232 44233 09033 177Employed32 33932 09332 797199920002001200233 10633 84934 52635 02932 96933 69034 41834 93832 04731 99132 88233 52334 322(Thousands)Breakdown by sector:16 74816 03016 46416 38715 48716 02115 45115 843Manufacturing and miningAgriculture4 4094 3684 3164 2254 4364 8134 7875 080Construction1 8432 1622 0041 2821 2851 2771 4081 4168143177178158172101964 0754 3484 5574 4674 7454 7985 4325 5109879569749259909519779644 1094 0864 3054 5834 8894 8505 3665 209Thailand’s Labour Force Survey

Asia-Pacific Development JournalII.Vol. 14, No. 1, June 2007TRADE LIBERALIZATION AND WAGES ANDTHE EMPLOYMENT OF THAI WORKERSTheoretical support for this study comes from the views of laboureconomists. This study takes, as a starting point, a model similar to the H-Oframework, in which trade liberalization should shift labour demand towards thefactor with which an economy is relatively more endowed. In an economy that hasliberalized trade, domestic producers and exporters often find themselves inimperfectly competitive market structures, such as oligopolistic and monopolisticcompetition. Hence, the fiercer competition due to trade liberalization in animperfectly competitive product market opens up scope for bargaining in labourmarkets. The bargaining situation as a result of market imperfections varies amongdifferent types of workers.Similar to the labour markets in many other developing countries, the Thailabour market consists of a large proportion of workers who are non-wageemployees and who work in the informal sector. Non-wage workers are classifiedas (a) own-account workers and (b) unpaid family workers, who accounted for,respectively, about 32.7 per cent and 25.5 per cent of total employment in 2003.The sum of those two groups is the ratio of workers in the informal sector to totalemployment. These workers might be considered by the Labour Force Survey asnon-wage workers; who include those who work in an enterprise that typicallyoperates on a small scale with a low level of organization.Figure 1. Share of wage and salaried workers (workers in formal sector)to total employment0.500.450.400.350.350.250.201980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002YearSource:Author’s calculation based on data collected from Thailand’s Labour Force Survey.45

Asia-Pacific Development JournalVol. 14, No. 1, June 2007During the period studied, the shares of workers in the informal sectordropped significantly, from 77.8 per cent in 1980 to 58.2 per cent in 2003. Theshare of own-account workers was found to be quite constant, about 32 per cent,during the period studied, while the share of unpaid family workers has beendropping substantially from 46.7 per cent in 1980 to 25.5 per cent in 2003.Therefore, this pattern means that the declining share of unpaid family workers iscausing a decrease in the share of informal workers. Why did the share of unpaidfamily workers decline? It did so because the majority of unpaid family workers inThailand are in the agricultural sector. Over time, a large number of these workersmoved to formal sectors, especially to small and medium-sized enterprises.7 Theseasonal pattern of the number of workers in the formal sector is determinedmainly by the seasonal mobility of labourers in private enterprises. Nevertheless,the seasonal movement of workers between the formal sector and the informalsector is also apparent, especially in the agricultural sector.8Figure 2. Share of own-account workers, share of family own workersand share of workers in the informal sector to total 1986Family own workersSource:1988199019921994Own-account workers1996199820002002Workers in informal sectorAuthor’s calculation based on data collected from Thailand’s Labour Force Survey.7Approximately 85 per cent of unpaid family workers are in the agricultural sector, followed bythose employed in the commercial sector and in the service sector.8Regarding the Labour Force Survey, the majority of unskilled workers move from the formalsectors to the informal sector, especially during the curvature period in the agricultural sector (i.e. thethird quarter of the year). Approximately 68.8 per cent of unpaid family workers are female; they werefound to have more seasonal (by quarter) movement compared with male workers.46

Asia-Pacific Development JournalVol. 14, No. 1, June 2007By applying this percentage share of labour to the total employment seriesusing the national account, the real wage rate of workers can be calculated usingthe definition of labour share, corresponding to two categories of workers: thosein the formal sector and those in the informal sector. The real wage rate of workersin the formal sector (wage and salaried workers) is calculated as the product of theraw labour share multiplied by the nominal GDP at factor cost divided by thenumber of workers in the formal sector (wage and salaried workers), after whichthe wages are adjusted using the 1988 GDP deflator.9 The most significant featureof this series is its substantial increase during the boom decade, namely from47,928 baht in 1986 to the maximum of 75,483 baht in 1996, and its slight dropduring the period following the 1997 financial crisis to 73,328 baht in 2003.Consistent with the rapid growth of the Thai economy, the real wage rate of salariedworkers increased substantially during the boom decade from the late 1980s tothe late 1990s. The wage rate in 2003 was about 57 per cent higher than what itwas in 1980. During the above-mentioned crisis, the real wage rate of workers inthe formal sector was found to be quite stagnant. It was consistent with thesituation existing in Thailand; many corporations decided not to immediately lowertheir employees’ wages, but rather to choose other options.10Figure 3 also illustrates the real wage rate of workers in the informal sector.Similar to what we computed for wage and salaried workers, the real wage rate ofinformal workers is calculated as the difference between the adjusted labour shareand the raw labour share, multiplied by the real GDP at factor cost (in 1988 prices),divided by the number of workers employed in the informal sector (own-accountworkers plus unpaid family workers). Unlike those in the formal sectors, thecomputed wages of workers in the informal sector increased slightly during theboom decade from 26,169 baht in 1987 to 28,874 baht in 1998. However, itsignificantly increased to 40,092 baht in 2003. The sharp increase in real wages inthe informal sector, from 28,874 baht in 1998 to 37,106 baht in 1999, was due toa sharp increase in the share of income from unincorporated enterprises during thecrisis period.9The Labour Force Survey also provides the monthly wages of those workers in the formal sector.Nevertheless, computing real wages from the account identity also introduces another approximation.Comparing the series to the minimum wages in each period, wages computed from the nationalaccount seem to be reliable, since those computed wages are slightly higher than the minimumwages (see Pholphirul, 2005).10Those options included, for example encouraging executives and high-level managers to retireearly, with hefty compensation, cutting the bonuses and other fringe benefits that were normally givento the employees, or saving on other expenditures, such as the cost of transportation, advertisingand production.47

Asia-Pacific Development JournalVol. 14, No. 1, June 2007Figure 3. Real wage rates: salaried workers, workers in theinformal sector and the average wage workers80 00070 000Baht per year60 00050 00040 00030 00020 00010 00001980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002Wage rate of salaried workersWage rate of workers in the informal sectorAverage wage workersSource:Author’s calculations based on data collected from Thailand’s Labour Force Survey.On average, the real wages of salaried employees or workers in the formalsector are about 2.2 times higher than those of workers in the informal sector. Thegap became larger when the boom decade started. In 1987, the real wages ofworkers in the formal sector were about 1.8 times higher than those of workers inthe informal sector. In 1996, real wages of workers in the formal sector wereabout 2.6 times higher than those of workers in the informal sector. It soundsintuitive to say that the wage rates of salaried workers are higher than those ofinformal workers. Since the majority of informal workers are unpaid family workers,and about 85 per cent of such workers are employed in the agricultural sector, thewages of those workers are much lower than those of the workers in themanufacturing sector.1111Even though some own-account workers, such as doctors and lawyers, might have higher earningthan salaried employees, the share of those own-account workers is still low and relatively stable atapproximately 30 per cent of total employment throughout the periods studied.48

Asia-Pacific Development JournalVol. 14, No. 1, June 2007Furthermore, why did the wage gap between workers in the formal andinformal sectors widen during the boom period? Again, since the majority ofinformal workers are in the agricultural sector, the wages of informal workers aredetermined by agricultural outputs, whereas the wages of formal workers are mainlyfrom non-agricultural outputs. The gains from the boom were not equally sharedamong the sectors. Thailand’s successful development strategy has been builtmainly on the export of labour-intensive manufactured goods. The agriculturalsector captured only a tiny gain from the investment boom. The wages offered inthis most labour-intensive sector were not as competitive as those offered in othersectors. As a result, while industrial employment grew significantly during theexport-led boom period, the share of workers in the agricultural sector declined.12However, the influence of trade liberalization on employment and wages isstill ambiguous and it varies by industry. Thus, more studies on market accessare required. To many critical observers, inter

LABOUR-MARKET ISSUES UNDER TRADE LIBERALIZATION: IMPLICATIONS FOR THAI WORKERS Piriya Pholphirul* This paper analyses the impact of trade liberalization on the labour market in Thailand. The impacts on wages, employment, gender roles, labour standards and protection, human development and unionization are investigated.

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