The government still has not decided to revise the national minimum daily wage rate (NMDW) to Nu 450, which it pledged it would. It is reviewing the NMDW, and the review is expected to be completed next year.
While the review is underway and the raise will depend on the study results, a study suggests that Bhutan should not hurry to revise the wage rate before considering various economic factors.
“The higher the wage rate, the higher the adverse impacts will be on employment, including the prices of goods produced in the country,” the study conducted by Chenpo, a researcher with Centre for Bhutan and GNH Studies concludes.
Titled “Implications of Upward Revision of National Minimum Wage Rate in Bhutan”, the study was conducted based on various literature reviews conducted in different Least Developed Countries to see the implications of increasing the wage rate.
The study concluded that an increase in the wage rate would lead to increase in the labour costs and in turn, could trigger price inflation, affect exports, and reduce the level of employment.
“At this juncture, considering various factors, it would not be a wise decision to revise the wage rate to Nu 450,” Chenpo stated. “Should the government choose to revise the rate as per the existing average wage rate, the government should explore revising the wage rate to Nu 247 instead.”
The above rate is based on the fact that many studies have concluded that a minimum increase in the wage rate has little or no impact.
The national minimum wage rate in Bhutan was initiated in the 1990s. In light of the growing economy, the government revised the wage rate from Nu100 to Nu 125 in 2014. Studies have shown that the wage raise has a greater effect on smaller firms in terms of income and employment, despite playing an important role in alleviating poverty and enhanced livelihood.
“As per the numerous studies in many developing and least developed countries, it is evident that the employment of less skilled labourers is mostly affected by the increase in wage rate,” the study concludes. “The studies show that the wage raise has a greater effect on smaller firms in terms of income and employment while it has played an important role in alleviating poverty and enhancing livelihood.”
The government, instead, should focus on skills development and capacity enhancement. Considering the current situation of Covid-19 pandemic where private entities are already grappling with challenges, the increase in the wage rate might worsen the current situation.
The study, instead, recommended the government to either initiate minimal revision or defer the revision for a few more years to ensure economic sustainability growth. In the context of Bhutan, the proposed wage rate would have implications on various aspects of the economy, employment, prices, and adverse effect on the construction sector. The study concluded that the evidence has shown that the impact of an increase in wage rate will depend on competitiveness in the market, overall performance of the economy, productivity of workers, and the degree of compliance with policies, among other aspects.
Possible implication of national minimum wage rate
Risk of exacerbating unemployment issue
Based on findings, it is evident that the major upward revision of minimum wage rate will have an impact on Bhutan’s employment aspects and a major wage raise will affect the employment of many in small Cottage and Small Industries (CSIs) and private sectors. With the revision of the wage rate, the small firms may not be able to sustain the increase in cost of production due to the rising inflation. Many small CSIs are already affected by the Covid-19 pandemic and if the wage raise is revised, it may adversely add to its effects. In turn, many people currently employed in small CSIs and private sectors may lose their jobs.
Implication on vulnerable working group
Many literature reviews have pointed out that a major wage revision has adverse impacts on vulnerable working groups such as women, unskilled people, uneducated people, and people with disabilities. The impact on such a working group in Bhutanese context is imminent should there be a major wage revision. If the major revision of wages comes through, the labour cost and production cost will also increase. Although the wage raise may come as a blessing to employees, as it may boost morale and the production in bigger firms, employers may resort to decreasing employees and lay off the people with perceived low skills in small firms.
Increase in prices of in-country goods and services
One of the biggest repercussions of upward revision of the wage rate will be an increase in the prices of goods and services produced in the country. There are many private production industries in the country and prices are already higher than imported goods. If the wage rate is revised, the growing private manufacturing and production sector, the so-called ‘engine of growth’ will be affected.
Implication on construction sector
With the revision of the wage rate at Nu 450 per day, the cost of construction will also rise. When the construction cost increases, it may lead to exorbitant house rent, especially in the urban areas affecting the larger population. Currently, the construction sector is already in shambles due to increasing material and labour cost. If the proposed wage rate comes into effect, it will further aggravate the issue.
In the Bhutanese context, the wage rate is heavily tied in with the legal system. The either upward or downward revision of the national wage rate will have an adverse effect on various aspects of the legal system. Currently, the compensatory damages, compensation, penalty amount (thrimthue) in lieu of imprisonment, fines and penalty for violations, and offenses under the Penal Code of Bhutan (Amended) 2011 are based on the current minimum wage rate of Nu 125. Fines and penalties according to Narcotic Drugs, Psychotropic Substances and Substance Abuse Act of Bhutan 2015 are also based on wage rate. With the major revision of minimum wage rate, the fine and penalty will increase by three-fold, affecting the low-income group.
A detailed report of the study can be availed from CBS and GNH Studies.
Contributed by Yangchen C Rinzin
Kuensel Research Fellow
Centre for Bhutan Studies and GNH Studies