By Daniel Mitchell
The garment industry is critical to Cambodia’s economy. It employs over 400,000 people – most of whom are female workers – and represents roughly 70 percent of the country’s exports. Yet, the minimum wage in Cambodia’s garment sector has gone up only three times since 1998. Last year, minimum wage was increased by 39 percent, in line with the reported 2.4 percent annual productivity gain realized in the past 14 years. Earlier this year, following a series of violent protests by unions and garment workers, wages were increased by 20 percent to $100 per month. Effective January 1, 2015, minimum wage will be $128 per month, or another 20 percent hike. This is substantially less than the 40 percent increase sought by labor unions but far more than the historic average annual increase in worker productivity or the 3.2 percent inflation rate reported last year.
International media coverage of the protest violence has tended to narrow the focus of this issue to a two-sided conflict with workers and labor unions on one side and garment manufacturers and the government on the other. This portrayal risks oversimplifying the interaction between the global economy and social dynamics and domestic politics in Cambodia.
The government-mandated minimum wage is important because Cambodian factory workers are unable to demand higher wages based on productivity or skills. Legally, the increase only applies to the garment and shoe sectors; however it will become the de facto minimum wage for everything except the subsistence agricultural sector. At present, most Cambodian workers have very low levels of education; this is primarily because the education system in Cambodia is completely inadequate. Earlier this year, when the Ministry of Education launched a crackdown on cheating and corruption on the national high school graduation test, 74 percent of students failed the exam. To the government’s credit, it is looking to the private sector to fill this gap.
For Cambodia, one of the few democratic states in mainland Southeast Asia, being a democracy complicates things. Domestic politics continue to play a key role in the wage negotiations. It is often difficult to differentiate protests of the opposition political party and those of labor unions. Campaigning ahead of the national election in July 2013, the opposition Cambodian National Rescue Party (CNRP) committed to doubling the then minimum wage from $80 to $160 a month. This immediately became a rally point for labor unions. That election resulted in a narrower majority for Prime Minister Hun Sen’s Cambodian People’s Party (CPP), demonstrating that they cannot afford to completely ignore the demands of this sector of the Cambodian electorate.
But the decision to raise the minimum wage for factory workers also presents a significant challenge for the CPP.
A majority of the Cambodian workforce (56 percent) is employed in the agricultural sector, which is still dominated by subsistence farmers. The average earning of a subsistence farmer is estimated to be less than $60 a month and fraught with risk. A factory job is generally considered an improvement. Subsistence agriculture income is unaffected by minimum wage increases. The rural population is a political stronghold of the CPP. Thus an increasing gap between those employed in the industrial sector and agriculture sectors, or the urban and the rural populations, risks eroding the CPP’s popularity in the countryside and generating social unrest as seen in Thailand.
Historically, the agricultural sector has absorbed a majority of new entrants into the workforce. Because of limited land availability and conflicts, that is no longer possible. The most conservative forecasts estimate the workforce (and therefore electorate) growing by over 150,000 per year for the foreseeable future. One of the biggest challenges facing the Cambodian government is creating employment opportunities equivalent to the current 400,000 jobs in the garment industry every two years. A balance must be achieved between wage increases for the few and job creation for the many new entrants.
Cambodia’s primary economic resource remains its low-cost labor. It competes for investment in labor-intensive industries with other low-cost labor countries such as Bangladesh and Pakistan as well as its neighbors in Southeast Asia. For exporting manufacturers, wages are only a portion of the total cost of production in a country. The prospects of future labor unrest disrupting production and delivery schedules are equally important.
Few believe this wage increase has brought the issue to closure. The increase will be absorbed by businesses and is unlikely to result in a significant number of factory closures. However, combined with the prospect of continued labor unrest, it is likely to have a negative impact on future manufacturing investment.
Mr. Daniel Mitchell is the CEO and Managing Director of SRP International Group Ltd., and serves on the Board of Governors of the American Chamber of Commerce in Phnom Penh, Cambodia.