By Elman Dzaki
In mid of March, the Malaysian Prime Minister announced the increase of the 1st national minimum wage from RM1,200 (USD285) to RM1,500 (USD356) effective 1st May 2022. The last minimum wage increase was in 2020 by RM100 (USD23) from RM1,100 (USD261). However, it will not apply to small and micro businesses with less than five workers and low revenues. Vulnerable sectors will also get an exemption and postponement, but the details are still vague until further announcement. While most employers are against the policy due to its quantum and timing, the increase is still necessary even at this challenging time.
Contentiously, there is a failure in the Malaysian labour market. Both current and new minimum wages are still below the RM2,200 urban poverty level.The average wage received by the bottom 40% income group (B40) is barely enough to sustain their basic needs (i.e., shelter and food), resulting in social problems. Many workers have to do more than one job and even live on debts to pay for basic needs, further pulling them into poverty. The government must bear the externalities through cash handouts and subsidies, including healthcare, childcare, housing, and education for the B40 households.
There is severe income inequality in Malaysia which shows low-quality economic growth. In2020, workers’ compensation consisted of only 37.2% of the GDP based on the income approach, lower than the OECD average of 50.8%. Worst, the household income data reveals that the total income for the B40 groups has been reducing since 2014.
The low wage level in Malaysia should not be associated only with employees’ low productivity. Malaysian employers are slow to adopt innovative technology and hence are also culpable for the low productivity.The Malaysian Investment Development Authority data from 2010 until 2020 show that capital investments concentrated on physical structures(i.e., real estate) rather than assets to improve productivity, such as ICT, machinery, and other tools. Employers would rather pay for dispensable workers at lower costs, especially when the supply of foreign workers is ample than procuring technology needing a higher initial sunk cost.
Malaysian economic structure transition towards modern services and high value-added industries has been sluggish. The lack of innovative technology has stifled progress and held the country in the middle-income trap. There are limited opportunities for high-paying and high-quality jobs to support technology usage and development.Malaysian businesses are still heavily relying on cheap unskilled workers. Data from 2017 until before the pandemic indicates that unskilled jobs vacancies were massively higher than the skilled and semi-skilled jobs combined. Skilled and semi-skilled workers are also more vulnerable to losing their jobs than the unskilled. Apart from incentives, increasing the minimum wage can nudge companies to shift to technology and help boost the transition towards an advanced economy and better-paying jobs.
Conventional economic wisdom claims that raising the minimum wage will reduce jobs, especially for the young and unskilled. However, contemporary studies with more robust methodologies have not been able to replicate this result. Although specific workforce segments (i.e., young and inexperienced) are typically affected by minimum wage policy, there is an insignificant difference in the net employment. The job losses are transitional. New jobs, either of the same or different types, will emerge. Higher disposable income will have a multiplier effect that will expand the economic pie. However, no single finding can be generalised. In the Malaysian context, hypothetically, employers have a broader threshold to pay higher wages without significantly affecting their businesses since the current share of employees’ compensation is very low.
The minimum wage hike is also commonly framed as areas on for business closures. It is a valid claim but may not necessarily be bad. Firms should be competitive to remain in business. Letting firms exploit labours to stay afloat and socialising the costs is unethical and inefficient in the long run. Low-productivity firms might have to close down, but more productive firms will fill the gap.
Many employers lament that the timing is unsuitable as the country is still recovering. However, raising the minimum wage now is necessary to set a reasonable recovery baseline, thus minimising impacts and confusion for businesses when the recovery is in momentum. Besides, most firms that survived the pandemic by now are likely competitive enough to manage the minimum wage hike.
Inflation is one of the trade-offs that need to be braced by society when the minimum wage increase takes place. Businesses will divide the increased cost with the consumers, further pushing the current uptrend inflation caused by other factors like the global supply chain disruptions and the Russia-Ukraine war. However, the market dynamics will eventually set the price at the right level in the short term.
For the time being, industries are awaiting the minimum wage implementation details, including which sectors will get the exemption and postponement.The government should reveal these details earliest possible to reduce uncertainties and provide businesses ample time to manage the coming 1st May. Certain quarters including the Malaysian Trade Union Congress (MTUC), the largest labour union in the country, are against any postponement or exemption for any sector as it would be unfair and will increase complexities and inefficiencies. On the other hand, although micro and low revenue businesses may be exempted, they are also worried about being crowded out for labour supply.
To conclude, wage stickiness, especially among the B40 and the vast income disparities in Malaysia, war ranted policy intervention to correct the inefficiency. Workers deserve to earn at least a basic living wage by having a job. The minimum wage increase is not only about the redistribution of wealth but also as an indirect tool for Malaysia’s transition towards an advanced economy. Implementing it now will set a more transparent baseline for a smoother economic recovery. There will be trade-offs like higher inflation, but it is still manageable. Ultimately, the implementation details by the government will determine the effectiveness of the policy.
