Is Minimum Wage Worth It?

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A common gripe these days is about not earning enough, about being paid 3rd world salaries but having to pay 1st world prices.

When the Minimum Wage Order was gazetted 1st July, 2012, many still complained that the minimum wage was far too low (RM900 in Peninsula Malaysia and RM800 in Sabah & Sarawak). Economists pointed at the minimum wage being only money wage, not real wage, and that purchasing power of wages was not taken into account when setting the minimum wage (for Peninsula Malaysia especially). Some raised concerns that in the short-run, the Minimum Wage Order would erode Malaysia’s cost competitiveness. Some purists decried the policy, saying that raising the wage floor leads to inefficiencies in the matching of supply and demand, and that the market should be left to its own devices in determining wages.

Employers voiced their chief grievance with minimum wage: paying staff more cuts into profits.

But how much do employers expect their costs to rise by? The minimum wage order affects only cheap labour, and by definition cheap labour is low-skilled and low value-add (and, possibly, illegally-sourced and therefore below the radar of authorities). If Malaysia wants to move towards a high-income nation, we must push for a highly-skilled workforce that is high value-add. The government says this is the goal. Now companies need to get with the programme.

Prof Datuk Dr Mohamed Ariff of the Malaysian Institute of Economic Research (MIER) believes that if Malaysia had not allowed the massive influx of foreign workers, local manufacturers would have been forced to innovate and automate to boost productivity to maintain their competitiveness.

Economists say continuous dependence on cheap foreign labour would not encourage local corporations to mechanise, which is necessary to push the economy to a high-income level as defined by the World Bank.

Malaysian Trades Union Congress deputy president Mohd Jafar Abdul Majid said that while there was no doubt that foreign workers had contributed to Malaysia’s economic growth, “our economy is swarmed with foreign workers who are unskilled or have low skill sets that cannot contribute meaningfully to Malaysia’s aspiration of becoming a high-income economy.”

Dr. Awang Azman Awang Pawi, a research fellow at the Institute of East-Asian Studies, Universiti Malaysia Sarawak said, “The robust economic growth in the past two decade has led to a higher standard of living which also contributed to the locals’ aversion to the 3D (dirty, demeaning and dangerous) sectors, which were eventually filled up by unskilled foreign workers. This doesn’t contribute much to our economy as most of the income received by these workers are channelled back to their home countries.”

The desired objective of the Minimum Wage Order is to raise competitiveness. Easy access to cheap labour means that companies do not invest as much in innovating, streamlining and raising efficiency & productivity of existing resources. The minimum wage imperative should be a good thing for companies – reducing labour redundancies will eventually reduce overheads and costs.

Reducing redundancies will eventually increase profits

On the flip side, this means that some workers need to up-skill or up and leave. Will the Minimum Wage Order result in increased unemployment? Classical and neo-classical economics suggests this, but they assume that the economy is competitive and flexible (self-adjusting). What if it isn’t? Will forcibly raising the wage floor impel competitiveness? If the Minimum Wage Order results in higher unemployment, what does the government plan to do to address this? Will there be grants for technological investments? Or will the government say that the grace period was sufficient for companies to get their acts together and bear down on non-complying employers with the full force of the law?

The latest Global Competitiveness Report this year shows that Malaysia has  improved by five spots among 183 countries.

Last year, Malaysia was in the 26th spot but now, it is in the 21st spot  having scored an overall 5.08 out of the maximum seven points for “improvements across the board”. Its previous score was 4.88.

Assuming all goes well, and all companies comply with the Minimum Wage Order, how long until the positive effects of improved productivity, efficiency and competitiveness come to fore? And in the transition, how many companies will end up paying more to workers while investing more in technological improvements?

In the final analysis, the issue here is “Our corporate citizens need to keep their side of the bargain in helping to raise the income of our long suffering lower-wage earners. In many ways, it’s no longer a financial issue. It’s a moral one.”

 

Want to read more about jobs, wages and GDP? Check out the World Bank’s latest report here.

The views expressed here are the personal opinion of the columnist.

Photo credit: Flickr users D.O’Bhrionn and stardex.

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