January 6, 2014
The minimum wage policy is consistent with Prime Minister Najib Tun Razak’s aspirations to transform the country into a high-level income country.
Although the ruling was gazetted in July 2012, it was supposed to take effect January this year. However, many businesses have urged for more time to comply to the ruling and as a result, the government said it would fully enforce the law only by January 2014.
This year, Malaysia will join more than 150 other countries that already have minimum wage laws in place. The policy sets a minimum wage of RM900 per month (RM4.33 per hour) for Peninsular Malaysia and RM800 per month (RM3.85 per hour) for Sabah, Sarawak and the Federal Territory of Labuan, covering both the local and foreign workforce, except for domestic workers such as domestic helpers and gardeners.
According to Bank Negara Malaysia (BNM), the minimum wage policy is estimated to benefit about 27% of workers nationally. On average, the affected workers in Peninsular Malaysia are expected to receive a 33% increase in wages, while those in East Malaysia would be given a 38% increment.
By economic sector, the agriculture industry is expected to be the most affected, as 43% of workers in the sector received wages that were below the minimum wage prior to the implementation of the policy.
If you think the minimum wage policy does not affect you, here are a few reasons why you should care.
1) Higher costs of business
If you are a business owner, you can expect a higher labour costs, no doubt. Not only the low-wage workers on your pay roll now needs an upward revision of salary, but this could also mean a whole restructuring of the reward system in your organisation.
On the other hand, you may see an increase in productivity of your employees. However, you may have to tweak how you measure the performance of your employees.
Furthermore, in the longer run, your firm may be encouraged to automate operations or acquire newer technologies that could enhance production capacity.
2) Higher cost of living
Following higher costs of business, consumers can expect pricier product and services. On the other hand, they can also expect better services as a result of increased staff productivity.
On the back of reduced subsidies and GST implementation, the minimum wage effect would then be another factor to push cost of living as a consequence of higher costs of doing business.
3) Increased purchasing power
Low-wage workers, especially, will have a better quality of life as now they have better purchasing power. Although this group of consumers is unlikely to have mortgages or loans, more money will be spent on necessities and maybe discretionary items too.
This would be beneficial for the country’s growth, which is largely driven by domestic consumption.
Furthermore, economists are of the view that low-income groups tend to have a higher marginal propensity to consume versus the middle income segment.
4) Less poverty, lower crime rate
Less poverty could also mean lower crime rate as wealth is better distributed among the members of society. If Bank Negara Malaysia’s (BNM) estimate of 27% of the local workforce to benefit from the policy is taken as guidance, the impact should be meaningful.
5) Increased unemployment rate
Based on simple economics of supply and demand, the imposition of a minimum wage will cause low-skilled labourers to lose their jobs, creating unemployment. This indirectly can also cause social problems if not rectified such as creating more jobs or subsidising the unemployed until they get jobs again.
Reports suggest that up to four million jobs are threatened due to cutbacks and closures following the implementation of minimum wage policy.
However, those who disagree say any adjustment to employment as a result of the minimum wage policy will likely be temporary, as dislocated workers would be reabsorbed into the workforce given the relatively tight labour market.
According to external data, job vacancies have been on an increasing trend since 2004, while Malaysia’s unemployment rate has remained consistently low, with a historical average of 3.3% over the recent two decades.
6) Increased government bill
In developed economies, the government must come up with a compensation system for the unemployed as a result of the implementation of minimum wage.
It raises the question if the federal government, which is already challenged with tightening the fiscal deficit, will need to fork out more money to support the system.
Good news is that findings from a survey conducted by BNM in May 2012 suggest that the impact of the minimum wage policy will be manageable. Over 90% of firms that would be affected indicated they would not retrench workers in response to the policy, while only 25% indicated a reduction in hiring.
7) Economy moves to higher-income
The policy is consistent with the government’s objective of transforming Malaysia into a high-income and high-productivity economy; the minimum wage policy provides incentives to both firms and workers to undertake productivity-enhancing measures.
This will result in more high-skilled workers and investments in automation and newer technologies that could enhance production capacity, instead of relying on low cost labour.
As such, some argue Malaysia, which has long offered competitive costs in doing businesses, risks losing its competitiveness to other neighbouring countries and see a dip in foreign investments as a consequence.
This article is contributed by Heather Bung, from iMoney.my, Malaysia’s leading financial comparison website. To compare and apply for the best financial products, such as fixed deposits, home loans, personal loans and credit cards, visit www.iMoney.my
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