Minimum wage: A need for transparency — Moses Lee

MARCH 23, 2012

MARCH 23 — The debate on a minimum wage has been hotly discussed in the media and clarity of the issue has been drastically lacking. One of the reasons for the lack of clarity is the objective and outcome of this policy do not match the expectations of the market, particularly small business owners and labour-intensive industries.

I am a supporter of a minimum wage. History is a clear indicator that a price mechanism is an extremely powerful tool in obtaining a desired outcome. However, the government must not forget that good economic management and setting the right policy expectations by the market are equally, if not more, important than just implementing a policy.

Based on what’s reported in the media, the main purpose of a minimum wage is to increase welfare of the underpaid, create incentives to upgrade and move up the value-added chain. All these are extremely important for the progress of the country. However, what is the role of the government in maintaining good economic management and providing the right expectations?

My greatest concern is that this policy is implemented without the correct compensation to “losers” in the economy. It is obvious the main losers are all labour-intensive, relying on cheap labour. The overnight impact of a minimum wage will see profits dive and small businesses lose out. In fact, those working on small profit margins will have to shut down overnight.

These are painful truths of such price policies, i.e. minimum wage. However, they can be necessary to ensure that the overall country’s welfare is increased.

My concern is now to the government. How does the government intend to appropriately compensate the losers in this policy? In Australia, for example, it was clear from the outset that the GST or carbon tax will be good to the overall economy, but costly to many segments of the economy. This expectation was clearly laid out to all affected. Those who lost out were properly compensated, either through direct monetary transfers or reduced taxes, ensuring they did not suffer an economic loss. All these were extremely transparent, well managed and the policy objectives were well achieved.

The problem we have currently in Malaysia is the lack of transparency, both in the implementation and the management of such policies. It can become unclear to the market whether this lack of clarity is due to poor economic policy and management, or insecurity on the government’s behalf. This will undoubtedly create wrong expectations by all business sectors and households.

I would urge the government to provide a clear, transparent picture on this policy’s management and expected outcomes. It is important to note that once this policy is implemented, many will be affected and there is very little room for turning back.

* Moses Lee is an associate lecturer in economics at the Australian National University, Canberra, Australia.

* This is the personal opinion of the writer or publication. The Malaysian Insider does not endorse the view unless specified.