Analysts: Raising minimum wage won’t harm Malaysia’s economy; better price controls urgently needed instead

·6-min read
Ringgit notes are seen in this photo taken in Kuala Lumpur August 4, 2019. — Picture by Ahmad Zamzahuri
Ringgit notes are seen in this photo taken in Kuala Lumpur August 4, 2019. — Picture by Ahmad Zamzahuri

KUALA LUMPUR, Feb 10 — Raising the minimum wage in Malaysia will not be detrimental to the economy or businesses, contrary to what some employers have claimed, said economic experts.

They said there isn’t enough empirical evidence to support the argument that raising the minimum wage ceiling now would torpedo an already flailing economy as suggested by Malaysian Employers Federation (MEF) president Datuk Syed Hussain Syed Husman over the weekend.

“Given the absence of data, including impact analyses, it is unclear how a minimum wage hike of 25 per cent would impact the sustainability of businesses in Malaysia. It would be interesting to see if MEF themselves have conducted studies to come to such a conclusion,” Intan Nadia Jalil, a chief economist of an established regional bank, told Malay Mail.

“Based on evidence from other countries, including empirical research, however, hikes in minimum wage are unlikely to result in a mass exodus of businesses.”

She pointed to the work of economist David Card whose research into minimum wage and the effects of immigration on labour costs made him one of three recipients of the 2021 Nobel Prize for Economics.

Card posited that raising the minimum wage didn’t necessarily cause businesses to lay off workers and hurt employment.

Before his game-changing study, economists almost universally believed that minimum wage increases and job losses were correlated.

“At its root, this is mainly due to the fact that workers are also consumers, and any rise in incomes would generally lead to an increase in consumption.

“Interestingly, the spokesman for the MEF also mentioned that Malaysian workers are paid far higher than minimum wage rates, so the hike could potentially reduce an over-reliance on foreign labour, which has been a significant vulnerability for some firms, particularly during the pandemic,” she added.

Director of Economics and Business Unit, and Acting Research Director for the Institute for Democracy and Economic Affairs (IDEAS), Juita Mohamad, said an increase in the minimum wage has been happening every two years without fail.

She said, with a positive growth rate projected for 2022, supported by a high vaccination rate and higher export growth, business sentiment should strengthen in the months to come.

She suggested that the government provide special grants for businesses to tide them over these trying times.

“Given such progress and outlook, the minimum wage increase should not be frozen as this would derail wage growth over time,” said Juita.

“The government should strengthen distribution capacities and make grants available for micro, small and medium enterprises (MSMEs) especially to digitise and automate wherever needed. This is how they can stay competitive in a post-pandemic era,” she said.

Putrajaya proposed to increase the minimum wage from RM1,200 to RM1,500 and are contemplating when to do it, although the tentative date is said to be in the fourth quarter of 2022.

Syed Hussain’s argument for not increasing the minimum wage was that MSMEs were already suffering and even a small increase in business cost would aggravate their plight and they might close down, what more with an increase of RM300-RM400 per month on top of the existing national minimum wage.

He said doing so would push up the cost of goods and services as well as operations costs indefinitely, adding that a salary adjustment would demotivate employees whose salaries are already above the minimum wage.

Timing and need for better policies

Syed Hussain’s remarks were contradicted by Malaysian Trades Union Congress (MTUC) deputy president Mohd Effendy Abdul Ghani who wants the wage increase to happen now instead of by year's end.

MTUC secretary Kamarul Baharin Mansor also called for the wage increase, citing the continuous rise in the cost of goods, which he said was uncontrolled.

Human Resources Minister Datuk Seri M. Saravanan said Malaysians can expect a minimum wage of around RM1,500 before year's end without specifying the exact date and rate of increase.

He said the new rate had not been finalised.

As such, Socio-Economic Research Centre (SERC) executive director Lee Heng Guie said part of the issue with trying to find common ground was the country’s economic, financial and social situation.

Malaysia is currently experiencing a fourth Covid-19 wave dominated by the Omicron variant, which is now in the community. Daily cases are set to soar beyond 20,000 in the coming weeks.

Lee said the tug of war between MTUC and MEF is expected as the wage increase is set to benefit around 2.25 million individuals, based on their gross salary, and not including allowances and overtime.

He added that not all businesses recover the same way and many are still struggling with the lack of manpower, early closing times, as well as loss of customers, as their business model does not work anymore in the pandemic era.

“If these businesses had to increase wages, then the contribution rates to employees would increase as well. As it is, people are struggling with the current price of goods; increasing labour costs will cause another chain effect,” Lee said when contacted.

“The key here, which I believe the government will do, is to figure out what the magnitude of the wage increase should be and when to implement it.

“Don’t make it too steep and find the right time to implement the wage increase. We know employees are struggling so a deeper look at the conditions we’re living in both business and economics is necessary before making a big decision like this.”

Juita concurred with Lee, adding that Bank Negara Malaysia will introduce measures in the second half of the year to curb inflation and further price increases.

She also urged for better policies to govern the increasing wages and price of goods.

“There should be a concerted effort to deploy needed policies to ensure minimum wage can increase while curbing higher inflation and prices. Other measures like subsidies and set price ceilings are already used to curb the increase in the price of goods and services,” she said.

An example would be the price of chicken eggs, which has risen, due to an increase in the production costs incurred by chicken egg farmers.

Some parts of the country have also seen an increase in chicken prices of up to RM2 from the previous RM7 per kilogramme.

The Selangor government is in talks with chicken egg producers in the state in an effort to reduce the price of the protein source below the market price and as part of preparations to ensure sufficient supply until the Aidilfitri celebration in May.

Many have called for better regulation of such staples, as almost every year, especially around festive seasons, the price of goods inevitably increases.

As such, Intan too felt there was a need for better policies.

“Generally speaking, precipitous hikes in wages would only result in inflation if they are not accompanied by improvements in productivity, including in terms of technological efficiencies.

“To prevent this, perhaps the minimum wage hike should also be accompanied by effective policies to incentivise firms to invest in innovation and movements up the value chain,” she said.

“As with all policy measures, the timing of implementation is also a key factor. However, with regards to the impact of the floods and the pandemic, given that there is a high possibility for economic recovery by the end of this year, the negative impact on firms may be neutralised.”

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