Rethinking wage policy to reposition our economy

Although the minimum wage law is scheduled to take effect in January 2013, the Barisan Nasional Government does not seem to be particularly committed to re-imagine the Malaysian economy through wage policy reform. Efforts to smoothen the transition for small and middle industries are seriously lacking too.

Minimum wage is meant to tackle several long-standing structural issues of the economy at once. As the United States and Europe struggle to stay afloat economically, Asia can no longer remain as an exporter, we need to grow our domestic/Asian markets; a higher income among locals will help generate a more vibrant domestic market which in turn will generate more jobs.

Also, with minimum wage, companies and industries will likely to rely less on cheap labour but invest in longer term potentials, capabilities and hence productivity of the workforce.

This is a virtuous cycle that will check dependence on unskilled foreign workers and brain drain at once.  Skilled citizens who work in foreign countries are likely to consider resettling back to their homeland if the wage difference between their home and host countries is narrowed.

Gangnum-style policy making

Essentially, BN lacks a coherent new economic framework.

I frankly do not think that the Barisan Nasional government and its leaders had any idea why there was a need to introduce a minimum wage. Like many other policies, it was done just to respond to the Opposition’s agenda.

While BN is currently the longest serving elected government in the world that is still in office and wanted to be reelected for policy continuity, most policies were made in what I call “Gangnam style manner” – on the horseback, basing on just back-of-envelop calculation. Consultants were brought in later to make ad hoc decisions implementable.

So we hear hilarious claims by MCA President Chua Soi Lek and his son Chua Tee Yong that minimum wage leads to national bankruptcy and that paying foreign workers minimum wage will amount to more currency outflow through remittance.

By the way, Chua Soi Lek also claimed that Pakatan Rakyat’s policy to renegotiate toll rate with concessionaires and to end North South Highway toll collection would result in tens of thousands of toll workers losing their employment.

To Pakatan Rakyat, removing many monopolies and rent seekers in the economy will help generate higher disposable income for ordinary Malaysians. To Chua and BN, any change to the crony economy is a bad idea.

Why minimum wage?

Before we venture into the rationales for a minimum wage in Malaysia, let us first understand the regional economic dynamics.

On 21st November 2012, newly elected Jakarta Governor Joko Widodo raised Jakarta’s monthly minimum wage by 44% to Rp 2.2 million (RM700). On the subsequent day, West Java increased the minimum wage levels of its 26 districts and cities by an average of 25%; one of which, Bekasi, is at Rp 2.1 million, just slightly below Jakarta’s level. More regions are likely to match Jakarta’s level close enough to prevent their own workers from flocking to Jakarta.

The immediate response from the Indonesian stock market was huge appreciation of share prices for companies producing consumer goods, as higher wages mean higher domestic consumption. Of course some employers were not happy with the rise but many can immediately spot the benefit of a bigger domestic market.

In the Eastern seaboard of China, such as Shenzhen, minimum wage is at RMB1,500 (RM735) while new daily minimum wage level in Thailand is at 300 baht a day (RM30, almost equal to Malaysia’s minimum wage).

What do these figures mean for Malaysia? The Barisan Nasional Government sets its minimum wage at RM900 for Peninsular Malaysia and RM800 for Sabah and Sarawak while Pakatan Rakyat proposed a RM1,100 package with transitional funds to facilitate vulnerable industries to adapt.

The challenge for Malaysia in the years to come is whether there will still be abundance of supply of foreign labour from neighbouring countries like Indonesia and Burma where their wages are close enough to that of Malaysia’s.

The Malaysian economy will soon to be at a standstill if supply of cheap labour dries while Malaysia’s skilled labour and professionals look elsewhere for greener pastures due to low pay and lack of upward mobility in general in Malaysia.

Minimum wage is but one of the many reforms Malaysia that needs to undertake to move to the next level.

A new agenda for SMIs/SMEs

Many of the reforms like helping labour-intensive industries to become skill and knowledge intensive should have happened twenty years ago in 1992 when Malaysia first reached middle income nation status. But because for every foreign worker brought into this country, someone close to the establishment makes a cut through licensing and other sorts of payment, there is a huge lobby to resist any change.

While minimum wage has very little impact on most industries especially those with very high value added, it is also clear that the implementation of minimum wage, even at RM700 – not to mention higher rate, causes problem for small and medium industries in low-end manufacturing.

To help them is not to stop implementing minimum wage but to support them with financing as well as skill development so that they can be less labour-intensive. What is lacking in BN’s minimum wage policy is a facilitation fund as proposed by Pakatan Rakyat to assist these affected industries.

Beyond minimum wage, Malaysia’s small and medium businesses face other challenges. Corruption, red tape and dominance of GLCs in the economy make it very difficult for the “small guys” to operate in. A form of “tax terrorism” in heightened tax collection and frequent tax raids on SMIs/SMEs have caused fear among small businesses.

What Malaysia needs is a rethinking of our wage policies in a new global and regional environment. Anything short of that won’t take us very far.

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