Ending low pay

The Malaysian economy is at a crossroads. Indeed, Malaysia as a nation is at a crossroads.

The most important question concerning the Malaysian economy is the presence of a huge ­“educated underclass” in our midst.

Malaysia has a relatively well-educated population, with a tertiary education enrolment ratio of 43%. At the same time, many Malaysian graduates are overqualified for the jobs offered in the economy. Indeed, from 2010 to 2017, the annual growth in the number of new graduates was nearly double that of the number of high-skilled jobs created, as stated in the Bank Negara Malaysia Report 2018.

Clearly, there is a contradiction between the population’s high educational attainment and the lack of sophistication of Malaysia’s industries and businesses. Fresh graduates are arguably among the most vulnerable in this regard, particularly since the start of the pandemic: their median salary fell by a quarter from just over RM2,000 in 2019 to a paltry RM1,550 in 2020.

Low pay has caused many Malaysians to vote with their feet to work in Singapore, Australia, South Korea and so on. Some are there illegally. For instance, Malaysians top the list of overstayers in Australia. Many are working in foreign countries in jobs that are below their qualifications. For example, many graduates from Malaysia work as 3D (dangerous, dirty and demeaning) workers in Singapore, such as security guards, cleaners, mechanics and factory workers.

Low pay and the inadequate supply of viable jobs in the formal sector cause many Malaysians to work in the gig economy, which tends to be precarious as well as lacking access to social protection. Due to low pay, there are also many who work more than one job to pay bills.

There are also many Malaysians who elect to work in jobs that are below their qualifications but offer some security. There are many instances and testimonies of graduates hiding their higher qualifications to gain civil service jobs that need only a diploma or secondary school certificate to qualify for.

Stuck in the 1980s model

There are some who argue that pay must not rise too fast as it would cause inflation. One of those who staunchly held on to such a view is former prime minister Tun Dr Mahathir Mohamad.

I requested a one-to-one meeting with Dr Mahathir in February 2019, when he was prime minister and I was deputy defence minister. Apart from a brief discussion on the then upcoming Defence White Paper, I devoted almost the entire hour trying to explain to him that the current wage structure and the prevalent presence of the educated underclass were politically destabilising and dangerous. I told him that real wages have not risen much since the 1997/98 Asian financial crisis while inflation has paced ahead.

I argued that creating jobs that pay RM4,000 per month should be placed at the centre of all economic considerations of the government. A caveat must be made here that this is not about a legal minimum wage but the creation of jobs at such levels through policy interventions.

A few months later, Syed Saddiq Syed Abdul Rahman told me that Dr Mahathir told the cabinet that we were mad to talk about creating jobs that pay RM4,000.

I could only conclude that Dr Mahathir was stuck in the foreign direct investment-driven industrialisation of the 1980s, when cheap labour was a competitive edge that propelled the economy to thrive. Understanding the context is important. When FDI-driven industrialisation started in Penang in 1971, the state’s unemployment rate was in the double digits. The new jobs created in the Free Trade Zones in Bayan Lepas, Petaling Jaya and Shah Alam in the 1970s and 1980s were low-paying when compared with wages in advanced nations. But within the country, it was considered good pay that often doubled those paid in other domestic sectors. Many left their villages or small towns to come to the cities to work at these factories.

But this is no longer the case. Low pay is the problem that confronts us now.

Low pay: A 25-year problem

I would like to share an anecdote. At 14 years of age in 1991, coming from a struggling family, I worked as a waiter in Subang Parade. The initial pay was RM2.50 per hour. A lot more skilled a year later, I was paid RM4.50 per hour. Thirty years later, in 2022, fast food restaurants pay their staff about RM6 to RM7.50 per hour.

Imagine if these fast food restaurants paid their workers RM15 to RM20 per hour, many university students would queue up to work at these chains. There would be no hunger among students from poor backgrounds in university.

There are some businesses who can easily afford to pay more but don’t want to do so because they simply don’t have to. Fast food chains belong to this category. When corporations talk about ESG, the “S” — ­social — is often forgotten or glossed over. Our society should frown at companies that could afford to pay more but choose not to do so.

But unscrupulous companies are only a small part of the problem. Low pay is ultimately a systemic issue. We cannot ignore the role that the government should play in providing policy help to businesses and industries to transition into a model that reduces the use of unskilled labour and heavily emphasises technological upgrade and automation. It is often a mind block that has to be dismantled.

About 20 years ago when I was studying in Canberra, Australia, I washed dishes at a Korean restaurant to pay rent. Every restaurant had a dishwashing machine because labour cost was already quite high in Australia then. In Malaysia, many think the dishes will be cleaner if we wash them with our hands.

In the boom years of the early 1990s, Malaysia struggled with labour shortages, which explained why as a 14-year-old, I landed a waitering job. Petrol stations were told by the government to implement “self-service” at the pumps. Today, as unskilled labour is abundant, often there will be workers offering services such as cleaning the windscreen, even though the filling of petrol is done through self-service.

Also in the early 1990s, with great fanfare, drive-through car wash machines were introduced at petrol stations in the cities.

The government later decided to allow an almost unlimited number of unskilled foreign labour to work in the economy. Successive home ministers, human resources ministers and senior civil servants at the home ministry quickly found that there is so much illegal money to be made by making foreign unskilled labour ubiquitously available at all times.

Effectively, dependence on unskilled foreign labour has been the defining feature of Malaysia’s economy for three decades. Reversing this would require political will, societal consensus and a gradual but planned exit that reduces disruption.

Moving forward

Policymakers must understand that low pay and the heavy dependence on unskilled foreign labour are slowing productivity gains and innovation as there is no need for businesses to automate or do things differently.

Low pay has other societal consequences. Apart from the exodus of Malaysians for greener pastures elsewhere, persistent low pay since 1997 has resulted in a generation with no savings for retirement, made worse by the Employees Provident Fund withdrawals championed by former prime minister Datuk Seri Najib Razak.

The prevalence of low pay is bad for the economy as domestic consumption is not going to be high, and since many do not earn enough, they resort to consumption funded by various forms of debt, such as hire purchase and personal loans.

Low pay also results in the perpetually low number of tax-paying citizens, with less than 17% of the workforce paying income tax. This narrow tax base has prompted some to champion the reintroduction of the Goods and Services Tax (GST), which actually would worsen the situation: low-income households who are on the edge would be taxed for the first time, causing even lower disposable income and a lot of anger.

Rather than further burdening the poor with regressive indirect taxes, what is needed is to raise household incomes and create sustained real wage growth so that everyone earns at least a living wage and can live in dignity.

Therefore, for the Malaysian economy to move forward in the next decade or so, we must set out to create a middle class society, a society in which the middle is bigger than the bottom. At the moment, especially after the Covid-19 crisis, the bottom 60% (B60) are living a hand-to-mouth existence.

Instead of the pyramid structure where the bottom is the largest block, we must envisage a diamond shape in which the middle is bigger than the bottom. 

To achieve this, the economy needs to push for robust productivity gains through the creation of sustainable high-skilled jobs, which requires a greater focus on research and development, innovation, capacity building and high-quality FDI, coupled with the adoption of technology (IR4.0), automation and the improvements of processes.

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