No details yet, but the National Wages Consultative Council has submitted their recommendation (excerpt):
KUALA LUMPUR: The Government has decided on the national minimum wage and the details will be announced by the Prime Minister.
Deputy Prime Minister Tan Sri Muhyiddin Yassin, who disclosed this, said an agreement had been reached between various parties and the Human Resources Ministry…
…However, Muhyiddin did not elaborate if a fixed amount had been reached by the Government in the National Wages Consultative Council the tripartite body comprising employer and employee organisations and the Government.
He said all relevant factors such as cost of living, inflation, demographic trends, the effects on employers and the economic impact were taken into account during deliberations…
…It was reported that the Government was looking at a minimum wage of between RM800 and RM1,000 for some 3.2 million workers in the private sector.
Close to 33% of such workers are said to be earning less than RM700 a month below the income poverty line of RM763 a month.
On Friday, Human Resources Minister Datuk Seri Dr S. Subrama-niam said the minimum wage policy was expected to be announced later this month.
Point of fact – most other countries minimum wage policies cluster around 40% of the average national wage, which should put Malaysia’s at around RM800. But that’s too low relative to the poverty line (it’s barely RM50 apart). On the other hand, putting it much higher would be increasingly disruptive economically.
So perhaps a graduated approach might be best – RM800 this year, then whack it up RM50 every year for the next 4 years or so. That won’t make anybody happy, but it gives an opportunity for every side to adjust (and save face).
Now as to the effects – if the minimum wage comes in at around the RM800 level, I wouldn’t expect too much of a negative impact, at least not immediately.
But there will be a cascading effect on wages up the scale, which will raise both supply side and demand side inflation over time – if a basic worker gets an effective 25% increase in base pay, you think his/her supervisor ought to be getting anything less? And that will raise wage costs, particularly in those industries which are sensitive to worker pay, i.e. services. So your teh tarik and roti canai are going to get a bit more expensive pretty soon.
Employers might also start being more wary over hiring as well as cutting benefits in-kind and allowances, so I’d also expect a minor increase in long term unemployment, though at RM800 it won’t be much.
As the minimum wage gets further away from the poverty line, you should expect both these effects – inflation as well as unemployment – to accumulate faster.
You’re not going to be able to do much about the former (it’s a natural consequence of becoming a higher income nation), but for the latter, I would think we should start seriously considering what the IMF suggested – implement unemployment insurance, funded through employer and employee contributions.
It’s not exactly having your cake and eating it too, but a second best alternative.
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What will happen when labour-intensive industries up stakes in Malaysia and head for cheaper locations in the region?
ReplyDeleteThe Malaysian work force isn't exactly the best in the world, and investors are not exactly beating on the door to set up shop in the country.
A minimum wage is bad economics and bad policy, dressed up in populist guise.
Whatever happened to the good, old-fashioned virtues of economic restructuring, tying wages to productivity, improving the skills levels (and English capabilities) of the Malaysian work force, from school leavers to polytechnic and local university graduates?
Time and again, the federal government has chosen to pass on the bitter medicine and opt instead for the quick fix.
The whole subject of subsidies is a case in point.
But I guess that getting re-elected trumps commonsense!
"What will happen when labour-intensive industries up stakes in Malaysia and head for cheaper locations in the region?"
ReplyDeleteWhat labour intensive industries? :)
Don't look now, but the ones who would go have already gone. The Ringgit was overvalued in 2002-2003, and China really started emerging in 2004. The float of the Ringgit in 2005 was probably the last straw.
"The whole subject of subsidies is a case in point.
But I guess that getting re-elected trumps commonsense!"
Vested interests - voters demand subsidies, and its politically impossible to do without them for now. And PR isn't exactly proposing to cut them down either.
I hope the government will release its study on the sectoral impacts of this minimum wage ruling. Hishamh may have a point about rolling it out incrementally but right now no one can be faulted for thinking that the thrust towards high income economy is by just increasing salaries by the stroke of the pen.
ReplyDeleteNotice also how quiet the National Productivity Centre has been with regards sectoral productivity improvements if any over the years.
Nice insight. Nway, i dont think rm800 is too low relative to proverty line rm763. The poverty line is based on a household needs not individual. On average there're 2 working adults (1.8 to be exact) per household. A good policy to complement minimum wage should be on encouraging female labour participation which is too low. Also, i dont think the timing is too off - inflation pressure is low and unemployment rate is around 3.2%. Of couse, there's a downside risk to growth now should the advanced economies deteriorates
ReplyDeleteRemind me again, why is inflation a natural consequence of being a high income nation?
ReplyDeleteIf anything,in the long-run, price stability is to be maintained to ensure prosperity
@anon,
ReplyDeleteIt's the other way around - inflation is one of the underlying factors in becoming a high income nation.
What's a common denominator among high income economies? A high cost of living (technically, a high price level), which is a consequence of high incomes. You can't have both high incomes and low living costs. Unless you want to see higher wages forcing businesses to go under, those costs will be passed on to the final consumer.
I'm not saying here that headline inflation can or should increase. What we'll see is a divergence in the price levels of different sorts of goods and services. I think goods inflation will drop, while services inflation will jump - in fact it's happening already. That makes sense, because services is all about human labour.
The divergence will keep the overall inflation rate down, but things will get more expensive for people.
"If anything,in the long-run, price stability is to be maintained to ensure prosperity"
That depends on what you mean by price stability. Absolute price stability = zero growth. You need a little bit of inflation (usually defined as 2%, though there's some thought that it should be higher) to reduce money demand, and get businesses and people to spend and invest.
Sorry, but I simply couldn't understand this.
ReplyDeleteA high income nation is a nation with high real income per capita. What we need is high real wages, and that comes only by improving productivity. Of course, we can temporarily boost real wages beyond its appropriate level. But, this temporary boost cannot last. Like you've said, introducing minimum wage gives everyone at least more than RM 1000 nominal wage. But, in the long-run, price level would erode that. In the end, we would not be a high income nation. We will have higher nominal wage but not necessarily higher real wage. In fact, what we know for sure is we will have higher unemployment.
"A high income nation is a nation with high real income per capita. What we need is high real wages, and that comes only by improving productivity."
ReplyDeleteWhat's productivity? It's output less inputs per worker. That's easy to measure with manufacturing or mining or agriculture - I produce so much widgets per month, and if I produce more my productivity improves and so should my wages.
But what happens with sectors that don't produce physical things, like finance or accountancy or haircuts or hotels or restaurants? It's still output less inputs, but because nothing "real" is produced, higher wages begets higher prices begets higher earnings begets higher "productivity", even if you're not "producing" anything more.
So boosting "productivity" to arrive at higher real wages can be a bit of a mirage. Historically, that's what has happened to high income nations - as they shift from an economy based on the secondary sector (processing) to growth based on the tertiary sector (services).
I'm not reinventing the wheel here. The empirical evidence shows that high income nations are also high cost economies - it's called the Penn effect (you can read a simple exposition here). Assume two different types of goods - internationally tradeable goods and non-tradeable goods. Costs of tradeable goods and the income derived from them are determined on global markets. The only way to improve growth and incomes would then be raising productivity, improve value-added, moving up the value-chain yada, yada, yada.
But with non-tradeable goods it's different - demand and supply of the output and inputs are determined solely at the domestic level. Increasing demand (expanding production) within the non-tradeable sector raises nominal incomes across the whole economy (through labour arbitrage), but which is matched by an increase in nominal prices i.e. real incomes stay the same relative to non-tradeable production.
But shifting production from the tradeable sector to the non-tradeable sector also shifts the "internal" exchange rate between non-tradeable and tradeable goods - you need less non-tradeables to buy more tradeables. This in turn shifts the real exchange rate for tradeable goods as well, i.e. you need less money to buy internationally traded goods.
Bottom line - increases in nominal wages within the non-tradeable sector will result in an increase in real wages across the whole economy without requiring a concurrent increase in "productivity". But the increase in real wages will not match the increase in nominal wages i.e. some of that increase (that spent on non-tradeables) will be eaten by nominal price increases.
Further implication: the tradeable sector will now HAVE to improve real productivity to survive, but this is not necessarily true across the whole economy.
adding non tradable sector would complicate things but
ReplyDelete1. there are many explanations to the Penn effect. But, most of them tend towards tradable and non tradable type of explanation-similar to yours. In fact, empirical evidences are strongly in favour of your explanation and I find it very appealing to accept. But, to what extent do we have a non-tradable sector?
2. It's not entirely clear cut that services = non tradable. One could import some relevant form of financial and accounting services. Hotels need to clean a number of towels bedsheet and yada yada. There are still some degree of "real" production in services.
3. Once we include non tradable goods, real wage isn't accurately reflecting real income per capita.
As you've said, tradable sector will have to improve productivity to survive. And, I strongly suspect they would do so by cutting the number of workers. Of course, this productivity improvement can come from technology as well but I doubt any sudden technological innovation is possible. (though not entirely impossible)
So, yes, real wage would rise but we would counter-intuitively have lower real income per capita by condemning those unfortunate workers fired. (*for non-economist, income per capita is income per the whole population and not just those in employment)
Sorry for the late reply, family outing this weekend.
ReplyDelete"But, to what extent do we have a non-tradable sector?"
Misses the point - it's not the relative size, it's identifying and using the right policy lever. Changing the balance between tradeable and nontradeable sectors is the key, not their relative sizes at any given point in time.
"It's not entirely clear cut that services = non tradable. "
Nor can we truly say that manufacturing = tradeable. There are elements of nontradeable inputs in every tradeable good. We're not dealing with binary choices here - as in all things in life, the reality is much more complex than our economic models. It's enough, for me anyway, that the nontradeable component in services is higher than the tradeable component.
"Once we include non tradable goods, real wage isn't accurately reflecting real income per capita. "
True, but it would still be true even if we don't include non-tradeables, because of a fundamental problem. We assume that labour earns its marginal product. What if that weren't true empirically?
Between 1959 to about 1995, manufacturing productivity (output per worker) and nominal wages grew more or less in tandem (averaging 6.0% vs 5.7% in log terms).
Since 1995 however there's been a growing gap with output growing by 7.0% while manufacturing wages have grown on average just 4.9%. From at most a differential of around 10% in the wage and output levels per worker since 1970, the gap has now grown to nearly 40% in log terms.
Something is not right here. Real income per capita (and productivity) is increasingly reflecting not employee compensation, but returns to capital.
"So, yes, real wage would rise but we would counter-intuitively have lower real income per capita by condemning those unfortunate workers fired."
You're assuming an inelastic labour supply curve. It's well documented that Malaysia relies considerably on legal and illegal foreign labour, especially at the lower end of the wage scale i.e. the labour supply curve might be more elastic than you might think.
Second, if labour value added is low (as it is in quite a few export indutries), employment losses shouldn't offset increases in real per capita income. We will however have a distributional issue with even more higher increasing returns to capital rather than to labour.
Third, from my reading of the minimum wage literature, employment losses appear to be a function of the distance between the minimum wage level and the market clearing level. I also think that the trade-off might be non-linear, though I can't prove it.
As long as we don't get too ambitious, I don't think disemployment effects will be that great. RM800 sounds about right to me, RM1000 might be getting too far ahead of ourselves. Over those levels is where I think we might be treading dangerous ground, at least for now.
Fourth, employers are likely to cut back first on benefits rather than on head counts (e.g. accommodation, food). Actual employee compensation (cash and benefits in kind) might not actually move much, in which case disemployment effects will be muted.
I'm not blind to the potential human cost of a minimum wage, but at the levels the NWCC is thinking of, I don't think the downside is going to be all that great. Even better if the government follows through on the IMF's recommendation to implement unemployment insurance.
So, tell me. Will national minimum wage increase our real income per capita?
ReplyDeleteQuite likely, just not to the extent of the nominal increase in income.
ReplyDeleteActually, what I would be looking for specifically is a rebalancing between capital income and labour income shares. Malaysia has one of the worst income equality measure in East Asia. And fighting inequality matters more in the long run than real income gains.
"..what I would be looking for specifically is a rebalancing between capital income and labour income shares. Malaysia has one of the worst income equality measure in East Asia"
ReplyDeleteWould that be referring to the OS-CE and CE/GDP relationships as per GDP by income approach? Coz our CE/GDP is amongst the worst.
Idris Jala: A high income nation is a "high GNI per capita" nation..bugger other definitions and bugger the rakyat
ReplyDeleteAre you sure implementing a minimum nominal wage can magically improve our real income per capita, adjusted for PPP or even GNI per capita? We're not suddenly capable of producing more.
ReplyDeleteTo sum up,
In my post earlier, I said we don't have the improvement in productivity to justify higher real wage. In response, you said there's a non-tradable sector.
I replied that with the inclusion of non-tradable sector, real wage would rise but at the expense employment. (In fact, it's a little sloppy to stop just there) Real income per capita wouldn't change or might even fall. In your response, you agree that a minimum wage would probably cause unemployment but not as many.
Still, this doesn't change the fact that unemployment would erode any gains you expect in real wages.
Take a more realistic scenario,
We have a toy producing and mamak stall. Increasing nominal wage causes roti canai to go up in price. We won't see improvement in real wage in mamak stall. In toy producing factory, we can't raise our price beyond internationally decided price unless our nominal exchange rate tracks the movement in price of tradable goods. Being less price competitive, the toy factory cannot sell as many as it used; it cut the number of workers. As a result of higher nominal wage and pre-determined price of tradable good, workers still in employment gain better real wages. But does real income per capita change? Are we producing more? No.
If so, a nominal minimum wage is purely a redistributionary exercise. Even worse, a minimum wage simply redistribute income among low income workers. It doesn't even address income inequality between high income earners and low income earners. ( *I don't see income inequality as a big problem myself but if the majority don't want it, then so be it)
Now to include your point on foreign worker.
we might think that, simple. just fire all those foreign workers and we're fine. Give our people better wage at the expense of foreign worker. After all, they simply repatriate all their income back to their home country. BUT, are you sure firms would fire foreign workers? Given a choice between our domestic worker and foreign worker at the same wage, who would you choose. It's a rather obvious choice for firms. And even if our all caring government come in and force firms to fire foreign workers, things turn out even worse. Firms are now under two source of pressure, higher nominal wage and the regulation on foreign worker usage. More of them close down. Temporarily, we might see our domestic worker enjoying higher real wage but many firms would sooner or later decide to exit. On top of the original unemployment we had from higher nominal wage, we now have an extra concern of unemployment to deal with. In short, we're not magically capable of producing more and we cannot justify higher real wage.
The concept that minimum wage accelerate our process of achieving high income nation is misguided. It is purely a redistributionary exercise.
Do enlighten me: how does that redistributionary effect work on rebalancing capital income share and labour income share in the long run? you've mentioned that real income per capita is rising because we're seeing more return to capital. I took this as an accumulation of capital instead of capital providing better returns. From what I understand, share of income appropriated to capital owners and labour usually remain roughly constant. This might not be the case in Malaysia but it most likely is.
If real income per capita is rising because we own more capital per capita, is that not desirable? Why do we want do discourage capital formation? I thought we're all hyped up about attracting FDI, savings, investing in SME and so on.
@anon 7.37
ReplyDeleteBoth...and the gini, and top income shares as well
@anon 10.40
Actually high income nation = high GNI per capita is technically true - which is why I'm much more concerned over the lack of distributional measures in the government programs
@anon 4.21
ReplyDeleteMy friend, you're confusing the measurement of a thing with the thing being measured. Real per capita income has only a passing resemblence to real output per capita (as in actual production, not the national accounts). That's the whole point of my bringing up non-tradeables.
Take your mamak stall example and assume labour input is 50% of the market price of rotu canai. If labour costs rise by 30% and assuming a constant profit margin (no change in absolute return to capital), the market price should rise by 15%. Congratulations, you've just increased real wages without an increase in output.
To take another extreme example, let's say 100,000 pensioners fall dead tomorrow (my apologies to all pensioners for using this analogy). You've now increased real per capita income, but again with no change in real output.
It's a numbers game. Just because we assume a Cobb-Douglas production function and factor inputs earn their marginal product doesn't mean its true in the real world.
[cont]
[cont]
ReplyDelete" It doesn't even address income inequality between high income earners and low income earners. ( *I don't see income inequality as a big problem myself but if the majority don't want it, then so be it)"
Actually it does address inequality, though in an admittedly inefficient way.
"Now to include your point on foreign worker."
Actually I was pointing out that the labour market supply curve (due to the presence of foreign workers) is probably more elastic than you're implicitly assuming. I wasn't advocating firing all the "foreigners".
"The concept that minimum wage accelerate our process of achieving high income nation is misguided. It is purely a redistributionary exercise."
Ah, light at the end of the tunnel. Yes, that's the primary reason why I support a minimum wage. I don't think the gains in real income will be all that large, nor do I think the disemployment effects will be that great either. But there will be an impact on income distribution.
"Do enlighten me: how does that redistributionary effect work on rebalancing capital income share and labour income share in the long run? you've mentioned that real income per capita is rising because we're seeing more return to capital. I took this as an accumulation of capital instead of capital providing better returns. From what I understand, share of income appropriated to capital owners and labour usually remain roughly constant. This might not be the case in Malaysia but it most likely is."
You've completely misunderstood what I tried to say. I did not mention real income per capita is rising because of higher returns to capital. What I did say was that the share of earnings is increasingly going to capital. There's a divergence between productivity gains and real wage gains dating back to about the Asian financial crisis. As of the latest data I have, the divergence is about 40% - i.e. productivity per worker has risen 40% more than employee compensation.
What's the point of raising productivity, if almost none of those productivity gains are shared with labour through higher wages? Productivity has in fact been rising, but wages have not kept pace i.e. labour is NOT being paid its marginal product, and the share of income is tilting towards capital owners.
In very simple terms, if real wages and productivity go hand in hand, then the nominal wage level at the very least should be 20% higher than it is today (taking into account the "normal" deviation from the mean of around 10%-20%).
It's preventing this sort of inequity that I support implementing a minimum wage, not because it will raise real incomes, but because it will partly address the asymmetries between labour and capital bargaining positions.
That's one of the biggest gaps in the NEM and ETP - they don't address this fundamental structural weakness. One of the commentators here has constantly pointed out that Malaysia's employee compensation as a share of national income is unusually low compared to high income nations (the outdated numbers that I have suggest wages at about 1/3 of national income).
The government is going all out for more investment, but they're "hoping" that some of it will spill over into higher real wages generally. From the recent record, it doesn't appear it will, not to the same extent that productivity and real per capita income increases.
I'm trying to give (and I failed now, I'm sorry) you all the benefit of doubt. So, I've tried my best to refrain from quoting selectively in case I quoted you out of context. But, it's sad how trained economist make such errors.
ReplyDelete"My friend, you're confusing the measurement of a thing with the thing being measured. Real per capita income has only a passing resemblence to real output per capita (as in actual production, not the national accounts). That's the whole point of my bringing up non-tradeables."
I don't get this paragraph.
"Take your mamak stall example and assume labour input is 50% of the market price of rotu canai. If labour costs rise by 30% and assuming a constant profit margin (no change in absolute return to capital), the market price should rise by 15%. Congratulations, you've just increased real wages without an increase in output."
I was working under the assumption that mamak stall is a non-tradable sector. Refer back to your own paragraph:
"But with non-tradeable goods it's different - demand and supply of the output and inputs are determined solely at the domestic level. Increasing demand (expanding production) within the non-tradeable sector raises nominal incomes across the whole economy (through labour arbitrage), but which is matched by an increase in nominal prices i.e. real incomes stay the same relative to non-tradeable production."
Now, tell me what does a profit maximising firm does when real wage is above marginal product of labour? Take my mamak stall example,
Now, from price of rm 1 roti canai. we have rm 1.15 (15% increase) as you've described. One worker can produce 1 extra roti canai. Wage increased from rm 1 to rm 1.3. Can the firm raises profit beyond this level? It obviously can. Either cut the number of workers or raise price by another 15% to get a sum of 30%. And, the firm would most likely choose the second option.
It's never about maintaining the profit margin or whatever; it's about profit maximising. Of course, you can challenge this particular firm behaviour, but I doubt there's many empirical evidences in support of that challenge.
This is merely a simple optimizing problem. Even if you look up on Balassa-Samuelson effect, wiki would give you the clearing condition of
Normalising MPL (non tradable) to one,
w=p(non-tradable) = p(tradable). MPL(tradable)
Now, on your paragraph
"To take another extreme example, let's say 100,000 pensioners fall dead tomorrow (my apologies to all pensioners for using this analogy). You've now increased real per capita income, but again with no change in real output."
I assume you were trying to illustrate your first paragraph with an example here. But, tell me, does real output per capita not increase in line with real income per capita? Isn't real output per capita similar to real income per capita in this example?
In your own words on what you did say and what you did not say:
Earlier, you said:
"Real income per capita (and productivity) is increasingly reflecting not employee compensation, but returns to capital."
Now, you say:
"You've completely misunderstood what I tried to say. I did not mention real income per capita is rising because of higher returns to capital."
To add on more stuffs,
ReplyDeleteYou point out that
"productivity per worker has risen 40% more than employee compensation."
Again from simple wiki, (if you're using a different definition of labour prductivity, do tell me)
labour productivity = volume measure of output / measure of labour input use
Did you adjust for changes in working hours ?
Can labour productivity not increase simply because capital per worker is greater?
labour productivity is not marginal product of labour. Although if you use Cobb-Douglas production function, you'll get
marginal product of labour = constant. labour productivity.
Put simply, can't worker be able to produce more because they can operate more equipment per worker?
And, is it wrong for capital owners to appropriate their share of income because they've saved and invested throughout the years?
"Now, tell me what does a profit maximising firm does when real wage is above marginal product of labour? Take my mamak stall example,"
ReplyDeleteBut what if the market clearing wage is below the the marginal product of labour? That's where I see the Malaysian market now. You're assuming the labour market is efficient and perfectly competitive and wages reflect the marginal product of labour. The empirical evidence suggests that its not. Employers are more effectively becoming monopsonists, not price takers.
"I assume you were trying to illustrate your first paragraph with an example here. But, tell me, does real output per capita not increase in line with real income per capita? Isn't real output per capita similar to real income per capita in this example?"
Similar? Yes. Same? Absolutely not.
On the last point, where in the first paragraph do I say real per capita income is increasing because of higher returns to capital? What that statement says is that more and more of per capita income is really returns to capital and not to labour.
"Put simply, can't worker be able to produce more because they can operate more equipment per worker?"
ReplyDeleteObviously, yes. But both the growth in the stock of net capital and growth in capital intensity per worker has been falling during the same time span, not increasing. And your statement doesn't explain why wages and productivity were closely linked before 1997...but not afterward. If more capital per worker allows for greater output per worker, shouldn't wages reflect that? Yet for the past 15 years, they haven't.
"And, is it wrong for capital owners to appropriate their share of income because they've saved and invested throughout the years?"
No, it's not. But the evidence suggests that they're now taking more than their share.
Now, lets make things clear.
ReplyDeleteIn theory, minimum wage does nothing to real income per capita even if you add in non-tradable and tradable sector. Agree?
Moving on, you want to add in another violation: firms are monopsonist.
Tell me, in standard microeconomics literature, what is the variable on the vertical axis: nominal wage or real wage?
Does a minimum nominal wage changes anything?
In theory, all things being equal, a minimum wage should not change the real wage. That's a different thing from saying it won't change real income per capita, as that's not the same thing.
ReplyDeleteWith respect to firms as monopsonists, this is a fairly common theme from the labour economics literature, or to be more specific, asymmetric bargaining power between labour and capital.
On your last point, you do realise that people suffer from money illusion? The standard micro literature (for that matter, most of macro as well), almost completely ignores money. So yes, changes in nominal variables will change agent behaviour.
I can think of a lot more "violations" as you put it from the economics literature e.g. firms generally maximise revenue, not profit.
For everybody's info, the BNM Governor's comments on the minimum wage at the analysts briefing yesterday:
1. Will not have an inflationary impact (segment is too small);
2. Company profit margins are high enough to absorb the cost increase;
3. Minimum wage is intended to reduce "exploitation of workers" (her words, not mine).
What I think will happen is, some of them as you've pointed out before:
ReplyDelete1. Firms would most likely to cut back on other form of allowances to mitigate the effect on a minimum wage.
2. If they can do without a hike in total compensation paid to employee, I therefore, see no reason to expect insane inflation. But, I do expect a tiny bit of it.
3. Irrespective of the profit margin, a binding minimum wage enforced with price control or simply a binding minimum real wage WILL cause unemployment.
4. I expect redistribution of income from capital owners in labour intensive manufacturing to service related capital owners. Some firms benefit at the expense of other firms.
5. I expect redistribution of income from those working in service related industries to those working in labour intensive manufacturing.
6. Unless indexed to inflation, minimum wage does not address income inequality properly. (Even if one finds the need to address income inequality, at least, do it properly.)
7. Without a binding minimum real wage, I don't see any reason to expect national minimum wage to contribute towards higher real income per capita. And finally, if real wage is pinned down, I expect a loss in efficiency. We trade away some potential gain for income equality.
8. Also, I'm rather curious. Does this minimum wage applies to foreign workers? We rarely get to test the claim that domestic workers are lazier compared to foreign worker. If we control for the amount of compensation they get, we have a natural experiment. Given the same wage, will firm choose foreign worker over domestic worker?
* In my opinion, her comments reflect rather sloppy thinking. But, it does make a lot of sense to the public. After all, whatever the majority thoughts are, these thoughts usually manifest them self. So, in theory, it might not do anything but if people suffer from money illusion or for whatever reason believe it's true, then it's true.
Am I talking to the same person here? I'm tempted to ban anonymous comments now.
ReplyDeleteDon't think I necessarily disagree with any of your comments here, except:
3. A binding minimum wage will cause unemployment only to the extent it is higher than the market clearing wage. As I said before, I think the relationship ia a non-linear function of the gap between the two i.e. you'll only see statistically significant unemployment effects if the gap gets too wide. The results of research on minimum wage and unemployment tends to be highly ambiguous. Another point is that we might see unemployment effects arising not from firings, but from slower job creation, and/or concentration among the young and unskilled.
6. As I said before, a minimum wage is an inefficient way of addressing income inequality. Better to use tax and transfer (we've made that recommendation to MoF, but I don't know if they'll give it any serious consideration). Malaysia does not impose either a capital gains tax (which favours higher income households with bigger holdings of financial assets) or an inheritance/estate tax (which entrenches existing inequality through inter-generational transfer of assets). Both or either of these would be a better option (for tax neutrality, we can cut the individual income tax rate at the same time), but neither would address asymmetric bargaining positions between employers and employees.
7. In ringgit terms, relative to non-tradeable goods, no; in actual purchasing power across all goods and services, it's more than possible. I think Ringgit appreciation from rebalancing towards non-tradeables will more than offset losses from unemployment, efficiency and inflation. The obvious corollary is that we should also see some increase in (real) imports.
8. I suspect it does, wouldn't be fair otherwise. At least one country has jumped the gun and imposed wage conditions on importation of their workers to Malaysia (India). The current dispute over maids from Indonesia is another case in point. Another interesting anecodotal nugget: local plantations are finding it hard to get labour because wages here are too low relative to Indonesia.
Sorry, I just found that I actually did comment on some research on the issue of unemployment and minimum wage:
ReplyDeletehttp://econsmalaysia.blogspot.com/2011/02/when-does-minimum-wage-start-having.html
At the median wage, that puts the "neutral" minimum wage rate at about RM650 and unemployment effects beginning at RM675.
If we use the average instead, it would be about RM800 and RM900 respectively.
Back of the envelope calculations:
ReplyDeleteEstimated increase in total wage bill for a minimum wage rate at RM800 will be about RM16.3 billion annually, or about a 5.5% increase in estimated annual employee compensation, and will cover about 3.3 million workers.
Assuming a completely elastic demand curve for labour, that means a max increase in the unemployment rate by between 12.1% to 20%.
yeah, it's the same me. I find anonymous convenient because I won't need to register or do some complicated stuffs.
ReplyDeleteOn point 7, in ringgit terms it does. But once we adjust for PPP, it would disappear. I've always prefer the PPP approach but it's not to unacceptable to use the normal constant prices approach.
Well, the only reason I would vaguely accept minimum wage is due to its redistributionary impact. Now that you've mentioned how inefficient it is, I see no strong reasons to support it. Also, I doubt this might be related to our fiscal condition. The government would want to address inequality but at the same time wishes not to raise/lowers tax or introduce new spending programme.
With respect to PPP, the increase in purchasing power should not disappear - PPP adjustment would only take away the relative differences with respect to non-tradeable components, not tradeable components. And there should not be any increase in real purchasing power with respect to nontradeable goods/services in any case, with or without a minimum wage.
ReplyDeleteAnd hey thanks - it's fun debating stuff like this.
higher pay... makes higher prices...
ReplyDeleteI think is nothing differences. not helping anyone and don't benefits anyone. in terms of local businesses which it seems nothing matters.
For exporter.. you better plan to move your company else way which is lower wages. how can you compete the price when wages increase by that much?
try surviving on minimum wage. definitely a challenge. just completed my experiment on Living with Minimum Wage in Malaysia recently
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