Tuesday, May 1, 2012

Minimum Wage: It’s Finally Done

Announced last night:

PM: Minimum monthly wage is RM900

PUTRAJAYA: The minimum monthly wage for private sector employees in the Peninsular has been set at RM900 and RM800 for those in Sarawak, Sabah and Labuan, said Prime Minister Datuk Seri Najib Tun Razak on Monday.

It covers employees in all economic sectors except those in the domestic service sector, such as maids and gardeners.

It works out to RM4.33 per hour for those in the Peninsular while employees in Sarawak, Sabah and Federal Territory of Labuan are to be paid a minimum of RM3.85 per hour...

...The rates will take effect six months from the date the Minimum Wage Order (Perintah Gaji Minimum) is gazetted.

However, the effective date for small-time employers or micro enterprises is extended by another six months in order to give them the space and opportunity to make preparation so that their businesses would not be affected, he said.

Najib said the 12-month grace period did not cover professional firms such as dental and medical clinics, legal, architecture and consultants...

...Najib also explained that the different rate of minimum wage between the Peninsula and Sarawak, Sabah and Labuan was due the variation in wage structures and the noticeable cost of living in those places.

However, the Government hoped that within the next two to three years, the minimum wage for Sabah, Sarawak and Labuan can be streamlined with the one in the Peninsular.

At the level set, unemployment and inflationary effects should be fairly minimal. RM900 is less than the 40% threshold against average per capita income which is the norm among developed economies and well below the 45% threshold which research suggests wage floors start causing significant unemployment. The copouts for including certain benefits and payments in kind as well as the 6/12 month implementation period, suggest that take-home pay might not actually improve much for workers already earning close to the minimum wage.

What would be interesting here is that we have something of the nature of a natural experiment – statistically testing the before- and after-effects of implementing a minimum wage. But at this level, below where we would expect anything significant to turn up, it’s purely of academic interest.

But I’m happy for those workers who are getting the forthcoming bump in pay – assuming of course it turns up as a real increase.

11 comments:

  1. I thought they would have had a higher Klang Valley rate , say A, then the rest of Semenanjung (B) followed by Sabah and Sarawak (C).
    Isn't the issue more about the urban poor rather than low(er) income earners in rural areas?

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  2. Hi, i think minimum wage would exclude overtime and allowances, you can imagine in factory they pay you 1.5 the hourky wage for overtime, double the wage to work during public holidays and triple during major events like raya to convince muslim workers to work during raya....i work as an engineer in manufacturing and a senior operator working overtime 4 hours during weekdays can get rm2k on a wage of rm2.7 to rm3 per hour on normal shift with 1.5 times the hourly wage on OT...i believe rm4.33 woukd certainly bump up the salary of the manufacturing workers and will eventually help increase the base salary of manufacturing engineers and executives which imo pretty low compared to peers in say oil n gas.

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  3. Hishamh, are the trms under the minimum wage act finalized,i red in the star that they may be renegotiating on terms like including the allowancs in the minimum wage which i think is unfair...and i remember najib saying that this will not happen...is the minimum wage tersm applied across the board or differes from industry to industry? I hope this act wont be a flip flop policy, i know the federation of malaysian manufacturers through MCA(which shows which demography is concerend about minimum wage and are the employers) was lobbying hard to make the ct favour them or perefrably cancelled all together.

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  4. @Adi

    As I recall, the biggest employers of low-wage workers would be the plantation companies.

    @Hijaz,

    At this stage I know as little as you. It looks like some allowances might be absorbed under the calculation, but they haven't determined which ones yet. The minimum wage itself appears to be across the board, but what allowances or other income (e.g. commissions) might be included under that is still up in the air.

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  5. Jason @ RAM HoldingsMay 3, 2012 at 10:15 AM

    Hi,

    I tend to be a bit 'textbook' when it comes to labour markets. Just want to know if you think my argument makes more sense.

    I like to think that the current distortions in the labour market have more to do with lack of wage transparency than anything else and lack of union strength/representation (though I won't argue much on this specific point). Wouldn't more frequent, comprehensive and stratified data be more useful than say, a minimum wage?

    As it is, policymakers have (to me) arbitrarily set a floor wage with insufficient data - or at least data that is not publicly available. It seems a bit unwise to set the wage just because of popular opinion, when the easier solution is to just make wages more transparent.

    I think this is a viable market solution to wage distortions in the labour market rather than fixing a distortion with another distortion (which would probably have to be readjusted during/before the next subsidy rationalization exercise).

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    1. Hi Jason,

      Sorry I couldn’t hang around for lunch the other day.

      I absolutely agree about weak union representation. But if that’s the case, then wage transparency won’t be an effective solution because it doesn’t solve the weak bargaining power of workers relative to employers, especially at the lower end of the wage scale. We’re not looking at a market of equals here, so the market’s already distorted. Of course, MTUC is way out of line demanding RM1,200-1,500, which would be too far above the market clearing level for low wage workers (plus because union members will benefit to the detriment of non-union members).

      Wage transparency might help in terms of reducing friction and search costs though, but given that we’re already operating above capacity and the skills mismatch between labour supply and labour demand, I’d think it’s more of a nice to have.

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  6. Jason @ RAM HoldingsMay 3, 2012 at 6:34 PM

    Again, the lack of data doesn't prove whether MTUC's assertion of RM1,200-1,500 is accurate (for that matter we don't even know whether RM800-900 is optimal either!). But I guess that's a personal gripe for me as a Malaysian economist.

    I still like to think that wage transparency can do a lot more than the minimum wage. You suggested that the market is already unequal at the low end of the wage spectrum, but why would a minimum wage adjust it far better than ordinary market mechanisms?

    The best outcome for minimum wage is that workers grab employers' surplus for a few periods before inflation inevitably takes over (if the employer still deigns to employ them)

    At worse, workers will be no better off (might be worse off actually, since minimum wage could have an effect of heightening inflationary expectations).

    My argument for boosting unions is just to improve bargaining positions, which is kinda lopsided in Malaysia considering the opaque labour market conditions (e.g. I have no idea what you earn :P) and current immigration laws. Its not so much a tool to further tip the scales in favor of the worker, but rather to help reduce the current level of opacity. Although I do accept the point that unions might not work so well at the low end of the wage scale; but I don't think it justifies a floor wage, I think there are better solutions out there.

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  7. Jason,

    Don't you guys work with EPU? I think they have the data. RM900 is pretty close to "optimal", in the sense that it raises the floor wage without seriously impacting employment.

    The rule of thumb is not to have the minimum wage more than 45% of average incomes (as calculated by GNI per capita), with the global median about 40%. Based on 2011 GNI, the 45% level would be RM1090 and the 40% level would be RM970. At RM900, the minimum wage would be about 37% of 2011 GNI per capita, which is below the "safe" level (and that's not even taking into account wage increments for this year).

    The reason why I'm dubious about increasing wage transparency as a mechanism to raise wages, is that the primary benefits will accrue to higher salaried workers where skill sets and knowledge base are greater and more heterogeneous, leading to greater pricing power relative to employers.

    The labour market isn't a monolithic whole - at the top end we have "superstars" with unique skills and high pricing power (think Lionel Messi!), which decreases as you move down the scale. At the bottom, most low wage work requires little in the way of skills and workers are virtually interchangeable and hence have little to no bargaining power at all. Knowing the market wage won't necessarily be helpful, especially considering that at that level wages are fairly standardised and mostly known to all market participants. There isn't a whole lot of wage differentiation on the shop or factory floor.

    With respect to inflation, believe it or not, that's precisely what I'm banking on. The reason why is a little complex, but basically has to do with the domestic price level (including wages) relative to the external price level of goods. Domestic wage inflation is a necessary pre-condition for achieving a real high income economy.

    Even if real wages relative to domestic goods and services does not increase (and I agree that's likely), you should get an increase relative to imported goods which means an overall increase in real wages (and thus living standards), though not to the extent of the nominal increase in income.

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    Replies
    1. Jason @ RAM HoldingsMay 4, 2012 at 6:05 PM

      I do see your perspective, but I do want to re-emphasize. Transparent wage policies can work on the lower end of the wage scale, only because their skills are generally transferable - a maintenance worker in one factory can likely to be a maintenance worker in another. This is unlike heterogeneous skills (unfortunately for us). I understand my solution can be flawed if your initial reply assumes unlimited supply of labour, if so...I guess the debate ends here :)

      I still think that the power of markets can be adequately harnessed to prevent further distortions. All you need are nation- and industry- wide unions for the lower end wage earners and wage transparency across industries, market forces can do the rest (it should, anyway).

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  8. Take out the cheap foreign workers...and low skills will no longer translate to low pay.Open up high skills and Messi will hv less bargaining power.

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  9. Totally agree Malaysia need to do without cheap foreign labor.
    As a country we need to decide to be high income developed nation who are more self sufficient and individually productive, or to continue to be the same we are currently -- lazy maams/tuans who expects everyone else to serve our every need and clean after our mess for free.

    It is about choices! We want to be developed and live a quality life, we need to work for it...

    I do not buy that Malaysians do not want the jobs --- the same Malaysians that refuse the kitchen jobs will do the work in London or New York. Why?

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