Minimum Wage Revised Part IV: Poor SMEs

I'm going to dive deeper into this topic, because there are a number of inter-related issues that need to be highlighted. The data here comes from the 2016 Economic Census, cross referenced with the subsidiary report on SMEs from the same survey.

Before jumping into how an RM1,500 minimum wage might impact SMEs, let me digress into a discussion of the nature of the capital share of GDP.

The 2020 split on the share of GDP was 37.2% labour and 60.1% capital (the residual is taxes and subsidies). This of course has given rise to accusations of greedy capitalists, which is (a little) unfair. Yes, the capital share in Malaysia is high by developed country standards, but its not out of line with other emerging markets. More importantly, the capital share is not the same thing as the share of income going to the business owner/shareholders.

Minimum Wage Revised Part III: What's the appropriate level?

Despite the government determining the minimum wage to be hiked to RM1,500 by May 1, 2022, there's still debate on whether the timing/quantum of the increase is appropriate. This is partly acknowledged by the government itself, with the qualification that it will not apply to micro enterprises with less than 5 employees.

So what's really appropriate? What's the safe level of minimum wage that will uplift low incomes while preserving employment?

Minimum Wage Revised Part II: Some Evidence on Wages

Part I dealt with some of the criticisms of the minimum wage. Part II here will look at some of the data around the impact on wages and prices. For a look at the impact on employment, see this old post.

How do wages react to an increase in the minimum wage? To try to answer this question, I'll use some estimates from the EPF on wages at various parts of the distribution. To my knowledge, I've only shown this particular data in public just once before, and that was many years ago. Since then there has been multiple revisions of Malaysia's minimum wage, with varying results at least in terms of boosting wages, as you shall see.

Minimum Wage Revised Part I: Theoretical Considerations

So the government has finally announced a new revision to Malaysia's minimum wage, two years after the last one. This time though, it's a whopping 25% increase to RM1,500, from the RM1,200 in 2020. Even after all these years (nine to be exact), the minimum wage continues to be the subject of a lot of arguments, so I thought I'd lay out some of the theory and Malaysian evidence (such as it is).

First of all, what we learned in Econ 101 is that when you establish a price above that of the market determined price, quantity supplied increases while quantity demanded decreases, and the market does not clear. In the context of labour, this implies higher unemployment, as more people are willing to work, but less employers can afford to take them on. But in empirical studies, this generally does not happen with the minimum wage. Why?

Thoughts on War and the Economic Outlook

It's been a difficult three weeks, given what's going on in Eastern Europe. I grew up under the threat of the BOMB. I was born the year of the Tet Offensive and the Prague Spring, and the first twenty years of my life was under the latent threat of nuclear holocaust. That is what makes Russia-Ukraine qualitatively different from all the other conflicts of the past 30 years, beyond the human tragedy involved, which we have seen in the Middle East and elsewhere. I'm worried and sad that it has come to this again.

More prosaically, war makes economic prognostication orders of magnitude more difficult, especially given the size and interconnections of both Russia and Ukraine in the global economy. It's not just oil & gas, but also wheat, corn, and a slew of other metals and minerals critical to global production. Ukraine supplies half the world's output of neon gas (of all things), which is critical to semiconductor manufacturing. An extended conflict will have severe ramifications on global prices and output. So this is likely to be a difficult year, with higher prices and more severe supply disruptions.