Thursday, September 23, 2010

Human Resource Minister: Minimum Wage Model Going Ahead

One of the downsides of having a long break is that you have to work double-time to catch up on everything when you get back – I’ve only just finished going through my news feeds for the past two weeks. There was quite a few items that I found worth commenting on, but they’re necessarily a little stale, but them’s the breaks.

Top of the list is that the minimum wage (due to be presented to cabinet in October) is again in the news with the Human Resource Minister outlining the bare outlines of the scheme (emphasis added):

Minimum wage model to be submitted to Cabinet in Oct: Subra

BEIJING: The minimum wage model that Malaysia is to implement will be across the board for all sectors, but it may vary regionally, Malaysian Human Resources Minister Datuk Dr S. Subramaniam said here…

…“We will revise low wages that have been stagnant for years, but at the same time ensure that the implementation will not affect the industry negatively," he told Bernama…

Subramaniam said the model would take into account factors in the national and regional employment sectors.

"It's no point raising salaries and resulting in the cutting down of jobs," he said

…"However, we will consider having a regional minimum wage model according to the cost of living of different regions ... minimum wages for Shah Alam may be different from that of Kedah or Perlis," he said…

…Data collection for the minimum wage model had been done and he would meet representatives of each of the sectors soon to discuss the model before tabling it to the Cabinet, he said. - Bernama

That line about not cutting down jobs suggests to me that the government is really aiming for a minimum wage line that approximates the market clearing level – thank God. The problem going forward is that once you implement a minimum wage scheme, how do you then regulate increases in the absence of labour market signals (i.e. wages)? Details are missing here, but public consultation – or at least talking to the affected employers – is an expected step. I don’t expect any good answers though, just some sort of inflation indexing formula which will probably be insufficient.

The Federation of Malaysian Manufacturers have meanwhile responded by asking for the level to be set around RM 700:

Manufacturers propose RM700 for minimum wage

PETALING JAYA: The minimum wage level of RM700 for general workers should be used as the median benchmark, said the Federation of Malaysian Manufacturers (FMM).

The association said it considered the amount as the acceptable minimum wage level based on a survey it did on the manufacturing sector in the period of April/ May this year.

“We propose RM700 as the median scale, which is adjusted according to differences in cost of living based on geographical location (rural-urban areas) and differences in economic sectors,” it said in a statement yesterday...

...It said that employers should be given a two-year grace period to adjust to the policy and that the minimum wage should commensurate with productivity gains and skills offered.

“Wages should be for the job, not the person...

...It also urged the Government to have in a place a review mechanism to prevent indiscriminate increase in minimum wage.

“The review process should also involve relevant stakeholders, in­­cluding employers, union and the Government,” it said.

And from the Malaysian Employers Federation (emphasis added):

Back minimum wage policy, Subra urges employers

KUALA LUMPUR: Employers should back the government’s proposed minimum wage policy to ensure its smooth implementation hopefully by next year, said Human Resources Minister Datuk Dr S. Subramaniam.

He said employers should not be worried or regard the policy as hampering business...

...Despite the Governments assurance that the minimum wage policy would not adversely affect the industry, the Malaysian Employers Federation is sticking to its stand that the policy would hurt local businesses and workers as it tends to benefit low-skilled and low-income foreign workers.

MEF executive director Shamsuddin Bardan was quoted as saying that the way to push for higher-income levels was not by basing it on a minimum wage but by increasing employee productivity and performance...

...[The Minister] said the minimum wage policy was necessary as the salary structure in many sectors had not changed drastically over the years despite rising prices of goods.

“Salaries must commensurate with the increase in the price of goods and the higher standard of living,” he said, adding that the cost of living had escalated over the years.

However, he stressed that the increase in salaries should be in tandem with increase in productivity. — Bernama

Here’s the problem – median wage increases over the past decade have been sufficient to cover productivity growth OR inflation, but not both. That effectively renders the average workers’ purchasing power almost flat in the last ten years. So just relying on employers to keep their workers’ incomes increasing in line with the economy hasn’t obviously worked. Most of that increase in productivity has ended up as increased corporate profits, not as increased household income.

Then there’s the dynamics within the labour market itself – Hafiz Noor Shams has a very apposite post on this issue which is well worth a look. I’d also point out that minimum wage policies inordinately favour unionised labour at the expense of non-union workers, which raises considerations of fair treatment. And I’m going to forebear from mentioning the potential effect on unemployment, especially low income and youth unemployment.

On the other hand, a minimum wage policy isn’t an ideal policy instrument for raising incomes across the board either, as you’re talking about a price floor not a an instrument that raises all incomes. One point that was brought up to me a couple of days ago was that other workers might demand wage increases too, to maintain wage differentials. That’s a possibility, and would help raise median incomes. But you have to then consider one of the general empirical characteristics of a high income economy – they also have a high price level, which I’ve pointed out before (look up the Penn Effect). Increasing wages for workers feeds through into higher prices of goods and services, so those higher wages might not translate into higher purchasing power, more so since I suspect that the effect will also be highly regressive, i.e. affecting the lower income strata the most.

I think the minimum wage policy is a good idea to limit employer abuses, as well as to ensure low income workers get enough to get by. But I’m not going to pretend it’s policy that’s going to raise Malaysians’ real incomes.

1 comment:

  1. This is a very well-written and important post. TK. We would have past examples of how income increases wage-wise or year-end bonus ended up as across-board higher consumer prices.

    Nevertheless it would not do not to have a minimum wageline without which labour exploitation will magnify. The question here is whether it will start foreign workers asking for more through their home country agencies.

    Secondly, the notion of productivity or economic worth of a worker will come into play just as the country is starting on 10MP/ETP. Permutations abound. Results hard to see.

    Waiting for your next post.