Wednesday, June 15, 2011

A High Minimum Wage Is Not Necessarily A Good Thing

I think there’s an argument for having a minimum wage, but let’s not get ahead of ourselves:

NGOs, MTUC want minimum wage policy immediately

KUALA LUMPUR: Several non-governmental organisations (NGOs), including the Malaysian Trades Union Congress (MTUC), are demanding that a minimum wage policy of between RM1,200 and RM1,500 be enforced immediately.

Describing the Government's proposal to table a National Minimum Wage Consultative Act in the current session of the Dewan Rakyat as "a step backwards", Parti Sosialis Malaysia treasurer A. Selvarajan said a minimum wage policy should be immediately implemented instead.

"It appears to us that the set-up of a consultative council, just like the Wage Council 1947, will have no power to enforce a minimum wage policy.

"Instead, the council will only carry out studies before making recommendations to the Government on what is the line for a minimum wage.

"This, to us, only prolongs the process of enforcing the minimum wage policy," Selvarajan said before handing over a memorandum on the issue to several Opposition MPs at the Parliament lobby here Wednesday.

He said considering the current inflation rates, the minimum wage for workers must be not less than RM1,500.

The problem here isn’t the minimum wage or the timely setup of the NMWCC; on that score these NGOs might have a point. Rather it’s the ridiculous idea of putting the minimum right on the median income level.

Viewed completely in isolation, it might seem a good idea to guarantee that workers earn enough to maintain a decent standard of living. The problem of course is that wages aren’t an isolated economic variable that can be adjusted without consequences. Put a minimum wage as high as RM1,500 and I guarantee two things: higher unemployment and accelerating inflation, both of which will result in a slowdown in real economic growth.

It’s not the level per se that’s problematical, but rather the level relative to the lowest market wage which appears to be around RM700. An effective wage rise of 100% will slash labour demand for unskilled workers, where we already have a glut. And businesses running on unskilled labour will need to raise prices to earn a return – those that manage to survive anyway.

So prices will rise, which makes a high setting for the minimum wage more nominal than real. Some workers will no longer find jobs, and the ones that do will find that their increase in earnings much less than they bargained for. Not a terribly smart thing to do.

I’d also point out that inflation (a rate of change) is not equivalent to the cost of living (a level). To posit a minimum wage (a level) because of an increase in inflation (a rate of change) isn’t logical – which is the kindest thing I could say.


  1. Brilliant. I've been waiting for someone to say all that.

  2. If only the the politicians see these points ... sigh. regional/geographical fair wages are better than a fixed minimum wage policy.

  3. Hi Hisham,

    I think its more complex than as you have made out to be. I also think the need for minimum wage in Malaysia is justifiable and necessary.

    Firstly, the labour market in Malaysia is artificially depressing wages in Malaysia. This leads to a whole lot of issues - ranging from social justice to industrial upgrading (Malaysia's dysfunctional labour market depresses wages - non across the board but selectively).

    Lee Hwok Aun has argued this:

    Because there is a failure in the labour market - government intervention is needed. This is the real issue - how should the government intervene.


  4. Greg, thanks for the link, it's very useful.

    I'm not arguing against a minimum wage - what I'm arguing against is shock therapy. Raising wages for what is effectively more than half the households in the Malaysian labour market, as is being advocated here, is going much further than protecting low wage workers, and will have adverse consequences.

    The low rate of wage growth has been a global phenomenon over the past thirty years, not a localised one. Will implementing a minimum wage address the fundamental causes of labour's lack of market power? I don't think so, though it's certainly on the table as one measure that can be used.

    I think the problem needs a more holistic approach and everything should be on the table, including stronger labour protection (which is actually being rolled back), profit sharing schemes, and a more equitable approach to taxation.