Thursday, March 29, 2012

Nomura On Malaysia’s Minimum Wage

In the Star today (excerpt):

Implications of minimum wage

Dramatic rise in wages poses upside risk to inflation…

…The minimum wage is likely to be set anywhere between RM800 to RM1,000 per month. If we assume RM1,000, this would imply a significant 17% rise in the wages of unskilled workers, which according to Malaysia's Employers Federation 2010 Salary Survey, are earning an average RM852 a month.

To put this in perspective, it compares with the average increase of wages in the manufacturing sector of only 6% per year.

This poses an upside risk to inflation, in our view. First, overall labour productivity growth, which has been slowing in the last few years to an average of 2.7% (versus 5.3% pre-1998), is likely to substantially lag the potential increase in minimum wages, resulting in a rise in unit labour costs.

Second, while one could argue that the legislation only affects a certain segment of the employed sector, in 2010 the share of private wage earners earning RM1,000 or below comprise nearly 50% of total employment, according to the Malaysian Institute of Economic Research.

Given the significant share, this is also likely to affect wage negotiations among higher skilled workers, and could stoke higher wage expectations.

As is common in other countries (e.g. Indonesia), minimum wages can be perceived as a wage-setting mechanism (which sets a floor to actual wages) rather than just a safety net for low-wage workers.

Finally, given the current strength in domestic demand (indeed Bank Negara's annual report suggests that domestic demand “will continue to be the anchor for growth,”) firms are likely to pass on rising input costs, fueling CPI inflation.

There’s more, but the gist of it is in the excerpt above. I won’t necessarily disagree with any of it, though I sincerely doubt the government would set the minimum wage at RM1,000 as I think that’s way too high an initial level. You definitely start risking unemployment effects and a one-time bump in inflation at that level.

The thrust of the argument in the article seems to be based on the RM1,000 level – set lower, we’re likely to see much more muted effects. Is RM1,000 a fair level? Nomura is right in saying this is near the 40% of the average wage level in Malaysia (I’ve just checked – average income in 2011 is about RM2,500 a month). Unemployment effects supposedly starts kicking in at about 45%, which would be at about RM1,125.

But the MEF is right too – sticker shock for businesses is a probable too. Some will go bust, especially those which have been getting away with paying their workers less than the poverty line.

At the moment though, we’re all dealing in hypotheticals. Until the announcement on the level is actually made, we’re all shooting in the dark.


  1. There is consensus (except business, which is to be expected) that Malaysia needs a minimum wage for economic, social and political reasons.

    The question then becomes - how to implement it. Big Bang or Crossing the river by feeling the stones.

    It would be helpful if various simulations are run just to have a feel of the various impacts. We can never ever predict all the scenario, but no harm in understanding it.

    Minimum wage affects the factor markets. Hence to address inflation, liberalisation in the product markets can ameliorate some of the problems.

    Allowing firms to exit the industry is good. Research on Malaysian manufacturing has shown that if a few of the MNCs and a majority of the SMEs were to exit the sector, overall productivity would increase.

    The question then becomes, what do we do with those displaced.

    Three ideas (there should be more).

    - retraining & reskilling
    - a better immigration policy on migrant workers targeted to meeting skills shortage rather than the demands of business for continued low cost strategy.
    - institutional support to improve product sophistication in the manufacturing sector of industries that can thrive without low cost labour
    - liberalisation in the services sector to generate growt to absopr dislocated labour

    The current global economic crisis provides an opportune time.

    The question is not whether we should, or should not have minimum wage but how should a minimum wage be implemented in a way the enhances economic growth and social justice.

  2. dear hishamh!

    i have a nagging question about this minimum wage proposal in malaysia. everywhere i read the proposed minimum wage is given as a monthly amount. why is that?

    in the USA [where i live], minimum wage, whether set at the federal, state or city level, is based on an hourly amount. the very term wage is understood here as such. those drawing monthly of twice-monthly remunerations are considered salaried and are thus not covered by any of the minimum wage regulations.

    the benefit i see of an hourly minimum wage is the flexibility it affords both the employers and the employees.

    employers can limit either the number of employees or employee hours or both to match their budget. this would be especially helpful to small-businesses with limited operating cost or households who cannot afford to hire fulltime housemaids or simply want to hire them for specific chores only.

    and wage earners have the choice of working as many hours and/or for as many employers as they want in order to meet the amount they need for their livelihood.

    i wonder too if a minimum wage amount based on a per hour calculation will not come out more reasonable to all sides.

    if the above shows a very simplistic view of this issue, it's because that's about my level of understanding for most things economics or financial. :)

    much thanks for any explanation.


  3. Just checking out the RM2500 avg that 2010 numbers?Based on that figure CE/GNI is 40% a very big jump from the DOS 2005 paper of 28%.Hv wages gone up that much?

  4. @Greg

    Rather than big bang or touchy feely, I'd prefer a graduated approach with commitment - start off on the low side, but make a firm commitment to incremental increases over say 3-5 years. That gives businesses and the economy as a whole time to adjust, but with the knowledge that there's a deadline for making those adjustments.


    Quite simply, the reason it's based on monthly wages is because employment contracts in Malaysia are on a monthly basis (you'll have to ask a lawyer if this is a legal requirement). Even fast food workers are paid on a per month basis.

    @anon 10.11

    It's 2011 numbers. I'm using GNI per capita per month. Yes, I know that's not the same thing as wages, but that's how the international benchmark is calculated.

  5. I'm running a retail chain store with 40 employees. I understand my company salary scale don't match the real inflation rate but can't help it with the current economics situation. I do wish to pay them more. Even with current salary scale, I'm facing an uphill task with reducing sales and higher overhead. If the minimum wages step it, the only alternative other then closed shop is to increase the selling price. The question is, can the market or the consumer sustain such a high price level? I'm not against the minimum wages, but I think the government should chip in some sort of compensation, ie; tax break, to reduce the impact. I believe if everyone have more money in their pocket, it's good for the market and economy provided the inflation level is maintain. Given the history policies were implemented, I don't place high hope on the outcome.

  6. mmmm, thanks for input.

    Your situation starkly illustrates some of the problems.

    From the point of view of micro-economic theory though, you ought to be raising your retail prices by the same proportion as your wage bill goes up. Even if people buy less, adjusting your price based on changes in input prices (including wages), should maximise the proportion of income going to you at any given time. If that isn't sufficient to keep you going, then closing shop might actually be the best option.

    To be honest, an inflationary response to the minimum wage is precisely what should occur and in fact is probably necessary for us to get to high income status. Most high income economies also have very high price levels for domestic goods and services - it's the only way to support higher wages. But that leaves imported goods (where prices are determined internationally) cheaper relative to the income level.

    A bottle of Coke at a supermarket costs pretty much the same everywhere, but hotel, restaurant and taxi prices tend to follow the level of income.

  7. A bottle of Coke won't cost the same as present because you have to factor in the handling cost - the factory workers, the lorry driver, the delivery man, the store boy that pushing crates of Coke and the sales assistant. They will be earning over RM1,000 with minimum wages. No goods, be it local or imported can by pass the local supply chain.

    I think our government is barking at the wrong tree. Instead of trying to please the voters bank with minimum wages, they should create and maintain a constructive environment for economic growth. The wages should be determined by the market force, that is demand and supply. If my business growth be leaps and bounds, I will certain pay more to keep my workers.

    Instead of making life easier, businesses are facing tones of red tapes, new licenses, extra penalties and plenty of 'kopi' money. Minimum wages will incur extra KWSP and SOCSO contribution, this a double edge sword. One side is pleasing the voters bank and the other is topping up the piggy bank.

    Minimum wages might be the final straw that force many businesses to close shop. Thus, will push up the unemployment and inflation rate.

  8. mmmmm,'s spam filter seems to be in overdrive this past week, and its tagged yours as spam for some reason. sorry.

    On to your points:

    No, nobody can run away from local costs. Having said that, for many goods traded internationally, prices are mainly determined by global supply and demand factors. Prices of such goods (ex-taxes) are remarkably similar across countries.

    Second, we've lived with market determined wages for a long time. But the result has been a skewing of income toward capital and away from labour.

    Overall employee compensation in Malaysia is a little over 30% of national income; the norm in developed countries is around 40%. Since 1995, manufacturing productivity has increased 40% more than wages; which suggests that average manufacturing wages ought to be 40% higher.

    Market forces are value-agnostic, and efficiency (maximum social welfare) depends on each participant being price takers; but the relative wage bargaining power between employer and employee is skewed towards employers. What that means is that any increase in business profits largely accrues to owners and employers, and not to wages.

    Malaysia, along with many other Asian countries without social safety nets, has among the highest income inequality measures. And that results in higher crime, poorer overall health, Lower social stability, among others.

    With respect to red tape and licenses, within the next year or so 400+ licenses will be abolished, and nearly 300 simplified. "Kopi" money? Please talk to MACC. We now have a "whistleblower" act that provides protection for your identity and immunity from prosecution. Corruption of any kind should not be tolerated.

    As far as the impact of a minimum wage on employment, that would depend on the level it will be set at. I think anything under RM900 will have minimal impact. On inflation, that's something I think is actually a necessary part of transforming into a high income economy.