Does Higher Minimum Wage Mean Higher Unemployment?

The new RM1,500 minimum monthly wage is not expected to increase this country's unemployment rate, though it could have a negative effect on SMEs.

Malaysia's unemployment rate is at its lowest since the first movement control order (MCO) in March 2020. In February 2022, the unemployment rate stood at 4.1% against 5.30% in May 2020.

 

A way to transfer money to employees without government funding

Dr Geoffrey Williams from Malaysia University of Science and Technology said the minimum wage is meant, in part, to transfer cash from employers to employees without government funding. 

He said the employers can pay despite complaining that they cannot do so. He added that higher minimum wages increase consumption in the lower-income group and promote long-term economic growth.

Moreover, he said raising the minimum wage hints that the country is reforming the employment environment, which has been in a negative spotlight lately. It will also improve foreign investor sentiment. 

He explained that foreign investors will not be discouraged by the new minimum wage as they would pay it anyway. 

"Many would be horrified that wages were so low before and that they remain so low. So increasing minimum wages is not a deterrent, and it will be viewed positively."

Williams said that if higher labour cost encourages companies to change their business models and present productivity-enhancing technology, they can provide higher-value services in the supply chain to foreign firms that invest in Malaysia. It would also help attract FDI since it hints that local firms compete on technology and quality, not low-paid labour. 

He also said this country does not have a properly run labour market where the right wage can arise. 

 

The necessity of minimum wage

Williams said the labour contracts enforcement, particularly for foreign workers, is not possible in today's system. The imbalance between employers and workers in negotiating salaries favours employers too much. For instance, Malaysia does not have effective trade unions and not in low-paid employment sectors. 

Furthermore, he said individual contributions to production do not determine wages. Workers are all provided with the same salary and terms on a "take-it-or-leave-it" basis.

According to him, the simple reality is the minimum wage is essential due to the labour market's failure to offer fair wages. He added that if Malaysia fully reforms the labour market, with a tax credit system and an effective system to enforce contracts and the rule of law, then things would be very different. 

Williams cited research by John Schmitt in 2013, where 64 minimum wage studies displayed insignificant effects on employment from a statistical and practical perspective. 

Additionally, a 2019 Quarterly Journal of Economics' study found that the minimum wage increases did not affect the overall number of low-wage roles in the five years after their introduction. 

He also cited Professor David Card's work as evidence that the minimum wage does not lower jobs overall. He added that the SMEs that cannot afford to pay minimum wage would be ordered to change their business model and improve efficiency. 

Another benefit of a minimum wage is that it weans bad supervisors away from low-paid business models. 

Williams said that those who cannot make effective changes would close, but their businesses were not viable anyway.

 

The biggest effect of the new minimum wage

Dr Carmelo Ferlito from the Center for Market Education Sdn Bhd said people who earn below minimum wage are a limited part of the workforce, primarily unskilled workers who are often foreign workers. Hence, there's the risk of rising unemployment. However, he said this risk will stretch over time. 

He said the biggest effect of the new minimum wage would be manufacturers limiting and delaying their post-pandemic recovery strategies, hence limiting growth and creating fewer job opportunities in the future. 

He also warned that forcing higher salaries by law is a tool for harmful economic consequences. 

He said that workers are not all the same, and companies do not get the same for every worker. For the company to pay them equally is a source of inequality as it does not consider the individual contribution to the production process.

Ferlito said that wages should be the result of a negotiation and not an imposition. 

"We can refer to less investment too, and therefore slower growth.

"Another can be rising prices for consumer goods not only because of the higher costs (which entrepreneurs will try to transfer to selling prices) but also because higher wages increase the demand for consumption goods and, therefore, the price for those goods.

Ferlito said the 'original sin' in this debate is that it is fixated on the minimum wage while not much is discussed about growth chances. He added that the real issue is social mobility.

 

Source: TheSunDaily