Is It True That Minimum Wage Benefits Everyone Equally?

The effectiveness of Malaysia's wage strategy has been called into doubt by a recent report on the country's minimum wage.

Based on a study conducted by an international e-commerce firm, Malaysia was placed 55th out of 64 nations on maintaining stable minimum wage rates over the past year, joining Armenia, Peru, and Vietnam.

Malaysia's minimum wage legislation was implemented in 2013 despite concerns about the potential negative implications, such as job loss and inflation.

These concerns are still being addressed nine years later, with calls for the government to abandon the minimum wage in favour of a living wage due to increased living costs.

 

Minimum wage

A minimum wage is the smallest amount of remuneration that an employer pays employees for work completed during a specific period. It is a legally enforceable maximum, and employers are not permitted to pay below this even under collective agreements or contracts.

 In 2013, Peninsular Malaysia's minimum salary was RM900 per month (RM4.33 per hour), whereas East Malaysia's minimum pay was RM800 per month (RM3.85 per hour). The government raised it to RM1,200 by 2020 (RM5.77 per hour).

 

History of minimum wage

Excluding the domestic sector, Malaysia implemented a minimum wage in 2013 across every industry.

Prior to this, the government only had the Wages Councils Act of 1947, which was created for low-wage workers with insufficient collective bargaining rights. The government had the authority to form councils made up of government, workers', and employers' representatives for certain non-unionised sectors of the workforce.

 

What criteria are used to determine the minimum wage?

There are two different rates, one for Peninsular Malaysia and the other for Sabah, Sarawak and Labuan. The National Wages Consultative Council (NWCC) reviews and sets the rates regularly, based on criteria such as labour productivity, competitiveness, unemployment, and cost of living.

The council is a statutory three-part advisory body. It also has technical specialists on board. Before making a recommendation, the council must hold public consultations on the rate and coverage, as well as gather, analyse, and publish data on wages and socioeconomic conditions in the country.

 

Who gains from minimum wage?

A report by Bank Negara Malaysia said that the minimum wage legislation would affect about "one-third of the workforce" when it was introduced in Malaysia.

The programme was expected to play a vital role in addressing labour market inefficiencies and improving the social welfare of low-wage workers.

According to Geoffrey Williams of the Malaysia University of Science and Technology, minimum wages help low-wage workers, particularly those with limited employment rights who are subject to exploitation by their employers.

He explained that foreign workers, in particular, are frequently exploited, and they cannot defend their contracts in court.

 

What went awry?

Following that, a 2018 Bank Negara report concluded that a national, sector-wide minimum wage would help to reduce income disparity. However, employees are still being underpaid for their output in most industries.

This indicates that Malaysia's current pay productivity levels are misaligned.

Wages, according to Williams, should represent the value of what workers produce or the services they provide. Wages should rise in lockstep with productivity.

Malaysia's minimum salary is comparable to most other countries, but it does not rise in lockstep with inflation. Some firms have also reduced employee hours in order to pay less than the RM1,200 monthly minimum wage.

Williams said this is a widespread practice among younger employees who are frequently offered internships or temporary positions that do not qualify them for minimum wage.

He added that trainees and gig economy workers do not qualify because they are not formal employees. These disparities result in income disparity and exacerbate social inequality.

He said this would impact a larger group of people's long-term growth potential, living standards, and quality of life and that economic growth and earnings are harmed when productivity declines. 

He warned that the economy could become caught in a low-wage, low-value-adding loop, with more individuals eventually falling into the lower-income bracket.

 

Solving the problem

Williams suggests that the government control prices in the short term to counter these effects.

However, in the long run, he said that the government should substitute minimum wage with an income tax credit, sometimes known as a negative income tax.

In this model, everyone who works but earns less than a basic income threshold is given a credit to top up their income, while everyone who makes more than the threshold pays tax as usual.

The threshold is established to be affordable and based on a living wage or universal basic income calculation to ensure that it is effective and not misused.

Williams added that Malaysia already has something similar in the form of the wage subsidy programme. However, it has to be revised to improve efficiency before being incorporated in a complete overhaul of the social security system.

 

Source: Free Malaysia Today