Monday, June 12, 2017

Revising the minimum wage levels in Malaysia

Imagine that you are the sole breadwinner in your family. You earn the current minimumwage of RM1,000 to feed a family of 4 living in Kuala Lumpur. How would you plan your daily expenditure and the expenditure of your family? You have only about RM8 per person per day to spend.

That was the underlying context for the “Poverty Line Challenge” organised by Suaram Penang for the past two consecutive years, which challenged participants to survive on only RM7.5 per day for five continuous days. This may be just a five day challenge to some, but in reality, 1.6% of households[1] (or about 106,800 households) in Malaysia had earned less than the minimum wage of RM900 per month in 2014. For the lowest expenditure class of households, on average they would spend 28% of their earnings on food and beverages, 30% on housing and utilities and another 9% on transport[2].

This begs the question of whether the minimum wage of RM1,000 is sufficient for a household living in an urban area.

According to the National Wages Consultative Council of Malaysia[3], the objectives of the minimum wages policy are to i) ensure basic needs of workers and their families are met ii) provide sufficient social protection to workers iii) encourage industry to move up the value chain by investing in higher technology and increase labour productivity and iv) reduce nation’s dependence on unskilled foreign labour.

Malaysia began implementing the minimum wage effective from January 1st 2013, where the monthly minimum wage in Peninsular Malaysia was RM900 and for East Malaysia, RM800. Effective since last year July, the monthly minimum wage was adjusted to RM1,000 and RM920, respectively. Under the minimum wage legislation, the minimum wage levels shall be reviewed every two years.

Critics blame this policy for harming the economy and forcing some businesses to close thus creating more unemployment. Some cast doubt because they feel that the labour productivity increases do not match up with the wage increment. On the other hand, others claim that the minimum wage is set too low and as such does not help the workers to cope with higher living cost in Malaysia. Proponents of a higher minimum wage, such as Malaysian Trades Union Congress (MTUC) and opposition parties repeatedly urge the government to set it at RM1,500 .

Figures from the Labour Force Survey seem to show some of the benefits of the minimumwage policy. This policy may be partially responsible for the improvement in labour force participating rate (LFPR) from 65.6% in 2012 (pre-minimum wage policy) to 67.7% in 2016. The implementation of the minimum wage policy also coincided with an increase in women’s participation in the labour force, where female LFPR reached 54.3% in 2016, up from 49.5% in 2012. The number of employed persons in Malaysia also increased from 12.8million in 2012 to 14.2million in 2016. This clearly shows that employment opportunities and labour participation in Malaysia were not negatively affected by the minimum wage policy. While the minimum wage policy has brought more socioeconomic benefits than harm, the current system in Malaysia is still far from ideal. Allow me to illustrate further.

The current minimum wage rates are only applicable to West and East Malaysia, as 2 general territories. However, inter-state difference is wide. For instance, is it fair to have workers in the Klang Valley and in Kelantan both receive the same amount of minimum wage? Even within a state there is huge disparity in living expenses: taking Selangor as an example, residents in Bandar Utama (an affluent township located in Petaling Jaya district) and Sungai Besar (a rural township in Sabak Bernam district) would have vastly different levels of living costs.

It may be true that some firms might consider laying off its workers due to cost saving when minimum wage is implemented. However, if the firm knows that the minimum wage level for rural or semi-urban area is significantly lower, they might consider moving into and setting up the business there, thus more job opportunities could be brought to the area.

Another issue is the fact that the current system does not distinguish between workers’ age. Employers are often reluctant to pay inexperienced ‘freshman’ workers too highly. In this case, a lower but reasonable wage for young workers may be a good balance. This also allows for the setting of a higher minimum wage at a later age, when the workers are more likely to shoulder bigger financial responsibilities for family needs. In United Kingdom, the government gazettes the National Minimum Wage hourly rates of £5.6 (RM30.33) to £7.05 (RM38.19) for 18-20 to 21-24 years old employees, respectively. However, the National Living Wage is applied to employees of age 25 years old and above, set at hourly rate of £7.5 (RM40.62).  Even more impressive is the fact that the UK minimum wage rates are adjustable or reviewed every half year. Can Malaysia emulate the same “age-sensitive” model?

One may have reservations and might worry that this proposal would complicate matters for the authorities and employers. One needs to be reminded that some countries set the minimum wage rates even according to different demographics, such as India, which has more than 1,200 rates across the country. I do not propose that we wholly follow the case of India, but at the very least, rates should be refined down to state or district level.

Many countries set the minimum wage at 30-60% of the median wage of their country. Thus, if our government takes 60% of the median household income[4] (RM4,585) divided by average number of wage earners per household (1.8), the minimum wage should be RM1,528. If we take the UK standard at 44%, then it would be RM1,120.

The current national minimum wage in Malaysia is set too low. If the lowest grade of workers from the Majlis Perbandaran Seberang Perai have enjoyed a minimum basic salary (including fixed allowance) of RM1,350[5] since 2012, there is no reason why the federal government cannot adjust the national minimum wage to an acceptable and fair level.

In setting minimum wage rates, the main consideration should be creating a social safety net that complements the existing social welfare system, which I believe is inadequate. The minimum wage should serve as a right for workers to avoid being exploited by the employers. Workers deserve sufficient wages to deal with basic living expenses, so they can live with assurance and dignity.

[1] Prices, Income and Expenditure Statistics Division, Department of Statistics Malaysia.[2] Household expenditure survey 2014, Department of Statistics Malaysia[3] T. Shanmugam, “Early effects and challenges of minimum wages in Malaysia: Sharing of pre & post economic and social indicators”, Presentation at the National Minimum Wage: Symposium & Policy Roundtable, Johannesburg, South Africa, 2-4 February 2016[4] Household Income And Basic Amenities Survey Report 2014, Department of Statistics Malaysia[5] “Dasar baru pro-pekerja 2012 MPSP, gaji minima RM1,350”, Bulletin Mutiara, 16 Nov 2011.

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