IN the report titled "Closing the Gap: Empowerment and Inclusion in Asia and the Pacific" published by the United Nations Economic and Social Commission for Asia (ESCAP) in 2019, the empirical and evidence-based analysis of the benefit of the minimum wage policy to the Malaysian economy has been well articulated.
The report is an examination and investigation on the issue of inequality, covering three vast areas of socio-economic development (education, decent work and income), the state of the vulnerable groups in their secondary education, and strategies and policy options to support socioeconomic empowerment.
Chapter 4 of the report, titled "Are Incomes among the Poorest 40 per cent and Rural Residents Increasing Enough?", talks about the economic performance in terms of addressing the issue of income inequality: "Malaysia has come as close to convergence as any other country in the sample. The average income of the bottom 40 more than tripled between 2009 and 2015 while it doubled for the overall population. The income was partly driven by the minimum wage legislation introduced in 2012."
Indeed, the Gini coefficient of income inequality has already fallen to its historic low at 0.399 in 2016, compared with 0.441 in 2009 (the Gini index of 0 represents perfect equality and 1 expresses absolute inequality).
Addressing income inequality is one of the benefits of implementing the minimum wage policy. But one has to appreciate the bigger agenda when the government introduced this policy back in 2012. It was meant to address the structural issue of the middle-income trap and eventually to transform the economy into an advanced high-income economy that is sustainable and inclusive.
In other words, the strive of becoming a high-income nation is not merely about high-income per se, but also being environmentally sustainable. More importantly, it is to achieve social justice in terms of the increase and fairer distribution of the income level while alleviating poverty.
Prior to the introduction of the minimum wage policy, the rise of wages in Malaysia was hardly correlated with the productivity level. It was also difficult for employers to increase wages or salaries as the inflation rate was being suppressed artificially low with the overdose of subsidies and price controls then.
Rubbing salt into the wound was the over-reliance on illegal unskilled foreign workers. Hence, the government intervention in the labour market by introducing the minimum wage policy in 2012 was nothing short of transformational. We can see a clear increase of mean monthly household income by almost 100 per cent to RM6,958 a month in 2016 from RM3,686 a month in 2007. If we followed the 2005 methodology of measuring poverty, Malaysia's poverty level was at 0.4 per cent in 2016, compared with 12.4 per cent in 1992. In fact, the productivity level has since improved when the target of the labour productivity level under the 11th Malaysia Plan (11MP) was achieved.
As part of the six multidimensional goals set under 11MP, labour productivity was set to increase to RM88,450 in 2020. By 2020, the labour productivity was recorded at RM89,025.
The minimum wage policy debate has once again come to light when Human Resources Minister Datuk Seri M. Saravanan recently made a statement that a new minimum wage of "around RM1,500 a month" is expected to be enforced before the end of this year. This is an increase of 25 per cent from the current rate of RM1,200.
In my opinion, the timing of the increase is right and the quantum chosen is fair for all quarters. The minimum wage hike will improve the economy, as what I have highlighted above, and employers would benefit in terms of better performance from their employees due to the higher pay.
Furthermore, companies and businesses can catapult this hike by preparing with new business models in the post-pandemic era, such as to strive towards automation or substituting their unskilled foreign workers with locals.
For employees, the hike is long overdue and, in fact, still not enough for them. But this is a good start nonetheless. Much stronger purchasing power of consumers will be good for businesses, companies, employers and the economy as a whole, especially in the context of the recovery phase of the economy due to the pandemic and to prepare the economy for the post-pandemic era.
It is hoped that the rise in the minimum wage will not stop here. It must trigger the overall growth in wage rates in Malaysia, especially an increase in wages in the public sector as well.
The writer is Associate Professor of Economics, Universiti Utara Malaysia
