The promise of raising minimum wage
BNM in its Annual Report 2017 had highlighted that Malaysia’s transition to a high-income and developed nation is at risk, as long as firms are still engaged on a ‘race to the bottom’ in relation to labour costs. It stressed that companies are unwilling to pay more, despite commensurable productivity gains had they adjusted.
“Employment of cheaper foreign workers vis-à-vis locals allows employers to keep wages low and in doing so, obviates the pressure to change the status quo.
“This distorts the natural wage clearing mechanisms that would have otherwise driven wages upwards,” it said.
It added that median wages of foreign workers are generally lower than those of locals, especially in mid-skilled occupations where 60.8 per cent of locals are employed.
“It is entirely plausible that the very high presence of foreign workers in the private sector could widen wage differentials and deter job creation for locals.
“This is most evident in the Gulf Cooperation Council economies where 88 per cent of private-sector jobs created from 2000 to 2010 were taken by foreign workers, of which 85 per cent of them were low-skilled,” it said.
Therefore, in a move to what it hopes could increase minimum wage, the newly minted Pakatan Harapan (PH) government pledged to reduce the number of foreign workers from six million to four million in the first term of its adniminstration.
In its manifesto, it said, “Pakatan Harapan Government will raise the minimum wage
there to be equal to that of the Peninsular. Minimum wage will be raised to RM1,500 per month nationwide in the first term of the Pakatan Harapan Government, and we will review this rate every two years.
“To reduce the burden on employers, the Pakatan Harapan Government will share 50
per cent of the due to the raise in minimum wage.
“This means that when the minimum wage is raised from RM1,000 to RM1,500, the Pakatan Harapan Government will share the cost difference of RM500 with the employer equally.”
If the new government successfully implements a new policy to ensure that Malaysia’s minimum wage continues to increase as the nation develops, private consumption, Malaysia’s main economic source, will also rise, driven by improved consumer sentiments.
MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) highlighted, “MIER’s consumer sentiment index rose firmly to 91.0 points for the 1QFY18 from 82.6 in the previous quarter, this is the highest since 3Q14.
“With the expectation of GST abolishment and higher minimum wages, we expect that consumer sentiment will still be on its upward trajectory to pass the 100 optimistic threshold level.”
It also noted that at company level, it expected that no significant changes in bottom line performance in short to medium term.
“While the consumer sentiment will improve and encourage spending, and hence improve topline performance of consumer companies, the additional administration expenses involves in GST abolishment as well higher staff costs will increase overall operating expenses,” it noted.
The research arm of Affin Hwang Investment Bank Bhd (Affin Hwang) also pointed out that higher minimum wage is not expected to have a substantial impact on corporate earnings because it is expected to take place gradually, over several years.
“Also, companies can easily absorb it through the cost saving from lower tax rates or pass it to consumers.
“Despite the unexpected outcome of the election, we believe that consumer sector’s share price performance should relatively outperform, given the resilience of private consumption and consumers being net beneficiaries of PH’s manifestor,” the research team opined.
Meanwhile, Maybank IB Research noted that for companies, the minimum wage hike will have varying. However, it estimated the overall impact to be negative.
“While some sectors are able to pass on the higher wage bill in full or in part (auto, glove producers, technology), there are others which are unable to pass on the higher costs either due to the high degree of competitiveness in their industry (services), or the nature of their industry which does not allow cost pass-through (upstream oil palm plantation).
“Among them, we believe the up-stream oil palm plantation will be the most affected as the industry is also labour intensive while the adoption of mechanisation especially in harvesting has its limitation,” it said.
It added, it is reasonable to expect across-the-board ‘knock on’ effect, on not just those currently earning at/ around the present minimum wage of RM920 to RM1,000 per month and below the next-five-years target level of RM1,500 per month.
However, it pointed out that the PH manifesto did say that the government would share the cost of higher wages.
Overall, the minimum wage hike is mainly targetted at benefiting consumers.
MIDF Research viewed: “Moving forward, we view private consumption to remain expanding at solid pace, above the RMK’s target of 6.4 per cent. As for 2018, we project private consumption to rise by 6.5 per cent.
“On the other hand, despite of a slight tone down of Household Debt-to-GDP ratio from 88.3 per cent in 2016 to 84.3 per cent in 2017, further reductions of the debt is in need to ensure debt risk in Malaysia on safe side.”