All that glitters is not gold
THE Malaysian Minimum Wages Order 2022, which came into effect on May 1, 2022, applies to all employees except domestic servants. The Order increases the minimum monthly wage of employees to RM1,500.
There is a temporary exemption for employers who have fewer than five employees until Dec 31, 2022, but this does not apply to those who carry out professional activities.
In Malaysia, the concept of minimum wage was introduced by the Wages Councils Act 1947, which was applicable to several sectors. It was repealed by the National Wages Consultative Council Act 2011, which established the National Wages Consultative Council to advise and make recommendations on minimum wages.
In 2013, the monthly minimum wage rate was RM900 for Peninsular Malaysia and RM800 for Sabah and Sarawak. It was subsequently raised to RM1,000 and RM920 respectively. The two different rates were abolished in 2019 when the monthly minimum wage rate was raised to RM1,100. The rate was raised to RM1,200 in 2020 and now to RM1,500.
The increase may be a positive development for employees, but it may have a significantly negative impact on employers. This is particularly so when there is a 25% increase in labour costs for minimum wage workers.
It may be an untimely move as businesses are still in a tough recovery stage following the Covid19 pandemic. Increasing the minimum wage at this juncture may jeopardise the efforts of employers to revive their businesses.
Employers who are unable to recover or sustain their businesses will have to reduce their operating expenses, including their manpower costs. Employers may freeze increment, bonuses or recruitment and enforce pay cuts or even retrenchment.
Employers may also seek the services of independent contractors instead of hiring to reduce costs. In other words, depending on the employers’ ability to cope with the current economy and spiralling costs, the unemployment rate might increase.
In simple economics, the increase in minimum wage ought to be associated with an increase in productivity, which will lead to increase in revenue. Otherwise, it will raise production costs and lead to spiral inflation.
The Q4 2021 report on Labour Productivity by the Department of Statistics Malaysia shows that labour productivity increased by only 1.7% (based on the ratio of value added per employment).
Only the manufacturing and services sectors posted an increase of 6.8% and 0.5% respectively. The agriculture, mining and quarrying, and construction sectors recorded a reduction of 4.6%, 3.4% and 8.3% respectively.
When labour productivity is unable to correspond with the increase in minimum wages, costs of goods will eventually go up, resulting in higher cost of living.
Therefore, higher wages may not improve the quality of life of workers nor increase their purchasing power.
The increase in minimum wages might also result in Malaysia losing its international competitiveness compared to our neighbouring countries. Foreign investors may be more attracted to countries like Vietnam, Thailand, Cambodia, Indonesia, Philippines, Laos and Myanmar, bearing in mind that their minimum wages are lower than Malaysia’s by approximately 43.99%, 41.14%, 43.21%, 11.63%, 36.98%, 69.63%, and 90.22% respectively. Lower minimum wages would mean lower operating costs and, by extension, higher profits.
It comes as no surprise that electric vehicle titan Elon Musk is considering investing in Indonesia. The diversion of foreign investment will further dampen Malaysia’s economic recovery.
Hence, while increasing the minimum wage might be a cause for celebration, it may be an ill-timed move, particularly when most employers are still recovering from the losses caused by the Covid-19 pandemic.