Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on July 2, 2018 - July 8, 2018

IT has been close to two years since the last minimum wage adjustment, and it is about time for a review by the National Wage Consultative Council. New Human Resources Minister M Kulasegaran recently mentioned that any decision on the minimum wage rate will be announced by August.

The news has left a speciality ingredient manufacturer unhappy. He is an entrepreneur with a mid-size manufacturing facility located in the Klang Valley.

“This will definitely impact our profits. We won’t be able to pass on much of the cost to our customers. It is not a very high-end product and that means it doesn’t allow us to increase our prices much,” he says.

The minimum wage policy came into force in January 2013 with the wage set at RM900 for Peninsular Malaysia and RM800 for Sabah and Sarawak. In July 2016, the rates were raised to RM1,000 and RM920 respectively.

The policy has its merits in ensuring that the basic needs of workers are met and addressing stagnant wage growth for low-wage earners. However, many do not think that it contributes much in resolving the structural labour-market issues the country is facing.

Undeniably, industries in Malaysia have thrived on cheap foreign labour for decades so much so that these workers have become a staple for businesses. This has profited businesses by keeping their costs low. However, like it or not, it has created a stigma among locals to be associated with jobs held by foreign workers.

It is worth noting that the biggest beneficiaries of this policy have been the foreign workers. Based on the Department of Statistics’ (DOS) Salaries and Wages Report 2017, the median salary of foreign workers has increased 40.5% from RM950 in 2013 to RM1,335 last year.

The salary increment for Malaysians was not as high. It has risen only 27.1%, from RM1,700 to RM2,160, over the same period.

According to the DOS’ definition, salaries include basic wages, cost of living allowance and other guaranteed and regularly paid allowances either in cash or in kind as well as overtime payments.

Meanwhile, those who support the minimum wage policy say it prompts industries to reduce their reliance on unskilled foreign labour and move up the value chain by investing in high technology and increasing productivity.

But most entrepreneurs do not share this view.

“Imposing minimum wages makes us less competitive in terms of pricing. While costs can be somewhat mitigated by increasing production volume and achieving economies of scale, it is a real problem finding willing and capable workers,” says the speciality ingredient manufacturer.

Other employers concur, noting that the biggest problem these days is getting sufficient labour to get the job done.

“The biggest hurdle is the availability of workers. Some businesses I know that have relocated overseas have said that if workers were not an issue, they would gladly move back to Malaysia,” says a local manufacturer.

When asked if he would hire locals if they are keen to work at assembly lines, he flatly says no. Interestingly, he points out that locals should be employed for positions that require more skills, such as supervisors and managers.

“It is not like 20 or 30 years ago, when many were uneducated. The education levels of Malaysians are so much higher now. It is really not suitable for locals to work at assembly lines. You want to see them in better jobs, right? What many people fail to see or highlight is that foreign workers do create job opportunities for locals,” he says.

“For instance, I need two supervisors for each production line manned by foreign workers. So, the more production lines I have, the more locals I need to hire as supervisors and managers. Don’t forget that other supporting workers are also required.”

For employers, the equation is simple: An increase in wages has to be commensurate with a rise in productivity. But with the various mandatory costs added to the mix in recent times, many businesses feel that they have hurt earnings as productivity is not rising fast enough.

“Businesses can no longer afford any increases in labour cost. Employers have been facing challenging times since July 2016 when the Social Security Organisation raised the threshold clause for employee coverage from RM3,000 to RM4,000. All employees below 60 years are also covered by Socso,” explains Malaysian Employers Federation executive director Datuk Shamsuddin Bardan.

“Then came the Employment Insurance Scheme where employers are required to contribute 0.2% of wages to the scheme. This easily costs them about RM500 million a year. The biggest cost came in January when the government decided to shift the burden of paying the levy for foreign workers to the employers. This costs them about RM3.3 billion per year.”

Some believe that businesses will eventually pass on the cost to consumers. So, does this mean that consumers will be back to square one, where an increase in their disposable income is matched with an increase in the cost of goods and services?

Nevertheless, entrepreneurs point out that should the new government keep its promise to pay 50% of the increase in the minimum wage, it would certainly be a positive for businesses (see “Taxpayers will be made to subsidise minimum wage bill”).

While businesses are not keen on paying a higher minimum wage, economists do see the benefits of having the minimum wage policy.

RHB Research economist Peck Boon Soon says it will certainly help the lower income group by increasing their disposable income and push companies to share more of their profits with employees.

On the flip side, he says, if businesses fail to see an improvement in productivity in tandem with the increase in costs, they may have to close shop and the workers will lose their jobs.

Institute for Democracy and Economic Affairs director Laurence Todd concurs, adding that ultimately, the best way to increase economic welfare is to improve productivity, ensuring wages rise naturally.

 

A holistic approach lacking

Economists believe that labour issues in the country should be tackled in a holistic manner.

They say raising the minimum wage alone will not make companies reduce their dependency on low-skilled foreign workers and spur them to move up the value chain.

“It should be complemented by reskilling and upskilling measures to enhance productivity as well as the facilitation of investment in automation and advanced technology. Industries must accelerate transformation by adopting hi-tech systems and the latest innovations,” says Socio-Economic Research Centre executive director Lee Heng Guie.

RHB’s Peck believes that the first thing that needs to be done to reduce the country’s dependency on foreign workers is to find out the exact number of unregistered foreign workers. It is understood that the figure could be double that of the registered ones.

“The undocumented foreign workers should be registered at a minimum cost. Then the policy on foreign workers can be drawn up,” he says.

He believes that industries will adjust themselves as the government tightens the screws on foreign labour, but emphasises that this has to be done gradually.

“Businesses will have to transform themselves under such a situation. But for certain industries, such as plantation, I do believe that they should be given some leeway with regard to employing foreigners,” he says.

However, business owners do need to make more headway in terms of automation as they acknowledge that relying on foreign labour is not a sustainable solution.

According to Bank Negara Malaysia Annual Report 2017, Malaysia is still behind the curve compared with its Asian counterparts when it comes to automation.

As at 2016, the robot density in the manufacturing sector was 34 per 10,000 employees, way below the Asian average of 63 robots.

Shamsuddin says automation is still minimal and he believes that more incentives are needed to speed things up.

An entrepreneur says businesses are making progress in automation, but the biggest hurdle for small and medium enterprises (SMEs) is funding.

“If you think about it, giving tax incentives to encourage automation is quite meaningless to the SMEs. A better way to help them would be to give them grants or loans with low interest rates,” he says.

That said, one thing for certain at this juncture is that if there is a sudden cut in the supply of foreign workers and a steep rise in the minimum wage, businesses will be greatly affected.

“A shortage of workers will cause delays in completing projects, which could attract penalty charges, or agricultural produce will not be collected. It could result in huge losses like in 2016 when there was a freeze on the intake of foreign workers. Employers suffered an estimated loss of RM24 billion within six months,” says Shamsuddin.

Lee believes that Malaysia will continue to need foreign manpower to complement its industry needs. He says all advanced economies have some degree of dependency on foreign workers. “It is about the type of skill set and the [right] number [of them] to augment the domestic workers.”

 

 

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