This article first appeared in Forum, The Edge Malaysia Weekly on May 9, 2022 - May 15, 2022

The labour income or wage is very much a subject of debate in the political sphere as a measure of how the benefits of growth are shared between workers and owners of capital. Wages account for about two-thirds of household income in Malaysia and, thus, play an important social function in influencing the welfare indicators such as living standard, poverty and income inequality.

On May 1, the government announced the implementation of a new minimum wage of RM1,500 per month. However, the issue of the new minimum wage is still a point of contention among politicians, employers, workers and analysts.

From the perspective of workers, an increase in the minimum wage is needed to offset the higher prices of goods and services that have resulted in a rise in the cost of living. This wage increase is also expected to raise the labour force participation rate, especially among the local population.

From the perspective of employers, especially micro, small and medium enterprises (MSMEs) and those still affected by the Covid-19 pandemic, a 25% increase in labour costs (from a monthly salary of RM1,200 to RM1,500) is likely to put pressure on their operation costs. Rising prices of goods and services and a reduction in the number of workers are among the market responses that are expected to occur when the higher costs cannot be offset by an increase in revenue.

The cost of labour is an important factor affecting business competitiveness. If we understand competitiveness to mean growth potential, we must examine the size and efficiency of use of labour in production. Employers hire workers up to the point at which the additional revenue generated by hiring an additional worker is equal to the wage rate (that is, the additional cost of employing that worker). Both employers and workers are in a “win-win” situation when additional labour costs are compensated by the additional revenue (see Figure 1). The bridge between wage and revenue is productivity.

In the case of the new minimum wage, when the increase in the wage rate is associated with productivity growth, then production and revenue expand. In this case, the increase in the minimum wage does not affect the level of business competitiveness. In contrast, a relatively lower productivity growth in relation to labour cost will limit competition and thus threaten business growth and job creation.

To give an overview of the relationship between wages and competitiveness, Figure 2 shows the growth of labour productivity (value added per worker) and wages (salaries) for the manufacturing sector and the overall economy for the period 2011-2020. For the manufacturing sector, the growth of labour productivity and wages are fairly correlated (wages change with productivity). It should be noted that no country in the world experiences a perfect association between labour productivity and wages.

For the economy as a whole, labour productivity and wage movements are less connected than in the manufacturing sector. This means there is a mismatch between labour productivity and wages for the agriculture, mining and quarrying, construction and services sectors. It is possible that there are some sectors in which labour productivity growth surpasses wage movements and the opposite may be true for other sectors. This requires a sector by sector examination. Similarly, a close examination of labour productivity and wages at the state level is crucial because of significant variations in the competitiveness levels among the states in Malaysia.

Finding an equilibrium point between balancing the need for salary increases and business competitiveness is important. The economic situation that we are facing is not similar to that of previous years, where the implementation of the minimum wage order was more efficient. The country is still in the economic recovery phase and will take longer to fully recover given the global economic situation and geopolitical conflicts. We have to believe that the equilibrium between wages and competitiveness exists and finding that equilibrium point requires the wisdom of policymakers.

In conclusion, the following analogy may be useful. An old vehicle with a small engine capacity will find it quite impossible to accelerate as quickly as a vehicle with a large and modern engine. That is not taking into account the safety factor during acceleration. Interventions to modify the engine are possible, but at the risk of compromising on safety. The ideal situation is to have a vehicle with a larger engine capacity for better acceleration (higher productivity) and to ensure that we reach our destination on time (more wealth creation and better well-being).

Associate Professor Dr Mohd Yusof Saari is chief economist at the EIS-UPMCS Centre for Future Labour Market Studies (EU-ERA)

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.