Budget 2024: it's going to be tough to raise wages, but it is necessary, but it is tough.

...but it is necessary...

The median wage is RM2,600 per month. It is worth simplifying what this means: half of our working population earns less than RM2,600 a month.

The poverty line is defined as earning RM2,589 and below, monthly. If you line up every Malaysian in formal employment from the lowest paid to the highest paid, the person in the middle (i.e. the median) is earning only RM11 above the poverty line.

Rafizi Ramli repeats exactly this in his speech at the launch of 世界银行 's latest Malaysia Economic Monitor report. [Scroll to around 28:00 https://fb.watch/nDg1vkev63/]. It's refreshing to hear a minister openly acknowledge the issue.

But we are way past the point where this is going to be an easy fix.

In the past, the government had a lot more leverage in forcing a higher minimum wage. If firms needed workers, they would have no choice but to pay more if everyone else also had to comply. Sure, trade associations will make noise, which is to be expected, but if the requirement was across the board eventually everyone would have to fall in line. Failing to do so will simply mean that you can no longer attract workers.

The mechanism of raising the minimum wage isn't so straightforward anymore even though it is what many local economists prescribe heading into the budget. In the past firms had no alternative, but they do now, thanks to automation.

The blockquote below is from this article

Increasing the minimum wage provides economic incentives for firms to adopt new technologies that replace workers: That is, a higher minimum wage raises the cost of labor and increases the range of tasks that are susceptible to displacement by automation—especially the tasks of minimum wage jobs, which tend to be labor intensive and composed of low-skill tasks

And there are many more recent papers that have been studying this new phenomenon. Firms have a choice now, to put it simply. Personally, I also know people who provide automation solutions to the manufacturing industry, and their business is booming. When I ask what they think is driving this, the answer is very simple: firms rather have machines than humans.

Why is this a concern in Malaysia?

Let's just take our manufacturing industry. It is still a significant contribution to GDP, as per Fig. 1.

But we have a significant manufacturing base with low- and medium-low technology intensity [Fig. 2], per an Asia School of Business working paper on Industry 4.0 Technology Adoption in Malaysia Manufacturing.

The government can't dial back automation to save labour anyway, not when we have a national policy to increase automation and IR 4.0. The point really is that these low- to low-mid-tech manufacturing processes are easier (and cheaper) to automate, and firms will see any increase in the minimum wage as a clear incentive to further automate.

Firms have a second incentive to increase automation: government grants.

This is what makes it really tough. We aren't really high-tech, to begin with, and the government is right to create the environment to nudge firms to digitalise further if we want to compete in the market. But half of our working population needs to move up the value chain in order to gain better wages, the very half whose jobs are at risk due to our need to innovate.