Minimum Wages - the Battle between Labour and Capital!

by DR. THANGARAJ, N M | Published in The Planter, Vol. 99, No. 1162, January 2023

The National Wages Consultative Council (NWCC) Act 2011 (Act 732) was gazetted on 15 September 2011. The Minimum Wage Order (MWO) 2012 was gazetted on 16 July 2012 to be effective from 1 January 2013. The Act 732 allows the Council to review the Wages Order at least once in every two years. The most recent MWO of RM1,500 per month took effect from 1 May 2022. The usual criteria that many countries consider in implementing their minimum wages are:

i. Labour productivity

ii. Competitiveness

iii. Unemployment

iv. Gross domestic product (GDP) growth

v. Consumer price index

vi. Cost of living

vii. Wages level

The general thinking in years leading to the NWCC Act is that MWO will lead to an increase in productivity and produce a more just distribution of income between capital owners and labour. What could have lent credence to imposing minimum wages in that period of time was that the real labour productivity of Malaysia grew faster at 6.7 percent between 2000 and 2008 compared to a mere 2.6 percent increase in average wages (Nurhani & Rusmawati, 2013). It was further envisaged that raising the minimum wage will reduce absenteeism. When workers are offered higher wages, it will discourage them from being absent from work, leading to improved productivity. Several studies support that higher minimum wages are correlated with lower rates of absenteeism for reasons other than illness.

Another motivation for the government to push for minimum wages is to achieve economic growth with inclusiveness. In the New Economic Model, the government envisioned our country to be a high-income economy and equitable distribution of national wealth for all its communities and citizenry. To achieve these goals, the government has to ensure that low-income people are not left out in reaping the benefits of growth and enjoying a better quality of life.

As productivity rises, greater output can be achieved with fewer hours of work. Naturally, this would enable employers to raise the wages of their employees. Higher real wages (adjusted for inflation) will permit workers to sustain higher levels of consumption, enjoy more leisure, and induce more spending on their well-being and education. It could be the perfect boost for the country.

Opponents of raising minimum wages argue that it interferes with market forces in wage setting, increases business costs, sets off inflation, renders companies less competitive, leads to lower profits earned by firms, and ultimately results in wage stagnation and job losses. There are an overwhelming number of studies that consistently show minimum-wage increases have negative effects on employment. This line of argument, propounded mostly by employers, can be justified by the slower growth of labour productivity relative to the growth of wages.

Locally, the overall real wage per worker has increased by 44.2 percent from 2005 to 2016, but labour productivity increased only by 19.1 percent. Labour productivity grew at 1.1 percent per annum during the Eleventh Malaysia Plan (2015-2020). The average nominal wage growth from 2016 to 2019 was 5.9 percent per year while the average inflation rate was only 1.9 percent. This means Malaysia had garnered positive real wage growth at an average of 4 percent per year (Azhar & Lee, 2022). It appears from the foregoing that the employers have a valid grievance—but like most arguments in life, there is more to it than what meets the eye!

The compensation-of-employees to GDP, or simply CE-to-GDP ratio, shows the workers’ share in the profits made by business owners. For every RM1 generated in 2021, 34.8 sen was paid to the employee and 62.9 sen went to corporate earnings, while 2.3 sen was given to the government in the form of net taxes. While Malaysia’s CE-to-GDP ratio has continued to improve over the years, it is significantly lower than several other high- and middle-income countries. The Eleventh Malaysia Plan document unveils that the country’s CE-to-GDP ratio was lower than Australia (47.8%), South Korea (43.2%), and even South Africa (45.9%).

Intuitively, employers may contend that the lower share of income accrued to labour suggests that capital is playing a bigger role in the production process. For example, in a highly capital-intensive industry, capital inputs such as plants, machinery, and equipment play a bigger role in the production process, and capital owners (rather than workers) should receive a larger share of income generated. In other words, a lower share of labour income should be the natural outcome considering the relatively higher level of capital usage. Fine, except that this argument does not hold true for Malaysia. Malaysia’s capital intensity is significantly lower than the benchmark economies (aforementioned countries), indicating that labour plays a relatively larger role in the production process in the Malaysian economy. Yet, labour’s share of returns from economic activities in Malaysia is relatively lower than capital!

From the approved investment data published in the Twelfth Malaysia Plan, Malaysia is shifting from labour-intensive to more capital-intensive industries, with the ratio of capital expenditure to labour increasing from 0.7:1 in 2010 to 1.5:1 in 2020. However, that investment was largely in physical structure, accounting for 59.5 percent of total investment, while investment in ICT (information and communications technology) equipment and other machinery and equipment was at 20.3 percent. This mirrors the low adoption of technology and automation among firms to take advantage of the full potential of emerging technology, affecting the productivity and efficiency of firms (Economic Planning Unit, Malaysia, 2021). It seems then, from an economic perspective, that business owners are not willing to invest in appropriate technology but want a disproportionately higher share of the national income!

The consequences of the lack of capital investments in technology pose a clear and present danger to the Malaysian economy. The biggest warning has come from BNM (Bank Negara Malaysia), that Malaysia’s repute as a labour-intensive and low-cost destination for investors will drive MNCs (multinational corporations) to relocate their high-value-added production to neighbouring economies while relocating their low-value-added production to Malaysia. It is inevitable then, as it is happening now, the migration of high-value local talent to higher paying employers in foreign countries—worsening the problem of brain-drain. As of the second quarter of 2021, the share of high-skilled jobs for Malaysia stands at only 24.7 percent, while 62 percent are semi-skilled and 13.1 percent are low-skilled. This is low in comparison to other countries, where high-skilled job percentages over the total labour force are 54.7 percent in the case of Singapore, 51.3 percent in Switzerland, and 42.2 percent in the United States (Liew, 2022). Malaysia has a long and difficult road to increase the percentage of its skilled workforce.

The data from the Department of Statistics shows the minimum wage is currently significantly below both the mean wage of RM3,224 and the median wage of RM2,442 in 2019, exposing the wide income disparity in the country. It means that high-income levels at the top are driving the average wage up, which is why it is significantly higher than the median. It is also critical to note that eminent economist Dr. Jomo Sundram has pointed out that there is a need for Malaysia to recognize the fact that the labour data in Malaysia, and consequently a great deal of the productivity data, can be misleading. The reason being, using telecommunication data, it was estimated that there were about 6.7 million foreign workers in Malaysia as opposed to official statistics of 2.2 million foreign workers in the middle of the last decade (The Edge, 2022). Therefore, in the likelihood of this dynamic prevailing until today, the actual mean and median wages could be significantly lower than the official statistics. The corollary is that Malaysian workers are less well-off than what official data may suggest.

From an economic standpoint, raising minimum wages may have other benefits. Every extra dollar going into the pockets of low-wage workers may add three times more to the GDP than money going to high-income earners because the marginal propensity to consume is higher for low-income earners, thus resulting in a higher multiplier effect on economic expansion. Another potential outcome is that minimum wages can result in more productive firms replacing the least productive ones—and leaving the remaining firms to be more efficient. These mechanisms can increase overall economy-wide productivity and prosperity.

The tug-of-war between labour and capital will be a prolonged one. The Government has to navigate a balance between the two sides and do what is best for the development of the nation.

REFERENCES

AZHAR, KAMARUL and LEE, ESTHER. 2022. “Cover story: Rising prices, rising inequality.” The Edge Markets. n.d. Accessed August 31, 2022. [https://www.theedgemarkets.com/article/coverstory-rising-prices-rising-inequality](https://www.theedgemarkets.com/article/coverstory-rising-prices-rising-inequality)

ECONOMIC PLANNING UNIT, MALAYSIA. 2021. Twelfth Malaysia Plan Document, 2021-2025 - Malaysian Government Document Archives. n.d. Accessed August 31, 2022. https://govdocs.sinarproject.org/documents/prime-ministersdepartment/economic-planning-unit/twelfthmalaysia-plan-12th-malaysia-plan/twelfth-plandocument.pdf/view.

LIEW, SHAWN. 2022. Malaysia urged to create more high-skilled jobs. HRM Asia. n.d. Accessed August 31, 2022. https://hrmasia.com/malaysia-urged-to-create-more-high-skilled-jobs/.

NURHANI ABA IBRAHIM and RUSMAWATI SAID. 2013. Kebangsaan Ekonomi Malaysia ke VIII, Persidangan, Dasar Awam Dalam Era Transformasi Ekonomi, Cabaran dan Halatuju, Johor Bahru, “Minimum Wages in Malaysia: Concept and Application.” JILID, 1: 326-35.

THE EDGE MARKETS. 2022. Malaysia’s labour, productivity data misleading, says economist. Accessed August 31, 2022. https://www.theedgemarkets.com/article/malaysias-labour-productivity-data-misleading-says-economist.