2011 May 22
May 22, 2011

Making a case for minimum wage

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The real reason Malaysian productivity is low is not because workers are not productive. It is due to the fact that employers have been successful in suppressing wages, and there is no incentive to invest in research and development for productivity improvement.

AFTER much debate, the Government has announced that the Minimum Wage Bill will be tabled in Parliament next month.

Even Prime Minister Datuk Seri Najib Razak has stated that companies must embrace minimum wage as a strategy and an opportunity to revitalise their businesses.

This is one of the most important and eagerly awaited piece of legislation as workers have long cherished a hope for higher income.

Employers, on the other hand, are concerned that it might drive up the cost of production so much so that their businesses may not be viable anymore.

I am part of the MTUC’s efforts striving for a minimum wage during the past decade. I am fully aware that employers with their powerful political connections can still derail the legislation, or worse, dilute it until it becomes meaningless and ineffective.

Let me address some concerns and misconception about minimum wage. It must be noted that minimum wage is not just a social tool to reduce poverty; it is a fiscal tool to enhance economic growth and improve productivity.

Wages should be determined by market forces

Employers have successfully convinced the government over the past 40 years to let wages be determined by market forces. The evidence has clearly pointed to the fact that wage levels in Malaysia have been suppressed and have lagged behind by all measures.

The World Bank has reported that wages in Malaysia increased by only 2.6% per annum. That is below inflation. The proportion of wages as a portion of GDP has also fallen.

The 2010 National Employment Returns showed that 34% of Malaysians earned less than RM700 — below poverty line of RM842 in Sarawak.

In Sabah and Sarawak, where the cost of living is much higher, the figures are a dismal 63% and 48% respectively. A further 37% nationwide earned between RM700 and RM1,500. For a country aiming to be a developed nation in 10 years’ time, it is alarming that 72% of workers earned less than RM1,500. These are collaborated by similar figures from the Employees Provident Fund.

Fifteen years ago, the salary of a part-time worker at a fast-food restaurant was RM3.80 an hour. Today it is just RM2.80 while the price of a burger has gone up from RM1.20 to more than RM4 in the same period.

So clearly market forces have not worked. There are two reasons:

·Stiffled trade unions — Market forces are controlled by business, and combined with the government policy of stifling trade unionism by segregating trade unions, only 3% of private sector workers are trade union members, and less than 2% are covered by collective agreements. While the number of trade unions has increased most of the unions are in-house unions with less than 100 members.

·The presence of millions of foreign workers — Malaysia is perhaps the only country in the world that made it extremely difficult for high-value and knowledgeable workers to work here, but has welcomed millions of low-wage and unskilled workers. This has undoubtedly suppressed wages, as Malaysian workers have to compete for low wages.

Will minimum wage lead to retrencments and business closure?

If companies are legally compelled to pay their employees more than they can afford, then naturally they would have to retrench their workers.

Firstly, the presence of more than two million legal (and God knows how many illegal) foreign workers shows that there is no unemployment in Malaysia. Our official unemployment rate is less than 4%, which by World Bank standards show full employment.

Secondly, if indeed it is true that minimum wage will lead to some retrenchment, it will be those low income workers who are mostly foreigners. Surely, this will help our nation’s objective to reduce foreign workers. It will also be in line with our aim to move away from a low-wage labour intensive manufacturing based to up the higher value chain.

Frankly, if a firm cannot even provide a decent living wage to its workers — one that is enough to meet their basic needs — it has no business being in business.

Will minimum wage reduce productivity?

If a company now has 100 workers each earning an average of RM500 a month, and if the minimum wage is to be increased to RM900, its wage bill will now be RM90,000 instead of RM50,000 — a huge increase and may not be sustainable.

However the real question is does it really need 100 lowly paid, low-value workers?

You can tap rubber for 25 hours a day, but if you still use the same tapping tools your grandfather used, how do you increase output? Or the construction workers who still use hand-assembled timber formwork to construct flyovers and buildings instead of pre-frabricated ones or the toll operator who has to manually hand out tickets?

The answer would be to automate the issuance of tickets. But employers would not invest in machines or integrated building systems (IBS) because it is more profitable to employ cheap labour. In Incheon Airport in South Korea, two women in their sixties can effectively manage the luggage trolleys, while in KLIA we have an army of Bangladeshis.

This is not because Korean women eat lots of ginseng, but they have a machine that collects the trolleys magnetically and tows them along.

In Malaysia the banking industry is a shining example. The banking industry is the most densely unionised, with even assistant managers being union members. Wage levels are amongst the highest in the country.

Yes, once in a while you hear of picketing, but productivity and more importantly profits are consistently the highest in the country.

Investment in technology and management systems is the highest and business efficiency has improved to an extent that banking now is global, 24 hours a day, seven days a week and 52 weeks a year. And apart from some expatriates, there is not a single lowly paid foreign worker.

The real reason that Malaysian productivity is low is not because workers are not productive. It is due to the fact that employers were very successful in suppressing wages. There is no incentive to invest in research and development for productivity improvement. It is more profitable for employers to pay RM12 a day for foreign labour.

So higher wages and a minimum wage will lead to higher productivity. Higher wages will encourage employers to invest in research and development to increase overall productivity and efficiency.

A minimum wage will not hurt Malaysia’s competitiveness

Our competitors in the 1980s, Taiwan and Korea and even Hong Kong, the bastion of capitalism and free markets, have minimum wage systems while in Singapore the head of the trade union movement is a government minister and thus the country is able to formulate an inclusive wage policy that has seen wage levels more than three times higher than Malaysia and productivity growth that has outstripped us.

These four countries have overtaken us, became high-income nations while we now compete with Vietnam, Indonesia and Philippines.

More than 90% of countries worldwide have minimum wages. Empirical evidence in more than 100 countries worldwide showed that there is minimal negative impact on competitiveness and unemployment where a reasonable, value adjusted, and regularly reviewed minimum wage is implemented.

To be a high-income nation under New Economic Model, the government has to be serious and change our policy of being a low-wage country, restructure employment to create decent and productive jobs. A minimum wage policy will go a long way to achieving this aim.
A major benefit to the country is that higher wages will lead to higher purchasing power that will lead to increase domestic demand and more business for local companies.

What should be the minimum wage?

It appears that the bill to be tabled in Parliament will provide for setting up of a National Minimum Wage Council (NMWCC) that will be mandated to determine and review the level of minimum wage. I would urge that this be a tripartite body with independent experts and representatives from employers and employees.

This should allay fears that the minimum wage level will be set arbitrarily. I am confident that the NMWCC will be able to set a minimum wage after taking into account relevant factors, including cost of business, cost of living and regional differences. It must always bear in mind that a big bold initiative is needed to make Malaysia a high-income nation.