ON MAY 1, the Government gazetted RM1,500 as the new minimum wage for Malaysia. The Executive branch was empowered by the law known as National Wages Consultative Council Act 2011 (Act 732) to determine the minimum wage.
The establishment of minimum wage in Malaysia is credited to Parti Sosialis Malaysia (PSM). In 2002, PSM linked Jaringan Rakyat Tertindas (JERIT) launched “Minimum Wage Campaign for All Malaysian Workers”.
The party conducted several class-based actions such as roadshow, signature campaign, leaflets and public assembly nationwide demanding minimum wage etc. In 2011, the Government caved and introduced the law.
Opponents of minimum wage, particularly capitalists, business, liberal think-tanks and employers, argue around the lopsided and biased notion that minimum wage will hurt the economy and kill jobs. Contrary to popular belief, raising minimum wage has multi-fold economic benefits to the overall society, which I will explain.
Improves productivity and competition of capital
Firstly, raising the minimum wage increases capital productivity. One example is petrol stations. Prior to introduction of minimum wage, petrol station employed fuel pump attendants for a salary of RM400 per month to collect cash from motorists and fill petrol.
Minimum wage made petrol pump attendants financially unviable. So, dealers pushed for self-service with debit and credit card payment.
Bank Negara Malaysia (BNM) regulations allow banks to issue credit cards to individuals with monthly salary above RM2,000 to prevent excessive indebtness. Debit card was unpopular at petrol stations due to the RM200 pre-authorisation deduction. Hence, 80% of the population could neither utilise credit card nor debit card for petrol purchase.
In 2018, Petronas introduced the Setel payment app whereby motorists pay for fuel through smartphone. The Setel App eliminated interaction with petrol station counter. This minimised time of vehicle parked at the pump as motorist do not have to walk to the counter to make payments.
The asset utilisation rate of Petronas’ petrol station increased as more vehicles were refuelled per petrol pump, compared to the competitors at peak period.
The Setel App allowed Petronas’ petrol stations to operate 24 hours a day without presence of workers after midnight. Thus, Petronas based petrol station experienced better sales compared to other brands with limited operational hours.
Generally, Petronas’ petrol station experience improved capital productivity compared to its competitors.
Besides that, introduction of Setel by Petronas kickstart industry wide competition. Recently, Caltex introduced CaltexGo app similar to Petronas’ Setel app.
Meanwhile, Shell is testing Touch n’Go based RFID payment method for petrol sales at five Shell petrol stations. The underlying material condition to improve competition and productivity of capital was created by raising the minimum wage.
Curtail unemployment
Contrary to popular belief, increase in minimum wage curtail the increase of unemployment rate. Department of Statistics of Malaysia (DOSM) reported stagnancy in unemployment rate coinciding with the year the minimum wage was raised. So, unemployment rate dropped due to increased overtime cost.
The Employment Act 1955 stipulates that labour overtime cost between 150% and 300% relative to normal hour rate, depending on the day of work. The hourly rate is pro-rated from the minimum wage since 2011.
The increase in minimum wage by 10% increased normal work hours renumeration cost by 11.3%, inclusive of employers’ Employees Provident Fund (EPF) contribution.
However, overtime cost rises between 15% to 30% relative to the normal rate. The increase in overtime cost prompts employers to curtail overtime by expanding the workforce.
For example, an electronic factory that operates for 24 hours per day will replace two work shifts per day (eight normal hours and four overtime hours) with three work shifts per day (eight normal hours). The blue-collar workforce in the electronic factory increased by 50% to cut overtime cost.
Increases domestic consumption
Thirdly, increase in minimum wage will boost domestic consumption. The positive spill can be captured at micro level from net profit of supermarkets and macro level from revenue of fast-moving consumer goods (FMCGs). Micro-level analysis reveals that profits of supermarket can be split into two categories; price controlled essential items and life-quality groceries.
The profit margin for controlled essential items such as, rice, cooking oil, bread and eggs are fixed by the Government. Meanwhile, profit margins from lifestyle groceries such as detergent, shampoo, cereals, ice-cream, chocolate and biscuits are not controlled.
Generally, profit margins from controlled items are smaller compared to lifestyle groceries. Hence, the increase in minimum wage will increase sales from higher profit items of lifestyle groceries at grocery stores, supermarket and hypermarket.
In 2018, Nestle Malaysia suffered export decline worth RM118 mil, but domestic consumption increased by RM117 mil. The revenue increase was caused by higher spending power due to the increase in minimum wage in the same years.
Reduce Government debt repayment
The increase in minimum wage will reduce Government debt cost. About 18% of the federal budget goes into servicing Government debt, which are mostly held as publicly traded bonds in Bursa Malaysia with EPF being the biggest sole holder of Government bonds. Government bonds are crucial to EPF portfolio to ensure the minimum rate of return of 2.5% per annum.
The long-term holding of bonds by EPF reduces bond supply for daily trading which increases the bond value. The increase in minimum wage will increase the contribution amount to EPF to acquire Government bonds. Subsequently, it reduces interest rates of the bond which translates into lower debt service amount.
Reduces political patronage
Lastly, the increase in minimum wage reduces political patronage of public resources. Liberal economist and think-tanks argue for smaller Government by outsourcing Government services without acknowledging that it breeds corruption and political patronage. One such example are school security outsourcing contracts.
The introduction of computer labs from 1996 demanded the need for school security guards. Tun Dr Mahathir Mohamad’s first regime did not expand the in-house security staff under Chief Government Security Office (CGSO).
Instead, the school security service was dished out to political cronies causing serious leakages. The outsourcing of essential services is smeared with political patronage, cronyism, corruptions and leakages.
According to research conducted by Jaringan Pekerja Kontrak Kerajaan (JPKK), the premium for 800 school security contractors after minimum wage payment to 40,000 security personnel is RM500 mil. The increase in minimum wage puts upward pressure for Government to increase contract value.
However, Government revenue constraints erased any room for increase in contract value. The increase in minimum wage makes more sense for Government to directly employ the 40,000 security guards directly as public servants and redistribute the RM500 mil of contractor premium as wages.
The system survived for 15 years without annual wage increment. The political patronage model through outsourcing contract is crumbling under the full weight of minimum wage policy. The ending of the outsourcing model will reduce corruption and political patronage.
Moving forward
In conclusion, the increase in minimum wage has a positive impact for all tripartite entities of the society; capital, labour and Government. Therefore, MPs must amend the minimum wage related legislation to peg the annual minimum wage increment to Malaysia’s GDP growth.
This will make the national economic growth more equitable as wages will increase parallel with economic growth. – May 9, 2022
Sharan Raj is human rights activist, environmentalist and infrastructure policy analyst.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
