Minimum Wages Order 2022: All that glitters is not gold

ON May 1, 2022 the Malaysian Minimum Wages Order 2022 (“the Order”) came into operation and this saw he minimum monthly wage of employees being increased to RM1,500.

The Order applies to all employees except domestic servant with a temporary exemption to employers who employ less than five employees until Dec 31, 2022. Such exemption, however, does not apply to employers who carry out professional activities.

In Malaysia, the concept of minimum wage was introduced by the Wages Councils Act 1947, which was applicable to several sectors.

It was repealed by the National Wages Consultative Council Act 2011, which established the National Wages Consultative Council to advise and make recommendations on minimum wages.

In 2013, the monthly minimum wage rate was RM900 for Peninsular Malaysia and RM800 for East Malaysia. It was subsequently raised to RM1000 for Peninsular Malaysia and RM920 for East Malaysia.

The two different rates in East and West Malaysia were abolished in 2019 when the monthly minimum wage rate was raised to RM1,100. The same was, again, raised to RM1,200 in 2020 and now to RM1,500.

The increment in minimum wage received a mixed reception. On one hand, it may be a positive development for employees while on the other hand it may have a significant effect on the employers.

This is particularly so when there is a 25% increase in labour costs for minimum wage workers.

It may be an untimely move as businesses are still in a tough recovery stage with most industries being badly hit by COVID-19 pandemic since 2020.

Therefore, to increase the minimum wage at this juncture may jeopardise the efforts of employers in reviving their businesses.

Employers who are unable to recover or sustain their businesses will have to reduce their operating costs, including their manpower costs.

Employers may freeze increments, bonuses or recruitments and enforce pay cuts or even retrenchments. Employers may also seek the services of independent contractors instead of hiring employees to reduce costs.

In other words, depending on the employers’ ability to cope with the current economy and spiralling costs, unemployment rate might increase.

In simple economics, the increase in minimum wage ought to be associated with an increase in productivity, which will lead to an increase in revenue and if it does not, it will raise production costs and lead to spiral inflation.

Based on the 4Q 2021 report on labour productivity by the Department of Statistics Malaysia, the labour productivity merely increased by 1.7% (based on the ratio of value added per employment).

Zooming in to the relevant sectors, only manufacturing and services sectors posted an increase of 6.8% and 0.5% respectively while the agriculture, mining and quarrying as well as construction sectors recorded a decrease of 4.6%, 3.4% and 8.3% respectively.

When labour productivity is unable to correspond with the increment of minimum wages, the cost of goods will eventually go up, resulting in higher cost of living.

Therefore, higher wages may not improve the quality of life of workers nor increase their purchasing power.

The increase in minimum wages may also result in Malaysia losing its international competitiveness compared to our neighbouring countries.

Foreign investors may be more attracted to countries like Vietnam, Thailand, Cambodia, Indonesia, the Philippines, Laos and Myanmar, bearing in mind that their minimum wages are lower than Malaysia’s by approximately 43.99%, 41.14%, 43.21%, 11.63%, 36.98%, 69.63%, and 90.22% respectively.

Lower minimum wages would mean lower operating costs and by extension, higher profits. It comes no surprise that electric vehicle titan Elon Musk is considering to invest in Indonesia. The diversion of foreign investment will further dampen the recovery of Malaysia’s economy.

In conclusion, while increasing the minimum wage might be a celebrative cause, it may be an ill-timed move, in particular where most employers are still recovering from the losses caused by the COVID-19 pandemic.

Coupled with the global inflationary pressure due to the Russia-Ukraine war and our weakening currency, introducing an increase of the minimum wage at this juncture may do more harm than good. – May 19, 2022


Leonard Yeoh is a partner while Khor Wei Wen is an associate with the law firm Tay & Partners.

The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.

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