Minimum wage for Malaysia.. likely going ahead

Saturday December 8, 2012

The effects of rising wages

FACTORY workers Siti and Noraini are elated when they think about the wage boost they will be getting beginning next year.

Attached to an electronics manufacturing plant in the Sungai Way Free Trade Zone in Petaling Jaya, both Siti and Noraini, who are in their mid-20s, are currently earning a basic wage of less than RM700 per month. This amount, however, does not include overtime and other forms of allowances such as medical benefits to which they are both entitled.

But come next month, Siti and Noraini’s basic wage will be increased by a relatively substantial amount according to what is stipulated in the minimum wage policy that will come into force by Jan 1, 2013.

“We feel somewhat relieved with the proposed minimum wage policy for the country; we hope the authorities will not turn back on the plan,” Siti tells StarBizWeek.

“To low-income earners like us, it can be quite a challenge to make ends meet nowadays, especially when the cost of living keeps increasing each year.

If we were to depend merely on our basic wage alone and not work overtime to earn the extra bit, it would be almost impossible to live a decent life in the Klang Valley, where things can be quite expensive,” she laments.

While Siti and Noraini do get their annual increments each year, the amounts, both point out, are not really that significant that they would make much of a difference in terms of maintaining let’s not even mention improving – their living standards in the city.

“We are thankful, therefore, because with the minimum wage, our salary increase next year will be higher than what we would normally be getting without one such policy in place,” Noraini explains.

Inevitable increase in costs

Malaysia’s first-ever minimum wage policy that requires employers to pay at least RM900 per month for their workers in Peninsular Malaysia or RM800 per month for those in Sabah and Sarawak is set to take effect from next month. The exception, nevertheless, applies to employers who hire not more than five workers. The date of enforcement for this group of employers will be July 1, 2013..

About a quarter of the country’s workforce is expected to benefit from the new policy, which will roughly result in up to a 30% increase in the wages of low-income earners in Peninsular Malaysia and as much as 100% increase in the wages of those in Sabah and Sarawak.

Needless to say, though, not all parties are pleased with the minimum wage policy.

Employers or companies, especially those operating in labour-intensive industries, are concerned about the impact of such policy on their bottom lines. Minimum wage means companies will have to pay more to hire workers. This will inevitably lead to higher cost of production.

Local glove manufacturers, for one, claim they will have to fork out an additional RM150mil per year for the around 25,000 low-skilled workers that their industry currently employs when the minimum wage policy comes into force next month.

Many other small and medium-sized enterprises (SMEs) also claim that their production costs will be significantly affected by the minimum wage policy when it comes into force, as many of them may not be allowed to pass on their higher production costs to consumers.

According to the Ministry of Human Resources, the National Wages Consultative Council had already received about 4,500 applications from SMEs requesting for a delay in the implementation of minimum wage. Apparently, these SMEs claim they are not ready to absorb the cost increases, especially in challenging and uncertain economic times like these.

But more likely than not, most of the applications submitted by the SMEs will be rejected, even as the Human Resource Minister Datuk Dr S Subramaniam had reiterated early last month that the Government would make good on its promise to implement the minimum wage policy in Malaysia by next month.

In an earlier interview with StarBizWeek, Subramaniam said the extensive studies done by his ministry had revealed that wages in general constituted only an average of 15% of a company’s total annual expenditure. And with minimum wage on average affecting only the salaries of less than 20% of total employers in a company, the increase in costs resulting from the policy was likely to be marginal and could easily be absorbed by companies.

As in anywhere else in the world, there are divided views about the implementation of a minimum wage policy in Malaysia.

Critics contend that a statutory minimum wage would only hurt businesses by putting pressure on their profit margins; and possibly cause higher unemployment as companies slash headcount to reduce costs, or higher inflation if companies were to raise the prices of their goods and services to compensate for higher labour expenses.

Proponents of the policy, however, argue that a statutory minimum wage would keep many households out of poverty and reduce income inequality in the country; help promote consumer spending; encourage the locals to enter the job market and replace the many foreign unskilled workers that we have in the country; and push industries towards greater efficiency, automation and higher value-added activities.

Malaysia in general seems more inclined to subscribe to the latter view.

This is especially so as the country intends to shed its image as a “low-skill, low-wage” investment destination, and strives to move up the value chain in line with its aspiration to become a high-income economy by 2020.

“Minimum wage is a complicated matter there are always costs and benefits to it. What’s important is for the country’s economy to move in tandem with the rising wage trend by improving on its productivity and efficiency,” Affin Investment Bank Bhd chief economist Alan Tan says.

“In that sense, we think the policy will definitely be a positive for Malaysia in the long run as it moves the high-income rank,” Tan adds.

Changing trend in Asean

Undoubtedly, South-East Asian economies have long been an attractive destination for foreign investments, especially in the low-value, export-oriented manufacturing sector, because of their relatively low labour costs. But things could be changing gradually as labour market reforms seem to be gradually sweeping through many economies in booming South-East Asia.

With countries in the region continuing to post robust growth rates, higher wages and better employee benefits have becoming increasingly pertinent to pacify workers’ demands.

Just last month, Indonesian policymakers approved a 44% increase in the minimum wages of workers in the country with effect from 2013. That will boost the minimum wage from 1.5 million rupiah (RM476) per month in 2012 to 2.2 million rupiah (RM698) per month next year. Despite the minimum wage hike, labour costs in Indonesia will still likely remain among the lowest in the region, especially in the manufacturing sector, according to Morgan Stanley Research.

Thailand, on the other hand, is expected to expand its programme of minimum wage hike nationally come next year, following a successful implementation of minimum wage increases by as much as 40% in seven of its provinces early this year.

Vietnam is also set to increase its minimum wage by up to 30% next year, while Myanmar is still deliberating on a bill for minimum wage.

Despite the wage increases that will take place next year, economists say, emerging economies in South-East Asia will not immediately lose its cost competitiveness, as the overall production costs (after pricing in the potential wage increases) will still be less expensive, compared with that of many other economies including China.

CItigroup, for one, says in a recent report that wages in China are rising at about the same pace, if not faster than most other Asean economies. In alluding to higher wages as being more beneficial to some of the region’s economy, It argues, that the average consumers will have more to spend when their wages are increased, and that will be an added boost to growth.

“We don’t think that the minimum wage policies will have any significant impact on cost-competitiveness, including that of Malaysia,” concurs CIMB Research chief economist Lee Heng Guei, adding that the competitiveness of a country depends not only on wages or the cost of labour.

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