• Minimum wage policy was long implemented in various parts of the world as a poverty mitigation tool

• The implementation of the minimum wage policy in Malaysia is in line with the government’s goal to become a high-income nation by 2020

• The latest minimum wage in Malaysia will take effect on 1st January 2019

• Labor market conditions remained stable, with continued growth in real wages

• Higher minimum wage could increase consumer sentiment

• Annual labor productivity surged 3.7% yoy in 2014 exactly the same year of the implementation of the minimum wage policy and has stayed above 3.0% pa

The minimum wage policy has been widely researched worldwide; perhaps one of the most studied issues in economics. Minimum wage is the lowest remuneration employers pay to employees, according to the governmental legislation. Minimum wage policy was long implemented in various parts of the world as a poverty mitigation tool. Many developed countries have implemented minimum wage policy, such as Australia, Luxembourg, France, Ireland, US, Japan, Canada, Korea, Turkey, Greece and many more.

Although minimum wage policy is not new in Malaysia, the implementation nationwide only took effect in 2013. In the Peninsular Malaysia, the minimum wages have been set at RM900 per month or RM4.33 per hour, minimum wages in East Malaysia is relatively low at RM800 per month or RM3.85 per hour. This is consistent with the differences in the social and economic factors (Minimum Wages Order, 2012). In addition, employers are also allowed to pay minimum wage based on a ‘daily basis’ depending on the number of days worked, as well as on ‘piece rated’ or productivity provided that the employees shall not receive less than the minimum wage of RM900 per month or RM800 per month in Peninsular Malaysia and East Malaysia respectively. Effective 1 July 2016 the minimum wages increased to RM920 in Sabah, Sarawak, and the Federal Territory of Labuan and RM1,000 in the Peninsular Malaysia. Whilst, the latest minimum wage will take effect on 1st January 2019 which would see the minimum wage nationwide including Sabah, Sarawak and WP Labuan at RM1,050 per month or RM5.05 per hour.

The concerns on the implementation of the minimum wage law and policy revolves around its impact on employment, labor cost, training, productivity, inflation and the country’s economic competitiveness. Therefore, minimum wage implementation in Malaysia has taken into consideration the differences in social and economic factors, including the poverty line income, median wage, consumer price index, productivity, and unemployment rate of both the Peninsular Malaysia and the regions of Sabah and Sarawak. As envisaged by the government to become a developed and high income nation by the year 2020, the main objective of the minimum wage policy in Malaysia is to improve the social and economic status of low paid employees. In addition, it envisages the need for transforming the nation into capital intensive, and removes dependence on cheap labor. Apart from improving government’s labor standards, the increase in the minimum wage will enhance the wellbeing and welfare of low income bracket employees, improve their motivation, and hence, their productivity.

Labor market conditions have remained stable, with continued growth in real wages.

To date, labor market conditions remained healthy. Although private sector wage growth for 2Q18 eased to 5.7% (1Q18: 6.6%), employment recorded stronger growth of 2.4% (1Q18: 2.3%) in 2Q18. During the quarter, labor force expansion continued to match net employment gains which resulting an unchanged unemployment rate of 3.3% (1Q18: 3.3%). Specifically, in the financial sector, the employed persons increased to 165,628 in 2Q18 as compared to 164,216 persons registered in the preceding quarter. This shows that there was an expansion in high-skilled occupations. The moderation in private sector wages in 2Q18 was underpinned by the subdued wage growth in the manufacturing sector as its tapered off to 10.1% after rising significantly at 13.9% in the prior quarter. In contrast, the wage growth of services sector improved by 3.7% in 2Q18 from 3.5% logged in the 1Q18. It was driven by the wholesale and retail trade, and professional services sub-sector.

Meanwhile, latest data showed that employment rose by 2.7% yoy (Jun: 2.4%) to 14.88m in July and making it the highest number of employed persons ever recorded. Similarly, the labor force expanded by 2.6% yoy in July following 2.3% increase in the preceding month. The growing momentum in the labor force remained in July as the number of labor force continued to reach an all-time high figure of 15.40m, higher than the previous month’s figure (15.38m). Due to this, the labor force participation rate increased to 68.6% in July from 68.5% in June. Again, the labor force participation rate also registered a new record high for four consecutive months (May: 68.4%; Apr: 68.2%) Jobs added in the labor market were registered at 19.2k, almost twice higher than 10.6k posted in the prior month. Nevertheless, the number of unemployed persons fell by 0.1% yoy in July after increasing significantly at 1.6% in June. The unemployment rate for July remained unchanged at 3.4% yoy.

Higher minimum wage could increase consumer sentiment

Basically, the implementation of the minimum wage policy is in line with the government’s goal to become a high-income nation by 2020. This policy is expected to transform the economy from a labour-intensive to a capital-intensive economy through automation and help the nation to achieve the high-income economy status by 2020. The implementation of minimum wage would boost the hiring of locals while still making room for healthy competition between local and foreign workers. Apart from that, the policy is expected to improve the wellbeing of low income bracket employees as well as enhance the productivity of the worker. Indeed, the annual labor productivity surged to 3.7% yoy in 2014 exactly the same year of the implementation of the minimum wage policy from -0.9% recorded in 2013. Since then, labor productivity growth has stayed above 3.0% pa.

Early September, the government announced that effective 1 January 2019, the minimum wage nationwide - including Sabah and Sarawak - will be RM1,050 per month or RM5.05 per hour. This would be the second increment since the minimum wage was introduced in 2014. The hike is in tandem with the rise in the median monthly salaries and wages received by the country’s employees to RM2,160 per month in 2017, from RM2,000 in 2016. Standardising the rate will reduce the inequality among the states and we believe that the decision to equalise the wage between Peninsular Malaysia and Sabah and Sarawak could reduce the income gap between the two regions.

However, the increase of RM50 for the peninsula and RM130 for Sabah and Sarawak is considered a “pittance” and still below the poverty line of certain states. The upward revision to existing minimum wages would not elevate the challenges of escalating cost of living confronting the low and middle wage earners of the country. We believe that the government will continue working towards setting a standard minimum wage nationwide and implement it gradually in the near future as a sudden hike will disrupt businesses.

The new minimum wage is expected to have minimal effects, amid the cancellation of the GST, stable retail fuel prices and easing inflationary pressure. The new minimum wage, in our opinion, is reasonable as it had taken into account the current challenging economic conditions and regulatory environment. While the average minimum salary in Malaysia needs to be increased, the pay-off should also be higher productivity in the country to compensate for the increased cost in raising the overall minimum wage.

Moving forward, we foresee wage growth to stay on an upward trajectory. As minimum wage continues to increase as the nation develops, private consumption, Malaysia’s main economic source, will also rise, driven by improved consumer sentiment. Higher minimum wage is not expected to have a substantial impact on corporate earnings because it is expected to take place gradually, over several years, in our view. Moving forward, it is critical that in the country’s march towards a developed nation status, Malaysia’s economic policy must be strategically geared to promoting and creating industries that are high value-add and pay well. It is also imperative that labor market interventions are required to ensure workers are reasonably compensated. After all, research have proven that a happy worker is a productive worker. It also finds that happy employees also equal better profits. It is a win-win for all.

Source: BIMB Securities Research - 19 Sept 2018