Minimum Wage Policy Malaysia

1.0 Executive Summary
Whether to adopt a statutory minimum wage has been the subject of debate in Malaysia for a number of years. Part of the motivation behind this debate has been the slow growth of wages relative to labor productivity. There are issues by implementing wage policy in Malaysia which I explored by doing this assignment. In 2002, the government is decided to implement a minimum wage policy where they set RM800 in West Malaysia and RM900 per month in East Malaysia as a minimum wage that employer should pay to their workers. This report is aimed to make an analysis on whether it is a wise decision to implement minimum wage policy.
However, there are advantages as well as disadvantages along with the cause and effect scenario that arises from implementing the minimum wage policy.
The analysis part in this assignment is critical to whether the government should implement minimum wage policy in Malaysia. It is truth that the economy of Malaysia is being harm and going downwards due to the implementation of this policy. Although the aim for Malaysia by implementing minimum wage policy is to eradicate poverty and develop this country, Malaysia into a high income nation which is the goal set by the government. Yet the government is not expecting the result of implementing this policy will be another way round and there are some side effects.
Based on the analysis and findings in this assignment, we can clearly identify the main affects for implementing minimum wage policy in Malaysia. The effects are shown as below:
Low wage causes poverty
Increase the salaries does not improve equity in the population
Creates a surplus of unskilled workers (more unemployment)
Reduces market efficiency
More labor supply from teenagers (foreigners) – people in need may end up losing jobs.
However, The implementation of this policy is not entirely a lost cause as there are some countries who have made success over this policy. UK has successfully reduced the gap between the low and high income workerss. There are some recommendations that I suggest Malaysia to take into account to make some changes on this policy. Firstly, the government need to re-adjust the minimum wage of Malaysia to become higher in order to ensure the local workers has fairer treatment. Secondly Minimum wage legislation should be used as an instrument to remove imperfections in the labor market and not meant to be used as an instrument for achieving development plan objectives because it is an inappropriate instrument to address poverty. In conclusion, minimum wages should not be the primary policy used to reduce poverty for Malaysia unless the government is willing to take those suggestions into account.

2.0 Introduction to Minimum Wage Policy in Malaysia
In 15 October 2010, Minimum Wages initiative for Malaysia was announced by the Prime Minister in his Budget Speech on 15 October 2010. It is one of the Government’s policy or tools for their New Economic Model (NEM) to ensure inclusiveness by transforming the economy from a middle-income to a high-income economy by the year 2020. The policy is meant to ensure workers have the income that enable them to meet their basic needs and create the necessary environment for the industry that their in to progress further in value. Minimum Wage is the minimum legal wage an employer is obligated to pay its employees and nothing below that value which is stated. For example, supplement the wages of these employees if their income does not meet RM900 per month for Peninsular Malaysia and RM800 for Sabah, Sarawak and Labuan and 900 or 800 is the minimum threshold. However, these wage are basic wages, excluding any allowances or other payments. This policy covers employees in all economic sectors except those who are working in domestic service sector such as maids and gardeners. One of the reasons why this policy has been brought about was that a study that was done in 2009 revealed that 33.8% of workers who are working in the private sector are earning less than RM700 per month, this comparison to the country’s Poverty Line Income (PLI) level of RM800. Besides that, the implementation of the minimum wage policy is aligned with Malaysia’s goal to become a high-income nation by the year 2020. The idea of a minimum wage policy has brought about much debates from government to opposition after nationwide protest planned by the Malaysian Trade Union Congress (MTUC). The National Wages Consultative Council (NWCC) was established And the purpose of this council is to carry out research on all matters related to minimum wages and to make suggestions or ammendments of minimum wages to the Government. Basically this policy is implemented to reduce poverty in this nation and ensure that workers are able to meet their basic needs.

3.0 Problem Statement
Malaysia is a country that attracts numerous foreign workers mainly in the cheap labor to come to work in manufacturing, construction and private sectors. This is mainly due to the fact that Malaysia has many industries and that they need the necessary man power to increase the productivity of these industries.. These multinational companies need a lot of workers in order to run their business process such as IT manufacturing and steel works. The bulk of these manufacturing could be fulfilled by local only local workers but it needs foreign workers as well since there is a lack of manpower. Because of that, these companies increase the their total revenue which leads to boost up the economic development or otherwise known as GDP. This has lead to the conclusion that Malaysia is expected to have more than five million foreign workers by 2010. The increasing influx of foreigners to work will affect the economy for Malaysian as the number of foreign workers is increasing and they are willing to be paid by low wage. Malaysia does not have strict barrier in labour market will also create illegal activities to take place such as hiring illegal workers who do not have work permits from the respective government.
Thus, subject has become a serious matter that has being debated in Malaysia for a long time. In order to handle this issue, Malaysia government have taken the necessary measures to mitigate the unfairness of distributing wage which eventually has made final decision to implement a statutory minimum wage policy. The policy of regarding distributing of wages to workers would bring some positives effects to them such as raising their income to cover the daily basic needs and to standardise the wage paid to less skills workers. However, this decision seems does not satisfy to all society and government. It creates a new issue that needs to be carefully identified whether this policy will be beneficial to the economy as whole or else will bring bad impacts. This unconfirmed result will be further discussed in details in the followings parts.

4.0 Analysis The Minimum Wage Policy

4.1 Rationale behind the minimum wage policy.
Most countries around the world have some form of minimum wage, and policymakers have often argued that the minimum wage, by increasing the income of low-income workers, can be used as a tool to reduce poverty and inequality. The Malaysian government’s concern to improve the circumstances of the working poor and vulnerable is valid and merits immediate attention, however, worldwide evidence shows that even though a well implemented minimum wage that imposes a moderate (and economically reasonable) level can have positive social welfare effects it is not the most appropriate instrument to address poverty and inequality. Indeed, many poor people are not employed or are employed in the informal sector where minimum wages are not binding. Also, poor people often have limited skills and low productivity and thus tend to be among the first to be laid off when wages increase in line with the legislation.Nor is a minimum wage the right policy to stimulate the productivity of firms. A minimum wage policy can cause low-productivity firms that cannot afford the higher cost of labor to go out of business, and this may result in an increase in the average pro ductivity in the economy. However, if the objective is to provide incentives for innovation, the ado ption of new technologies, and economic diversification that truly contributes to higher productivity growth across business and sectors, then governments should consider adopting other policies. Th ese might include investing in skills and infrastructure and improving the business environment in ways that encourage competition, investment, and entrepreneurship. The main justification for introducing a minimum wage in Malaysia would be to address inefficiencies in labor markets that preclude competition and can lead to the suppression of wages, especially for lowskilled (and low-income) workers. In this case, if implemented correctly and set at the right level, a minimum wage can increase wages without reducing employment levels or encouraging informality. Also, higher wages can encourage participation in the labor market and even increase employment levels. If badly designed and implemented, however, a minimum wage can harm business and reduce formal employment. This can happen, for instance, if the level of the minimum wage is too high relative to average earnings in the economy.

4.2 Effects of minimum wage on Malaysian firms.
There has been much debate over the implementation of the minimum wage policy, if implemented what would happen?

This is the graph before the government implements the minimum wage.
Let us just say, the company X is doing well with equilibrium wage rate of RM 3.23 hourly and equilibrium labor hours of 70 million which includes 400 workers. However, some changes occurred when new minimum wage is set.

This is after the implementation of the minimum wage policy. The minimum wage of RM 4.33 an hour, quantity supply of labor hours increases from 70 million to 90 million hours, however the firm’s demand for labor hours decreases from 70 million to 50 million hours of labor. This 90 million hours would probably be the demand for 500 people who would like to have a job with new higher minimum wage, but the firm wants to have only 300 workers for 50 million hours of labor. So the gap between 90 million and 50 million, which is 40 million hours of labor, is created. And if the minimum wage is set above the equilibrium wage rate and the quantity of labor hours supplied by employees exceeds the quantity demanded labor hours by employers, it will result in an excess of labor hour. Thus, the 40 million hours of labor which is also the 200 workers is a surplus of labor hour and this will result in unemployment. And as the government installs minimum wage, there will be more people who are willing to work with that higher wage. Problem is that they will face difficulties finding the jobs provided because firms will demand less workers.
Besides that, the firm may still need that 70 million of labour hours to produce more or maintain their previous standard level of production. Any reduction of labor hours will cause a reduction in output. Although there are more people out there to work, the firm is not able to hire them due to the minimum wage is it will be additional cost, which lead to higher prices thus inflation. Therefore, black market will enter to fulfill 70 million of labor hours, and it leads the firm to hire someone illegally under the minimum wage. By looking at the previous graph, we can notice that the wage below minimum wage of RM 4.33 is illegal and the firms are not allowed to give wages which is under the minimum wage to the employees.
The graph above is the illegal minimum wage graph. However, since this production needs unskilled labor, the firm may hire low-skilled foreign workers who still demands to work with RM 3.23 which would be below the minimum wage. This will benefit the firm to save money on wages with RM 1.1 per hour and maintain the previous quantity of labor hours, by not affecting on their outputs.
This will eventually result in decreasing in labor demand of the firm for locals workers and an increase in the labor demand of the firm for foreigners.
The lesser the demand for local labors, the greater the unemployment rate would be in Malaysia.
Therefore, the local people are the ones who will suffer from unemployment due to the implementation of the minimum wage when there are high possibilities that foreigners might replace them with under minimum wage and will results in social problems, and labour union strikes.
This is a chart to illustrate the effects of minimum wage and labour demand for local and foreign workers
And a real life example of the decrease in demand for labour in a glove manufacturing company. Malaysian Rubber Glove Manufacturers Association, to process automation, around RM 500million will be invested by rubber glove manufacturers. This shows that glove manufacture will resort to robotics in the future rather than using human labor force. Once the minimum wage is set, they found out that the cost of labour will actually be more expensive than using a machine. There are 60,000 workers and 45 manufactures in this industry. Assume that RM 900 is given as salary to these 60,000 people monthly. Will the spending of a total amount of RM 54 million monthly more valuable or investing RM 500 million at once will be certainly be more cost effective. If there is any firm to chooses to pay the wages, that firm would have to incur extra cost and will suffer substantial loses and may even go into bankruptcy.
4.3 Effect of the Minimum Wage Policy on the Country.
To evaluate the current state of labor market in a particular country, one key measure need to be focused at is the percentage of the total unemployed labor force. The last reported unemployment rate in Malaysia stood at 3.2 percent in July 2012. The unemployment rate is defined as the number of people actively looking for a job as a percentage of the labor force. The bar chart below shows Malaysia unemployment rate form January 2011 to July 2012.

Unemployment is such a fundamental economic factors because the costs of unemployment are so high. The problem that has been inflicted is so severe and those who are unemployed are more prone to suffer from loss of self-esteem, depression, and even worse, suicidal behavior which will even reduce total labor supply.
To further understand the labor market, economist and policy makers utilize the model of supply and demand. In the situation of the labor market, employers signify the side of demand whereas labors are on supply side. In a nation without minimum wage policy, a competitive labor market is in action, where there are overtime rates and bonuses.
This situation will completely change when a country implements a minimum wage policy. Contract or law of government determines the minimum wage. If the minimum wage set below the equilibrium wage rate, it has no effect. If the price ceiling which would be legal wage is set above the equilibrium price there will be a powerful effect, which leads to unemployment. The interaction of labor demand and labor supply determines the market equilibrium wage, in simple terms when supply and demand meet, the equilibrium wage rate is established.
When there is a minimum wage in the labor market, jobs are being lost and new employees are entering to compete for the jobs. In other words, the quantity demanded by employees exceeds the quantity demanded by employers. Therefore, there is a surplus of labor. The minimum wage creates unemployment because the legal wage rate cannot eliminate the surplus. Unemployment arises in the sector where the minimum wage is being imposed, when the wage reaches a level beyond which the least profitable entrepreneur would be unable to employ a worker. The wage rate is the price in the labor market.

From the graph above and as mentioned previously, any wage below the minimum wage is illegal. Minimum wage will lead to inefficient outcome. And at the minimum wage of RM900 per month for Peninsula and RM800 for East Malaysia, the quantity of labor demanded (X1) and employed is less than the efficient quantity (X). At the quantity of the labor hired, the minimal social benefit of labor exceeds its minimal social cost. In other words, the quantity of labor supplied would be higher than the quantity demanded by employers at the stipulated price. This will actually result in a deadweight loss, in which it decreases both worker’s surplus and firm’s surplus due to increase job search by the workers and firms. The full loss of the minimum wage is the sum of the deadweight loss and increase cost of job search.
According to economic update by CIMB, the national mean wage in 2010 is RM1, 804.43. The minimum wage set is 49.9% of the national mean wage which can be seen in the graph below. The report also stated the Malaysian government took into account social and economic considerations such as the cost of living, productivity, competitiveness and employment in setting the minimum wage. In Malaysia, almost one third of private sector workers earning less than RM700 per month in 2009, well below the poverty line of RM800 per month. The report also pointed out the new wage policy will have a greater impact in Sabah is set 40.4% higher than the current average salary of RM577, followed by Sarawak that is RM800 against the current average salary that is RM758, whereby in the Penisular Malaysia, the minimum wage of RM900 is set 20.4% below the market equilibrium wage of RM1, 131. The study state the demand for migrant workers is expected to decrease due to the competitive models if the minimum wage is fixed at RM900 per month and above.

Implementation of minimum wage in Malaysia reduces poverty because it increases the wages of the lowers income earners especially in rural areas. Even slight increase in the wage can make a significant impact on the living standards of poor families and individuals, who can better afford basic necessities such as food ,rent and clothing. There will be no protection without a minimum wage for lower income employees as no assurance is enforced that the companies will pay their workers fairly. Without government oversight, the companies could refuse to pay a reasonable wage.
Minimum wage also aids workers with low bargaining power particularly in tough economic times. Most the young and unskilled workers who usually acquire minimum wage jobs, does not has the ability to demand for a certain level of income from their employers due to lack of experience and expertise. Thus, the government established the minimum wage to prevent the employers or companies from taking advantage of the individuals.
Increase in productiveness is a good effect of this policy, as the doer esprit de corps is increased due to higher paysheet , which results in less employee absenteeism , and hence increasing productivity .hen labor productivity rises faster than salary s, stockowners and capital will welfare . Companies may increase the budget for the training of their workers. The lower limit wage can actually have a positive effect by changing the philosophies of the companies and organizations that are military group d to adhere to it. It was possible in the past to undercut your rival at the cheapest end of the worker market and run your byplay through force of phone number . A federal official minimum wage encourages businesses to concentrate on productivity from good workers rather than cheap labor.

4.4 Legalisation of the Minimum Wage.
To obtain the desired outcome of a minimum wage policy, it is crucial to understand its limitations before embarking on its implementation. And One of the main difficulties in using the minimum wage law effectively is that it is generally expected to solve more problems than it is capable of doing. It is important to specify the details of the governance structure, process of revision, composition of the decision-making body, exemptions, and date of review in the legislation, thereby leaving less room for subsequent improvisation. There are large differences in the countries studied in terms of the amount of detail that is included in their legislation. In some countries, most of the operational features are specified in the law itself, while in others they are set out in regulations or simply follow tradition. However, despite the differences, there is a trend towards specifying the details in the law, thus minimizing uncertainty and politically determined or arbitrary decision-making. For example, the laws of all of the countries studied (except Chile) specify requirements for the membership of tripartite recommending committees and their tasks as well as guidelines for how they should operate. Notwithstanding these legal requirements, the composition and mandates of these committees differ between countries in practice, mainly because some countries enforce the law more strictly than others.
Besides that, the world bank have also recommended extending coverage of the minimum wage to migrant workers for social and economic reasons. As a general principle, foreign workers deserve to be given the same treatment under labor law as Malaysian workers because of their contributions to the Malaysian economy. This should apply not only to the MW but also to other labor laws such as those related to social security and pensions. Furthermore, Article 6 of ILO convention 97 stipulates that there should be no discrimination in terms of conditions of employment, including wages, shall be placed on workers based on nationality.
Moreover, most countries set only one national level for the minimum wage and allow only a few exceptions or reductions. The reductions are mainly granted in the case of particularly low-productivity workers whose employment opportunities become extremely limited when the minimum wage is set at a high level. Some of the most common reductions are granted for younger employees, disabled workers, and apprentices. Based on the youth’s labor market profile and estimated impacts on low skilled young workers, the World Bank recommends that government considers a lower minimum wage for young workers.
There are also same cases where the law inflicts a negative impact, Evidence from around the world shows that having multiple minimum wage levels within one country can lead to negative consequences because of the difficulty in enforcing the law and ensuring compliance and the possibility of further aggravating market alterations.
The World Bank recommends that the MOHR be in charge of the implementation of the policy. It should also be responsible for ensuring that the law is enforced and that the review process is consistent with the law. Also, the World Bank team recommends that a National Minimum Wage Council which the acronym is (NMWC) be created to conduct the regular review process and to make a recommendation about the level of the wage that has been approved by a majority of the council members. Once the NMWC has made its recommendation on a proposed level for the minimum wage, there are several possible models for the final decision-making process.
Even if the NMWC has the final decision, it should be accountable for its actions. Public accountability comes from the transparency of the process. There needs to be a clear procedure by which underperforming members of the NMWC can be removed from their positions, perhaps as specified in its internal procedures. In addition, Parliament must have the right to impeach the NMWC and to impose penalties or fines on and/or remove from office any members that are proven not to have acted in accordance to their functions and responsibilities. In all of these cases, a super-majority of the NMWC’s members should be required to censure or remove any of the members in order to limit the potential for abuse of this procedure.

4.5 Advantages and Disadvantages of Minimum Wage Policy
Advantages
One of the advantages of this policy is that it helps low earners gain a higher standard of living, the wages of low earners are just simply too low to have a decent living. Inflation will deny these people a chance to live a comfortable lifestyle.
Next is that an extra disposable income should lead to extra spending in the economy, macroeconomics refer to this as the wealth effect where people would feel richer and purchase more goods which will set a domino effect firms producing more and thus improve the overall economy.
Besides that, a minimum wage gives an unemployed person incentive to take a job because he knows what his minimum pay will be, according to economics website Economics Help. An unemployed person can compare the money he gets from public assistance and compare it to the minimum wage to determine the financial incentive to taking a job. Which in turn reduces unemployment.
Disadvantages
The first disadvantage of this policy increases cost to business, this policy along with the established laws force employers to raise the salaries of underpaid employees which will increase the cost of their business leaving many employers very unhappy with this policy.
In light of the point above, businesses may be unable to afford to employ as many workers which will result in retention of staff or worse, the firm may even shut down completely as it is unable to bear the cost nor make profit from the increased wages.
The next disadvantage derives as an after effect from the two disadvantages above, this policy could cause unemployment. When a firm shuts down, employees will need to find other jobs elsewhere thus going into the unemployment pool
Last issue is that due to the increased salaries, other workers may ask for a raise. Labor strikes and labor unions will be on the move and this will only stir up more social problems.

4.6 Other countries with Minimum Wage Policy and Comparison.
Based on the analysis of the cause and effect that caused by the minimum wages policy in Malaysia, the problem is that Malaysia has implemented this policy at the very wrong period. A minimum wages policy is suggested to be introduced in middle and low income countries. How succesfull of this implemented policy heavily depends on context, capacity, and institutional design. The main objective of this policy as mentioned earlier is to reduce poverty especially in developing countries and whatever that makes the people happy and satisfied.

Malaysia is currently a second world developing countries. In order to grow the economy rapidly, it is needed to be made up of more Foreign Direct Investment, acronym is FDI in Malaysia to improve our manufacturing industry. Fundamentally the objective is to move the condition of Malaysia economy from a P based economy to a Kbased economy or otherwise known as knowledge-economy. When there is more foregin investment inflow into the country, the companies would have more capital thus more factories which in the end need more manpower to run the factory. Yet after Malaysia has imposed te policy and set the minimum wage for only RM900 per month, the unemployement rate in Malaysia has increased instantly as many of the local workers they are not willing to be paid at RM800 per month to work for 40 hours per month. Hence, this issues has exposed another more serious problem which is the unwillingness of local employees to work is actually giving a chance for the replacement of foreign workers who mostly comes from Indonesia, Bangladesh, Myanmar and Nepal.
The National Minimum Wage in UK

The UK’s Nati onal Min imum Wage has been instrumental in reducing the pay gap between the low and high paid. While it only directly raised the pay of 5% of workers, ‘spillover’ effects on wages above the minimum mean that up to 25% of workers benefited from the minimum wage.
The National Mini mum Wage is responsible for almo st a half of the fall in the wage gap between the lowest paid and the average worker in the UK over the past decade.

When the National Minimum W age was introduced in the UK in 1999, many thought it had been set too low to make any real difference to the relative wages of the low paid since it only directly affected 5% of workers. This research shows that the minimum wage has in fact been a very successful policy resulting in a substantial fall in the pay gap between the rich and poor in the UK. The impact of the minimum wage has gone way beyond the bottom 5% of workers, with up to 25% of workers benefiting from pay inc reases. The study presents evidence for wage ‘spillovers’, whereby the wages of those above the minimum wage are also pushed up.
These spillovers explain why the minimum wage has had more far reaching effects beyond those directly affected workers – with effects extending to 40% above the minimum. As a consequence, the minimum w age is responsible for almost a half of the fall in the wage gap between the lowest paid and the average worker in the UK ove r the past decade.

In the 1980s and 1990s, the pay gap between the low and high paid increased sharply in the UK. In 1999 as part of a package of reforms to ‘make work pay’ the government introduced the country’s first Nat ional Minimum Wage. Since its introduction, pay gaps have fallen for low paid workers relative to the median or average worker. This fall has occurred all the way up to the 25th percentile wage – that is, the bottom 25% of workers have experienced pay increases relative to the average worker. Here lies a paradox. If the minimum wage only directly affects the pay of 5% of workers, how can it be responsible for raising the pay of up to 25% of workers?
The researchers believe t hat wage ‘spillovers’ provide the answer. Here the minimum wage has a direct effect on pay by raising the wages of those who would otherwise have been paid below the minimum. But it also has an indirect effect on the wages of those workers wh ose pay is somewh at above the minimum rate.

The researchers present a theoretical model of employment where firms are competing with each other for available workers and in which the implementation of a minimum wage can result in wage spillovers. They then examine the evidence for spillovers by splitting the labor market into segm ents; women/men, young/old and low paid and high paid regions. They show that the decline in pay inequality since the late 1990s has been most ma rked in the low wage segments of the workforce. Using insights fr om the theoretical model, the researcher’s present direct evidence of spillover effects on wages. They show that the impact of the National Minimum Wage extends up to 40% above the rate at wh ich it is set. Among workers under the age of 30, there have been substantial falls in the wage gap between the bottom 10% of workers and the average (median) worker. The National Minimum Wage explains almo st half of this fall.

5.0 Recommendation

There are ways in which steps can be taken to improve or upgrade the minimum wage policy to will allow it to have a greater positive impact on the society.

1.) Government to provide incentive.
The minimum wage policy will increase the cost for a firm eventually leading to unemployment. The government would be able to resolve this matter by providing a provision fund for the firms. Some companies would receive this funding to cover the cost of extra wages and when the firm reaches economies of scale, the government would no longer need to provide this fund. This will also motivate the firm to increase profits to cover up the total cost.

2.) Increasing the child tax credit.
Families with children will benefit from the child tax credit program. This strategy would directly benefit low-income families with children. Also, like other tax-based solutions to helping workers with low income, the burden lies with the government itself, and not with businesses who they say would struggle if forced to pay higher minimum wages.

3.) Provide training for employees.
One criticism of raising the minimum wage is that if the pay rate of low-skilled and entry level jobs is too high, workers don’t have the option to leave their current job for better opportunities that pay higher wages. By offering minimum-wage workers training, they increase the employees' skills which makes them more valuable to their current employer, as well as to other employers in their market.

6.0 Conclusion
Through this analysis, it can be concluded based of the evidence and information gather that the raise in income ]or wages is supposed to reduce to situation of poverty as well as reduce the level of unemployment rate .
However, evidence suggests that the minimum wages should not be the primary policy used to reduce poverty. Minimum wage policy can be sometimes unfair to the people who has minimum wages. Assumes that if minimum wages are raised, there need to be social safety nets to protect low-income families that lose with higher minimum wages.

Under the policy of minimum wages with RM900 per month, in Malaysia, some critical issues had identified in this report and has shown a truth that the economy Malaysia is not being effective with the policy of minimum wage. In a result, the number of illegal foreigner workers keep increasing year by year in Malaysia and it also caused a social problem as the rate of crimes also increased rapidly in the meanwhile. Besides that, obviously when there are many different economy issues rises in Malaysia, the foreigner’s investors will end up with a decision that refuse to choose to invest in Malaysia. Due to the reason that foreign company they need to pay higher minimum wages to the workers under the protection employment in Malaysia