Minimum wage to be in effect on 2013. Will it benefit our society, or will be a recipe for national turmoil?

An opinion article captured from The Star “Addressing issue of minimum wage” written by Shamsuddin Bardan , an executive director form Malaysian Employers Federation.

“It is these employers who are mostly affected by the Minimum Wages Order which makes it mandatory for employees to be paid no less than RM900 of basic wage per month beginning next year.”

(http://thestar.com.my/news/story.asp?file=/2012/9/30/focus/12101002&sec=focus)

There is a lot talk surrounding the forthcoming changes on 2013, one of it being the new policy of minimum wage proposed by the government with the initiative to make Malaysia a high income nation. This as we all know will be a historical moment for us for it being the very first time the government have ever implemented such policy. Although their intensions are good, there seem to be many bad rumors surrounding it. Some may argue its sudden publication and call it a political stun for it being conveniently located near the upcoming general election. Others would say there will be little to no benefit at all.

The new policy that is said to be fully in effect on January 1 2013 whereby the minimum wage will be set at RM900 per month or an average of RM4.33 for Peninsular Malaysia and RM800 or an average of RM3.85 for Sabah and Sarawak. This figure is achieved by the study conducted by World Bank. 3.2 million workers in small to middle class was said to benefit in the near future. These people consist of roughly 33% of the workforce of small and medium enterprise sector who make an approximate RM700 a month that is consider those who live below the poverty line of earnings RM 763 per month.

Historically when a minimum wage policy has been applied, there will be an increase in the rate of unemployment rate as well as inflation. So the question is how this will be good for our nation as a whole? Let’s scrutinize the possible outcome as much as possible. This is all good if the government is making decision based on the interest of the citizens. However don’t forget that our workforce more precisely those who earn anything lower than RM900 per month are foreigner from less develop countries. To give you a better prospect, around 3.1 million foreign workers in Malaysia earns about RM550 will now get a raise to RM900. That is an increase of RM350 that probably perhaps will be flow out of our country back to their home country; this is in terms of millions. On the other hand the average poor Malaysian earns about RM850 will however only see an increase of RM50. In terms of equity, the local aren’t really on the fair side of it. This itself should call for an immediate review of the policy to adjust the integrity and the social welfare of the local workers.

Another point to note is that Malaysia is a labour-intensive industry that depends on the quantity of cheap and affordable labour. Moreover it’s also sad to say that Malaysian labour doesn’t really make the list of being the best work force in the world. This in turn will greatly discourage investor and business to start up here in Malaysia due to the increase in cost of doing business. Perhaps even to such extent that existing cooperation would even relocate to other region as a cheaper alternative.

Even if the government strongly state that their intentions are to alleviate poverty, but in return it will undoubtedly raise the unemployment rate. To give you a better understanding how the minimum wage would affect the more people to be unemployed, I will illustrate my example with a graph.

At the graph above, assuming that the centre dot is where we are now. That centre dot is the cross line between the supply of labour and the demand of labour. The interception between the supply and demand curve represent an equilibrium that states the optimum amount of number that a labour are supply by the society and the demand from it. At this equilibrium, it meets the overall needs of an economy and will in such a way be no surplus or shortage of labours. On the graft W1 will be normal wage that is unaffected and E2 will the current employment rate.

When the minimum wage policy is implemented, you will see a line about the equilibrium. This is known as a price floor, also known as a wage floor. It is also a common understanding that anything traded below the price floor will be deemed illegal. As such in this case it has already been stated that employers can be fined RM10000 per employee. If repeated, it could be fine up to RM1000 per day. Continuation of such practice will be prosecuted with RM20000 and/or jailed for 5 years.

When it is in effect, what happens is that the amount of workers that a business can hire reduces (the demand of labour shift from E2 to E3) due to the uprising cost to hire a worker. Because of that there is a retrenchment of labour, thus increasing the unemployment rate in the economy (the supply of labour shift from E2 to E1). As you can easily observe, setting a minimum wage for a long term may have negative effects on our economy.

When the policy was officially announced, a lot upheaval was created in the process. Mainly it was because people that are affected aren’t given enough time to react due to the implementation being a few months away. In the respond the government quickly redraft the policy to allow employers to restructure wages by exchanging some of the cash pay-out to benefits or incentives given by the employers as part of the minimum wage. 

Although I am not a person who neither detest his county nor am I a radical, I do not believe in the might of the government. Though if they have good intention to do what they see fit for the nation I will not reject them by any means. Nonetheless if this acts are made for the purpose to rally the populist of foreigners behind some political stun, they got another thing coming.