MInimum Wage Implemantation in Malaysia

   With reference to newspaper article by Liz Lee titled ‘Minimum Wage could kill SMEs’, the author writes about the dangers or implementing minimum wage. However, the author only focuses on the down side of minimum wage towards SMEs and not on the benefits of it in the long run.

   The minimum wage in Malaysia has been set to RM 900 per month or RM 4.33 per hour. Why do governments implement minimum wage? The main aim of a minimum wage is to reduce poverty and the exploitation of workers who have little or no bargaining power with their employees. When minimum wage is implemented in a country, the labour cost within that company will increase. Therefore, depending on the size of the company, the implementation of minimum wage will affect production and may lead to unemployment.

   In Malaysia, the amount of small and medium-scale enterprises (SME) is plentiful. Based on the nature of Malaysian operations, most of the SMEs consist of labour-intensive production. With that said, it is obvious that the implementation of minimum wage would affect SMEs drastically. The ratio of labours to machineries used is large and therefore a slight increase in labour cost would have a huge impact on the production cost of an enterprise. This will force SMEs to shut down and stop production due to unbearable costs. In addition, SMEs only obtain a net profit of 3 per cent to 5 per cent. An increase in salaries paid to workers will take up a large proportion of profits gain. At this rate, SMEs would only be able to make ends meet or shut down completely due to the higher manufacturing cost.

   Besides that, SMEs should be protected because they are the supporting industry to many multi-national companies. Therefore a chain reaction between these enterprises will lead to a further increase in prices. In contrast, before minimum wage is implemented, the government should first spread awareness to the people about the true definition of minimum wages and the advantages and disadvantages that could be faced. In a positive view, the implementation of minimum wages could bring about better economic growth and increase productivity of labours. Increase in economic growth could be achieved as people consume more from an increase in disposable income. The lower income groups with more allowance now have the means to enjoy more goods and live better lifestyles. On the other hand, an increase in wages for the lower income group could also create incentives for them to work better. Labours may feel more appreciated and thus work more productively or longer hours. Minimum wage could also promote dynamic efficiency. From a firm’s point of view, a minority of economist argue that the minimum wage will give employers incentive to train employees so as to increase their productivity, given that they have the means to provide training for employees. This means that minimum wage encourages firms to invest in both labour and capital which will also lead to higher economic growth. Therefore, an increase in minimum wages may benefit enterprises to a certain extent.

   On the flip side, the implementation of minimum wage has disadvantages towards consumers, labours and firms. First and foremost, minimum wage may lead to unemployment. Some firms may choose to cut down on labours in order to maintain the same labour cost as before the minimum wage is implemented. The effects of minimum wage can be shown in the diagram below:

When the wage rate is above the equilibrium level, the quantity of labour supplied exceeds the quantity of labour demanded- there is a surplus in labour. In other words, people are left unemployed. The diagram above shows the section of unemployment caused by minimum wage. Moreover, the setting of minimum wage also causes distortion to the way the labour market works because it reduces the flexibility of the labour market and changes the equilibrium point of demand and supply of labour. Therefore, such negative impacts of minimum wage could burden SMEs even more because they have no choice but to cut down on labour and this will disrupt production.

   On top of unemployment, minimum wage also brings about the issue of market failure. In a labour market, the supply curve measure marginal social cost of labour whereas the demand curve measures the marginal social benefit from labour. The benefit is the value of goods and services produced. An unregulated market allocates the economy’s scares labour resources to the jobs which they are valued most highly. Therefore the market is efficient. However, with the implementation of a minimum wage, the market mechanism is agitated and results in an increase in job search and unemployment. Moreover, the amount of worker’ and firms’ surpluses will decrease and the potential loss from job search will increase, making the market inefficient. This market failure will inevitably affect SMEs and the economy as a whole. In addition to that, high unemployment rates will also lead to the growth of black markets as people look for alternatives to earn for a living. From the graph, any labour cost below the minimum wage will result in black market. This type of market failure cannot be avoided because it is not easily detected by the government.

   According to the article, “..employers were still not sure if the policy covers allowances and benefits.”. Depending on whether or not a person is employed or unemployed will determine whether or not minimum wage will benefit them. For example, a person who continues to be employed after the implementation of a minimum wages will benefit from it because now his or her pay has increased. However, if an individual is unemployed, he or she will receive no form of benefit from this new regulation by the government.

   Nevertheless, in my opinion, the implementation of minimum will increase economic growth in the long run. In the short run, firms and individuals ought to bare the consequence in order for growth to take place. Minimum wage would reduce poverty level in a country and will increase the average income. In Malaysia the implementation is said to be done slowly, the government is doing so by implementing a low minimum wage of RM900. By doing so, SMEs and individuals do not feel the pinch of the new regulation and can adapt with time.

Jessica Chow Ann Kay (1101ah13308)