To address Malaysia’s stagnant wages, its government is exploring the adoption of the progressive wage model that the Singapore government came out with, but Malaysia doesn’t need to do so. What Malaysia really needs to do is to raise the minimum wage at a faster pace.

Ahead of Malaysia’s state polls on 12 August, Malaysian prime minister Anwar Ibrahim has announced the “MADANI Economy: Empowering the People” framework to address Malaysia’s economy and improve people’s quality of life, among which includes a plan to review the minimum wage. Malaysia’s Ministry of Economy has also developed a policy paper on implementing the Progressive Wage Model in Malaysia, and will present it at the National Economic Action Council (NEAC) on 7 August. But what can it learn from Singapore’s model?

Singapore’s progressive wage model is implemented on a sectoral basis, which outlines the minimum wages for various sectors, and specifies the higher wages that workers should earn if they become higher-skilled and get promoted. But such a system is already in place in most economies even without a progressive wage model – workers who become higher-skilled and promoted are generally paid higher wages. The progressive wage model therefore merely reinforces such a system, so it is not an unique invention.

In fact, after Singapore introduced the progressive wage model in 2015, the minimum wages under the scheme were still not adequate for Singapore’s cost of living. The minimum wage of cleaning and security workers started at only RM3,466 (US$767) and RM3,813 (US$843), which were very low and inadequate for Singapore’s cost of living. Moreover, wages under the progressive wage model were also growing very slowly. In the chart below, we can see that up until 2022, the minimum wages in Singapore’s cleaning and security sectors were just as stagnant as Malaysia’s national minimum wage.

Due to the Covid-19 pandemic and the rising cost of living, Singapore’s government finally had an epiphany that it could no longer suppress wages, and implemented six-year plans to grow the minimum wages in the sectors covered by the Progressive Wage Model (see the dashed green lines in the chart below). From 2022 to 2028, the minimum wage of cleaning workers will grow from RM4,547 (US$1,006) to RM8,388 (US$1,856), or by RM3,840 (US$849) or 84%. In the security sector, the minimum wage will grow from RM4,998 (US$1,106) to RM12,235 (US$2,708), or by RM7,237 (US$1,602) or 145%.

So, if there is anything Malaysia’s government should learn from the progressive wage model, it is that Malaysia’s minimum wage is also growing too slowly, and the government would need to implement a similar multi-year plan to raise the country’s minimum wage.

Data source: Malaysia, Singapore. Note: The Progressive Wage Model also covers other sectors but this article focuses on the two sectors where the model has been implemented for the longest duration.

If Malaysia’s minimum wage is to grow at the same rate as Singapore’s cleaning sector, Malaysia’s minimum wage could grow to RM2,767 (US$612) by 2029. It would grow to RM3,672 (US$813) if it follows the rate of Singapore’s security sector.

The other aspect that Malaysia’s government can adopt from the model is the progressive wage credit scheme, which is a five-year plan to subsidize wage increases, so as to provide support for businesses to pay higher wages. In the first year of the scheme, the Singapore government subsidized 75% of wage increases for gross wages up to S$2,500; this would be gradually reduced to 15% in the fifth year, as businesses become better able to pay for higher wages. A similar scheme was implemented from 2013 to 2021. 

The Malaysian government thinks that it needs to adopt the progressive wage model in order to enable wages to rise at other wage levels, however this is a mistaken notion. The main reason why wages at other levels aren’t growing faster is because Malaysia’s minimum wage is rising too slowly, and because wage growth at other levels is dependent on how fast minimum wage grows, the stagnant minimum wage therefore prevents wages from rising across the board. As a result of Malaysia’s wages stagnating, this has resulted in its economy stagnating as well.

In the chart below, we can see that prior to the late-1970s, Malaysia’s GDP per capita (in US$ terms) was actually higher than South Korea (the red line is at a higher level than the light blue line). In the early-1990s, Malaysia’s GDP per capita was also similar to that of the Central and Eastern European countries like Czech Republic, Estonia, and Poland. In other words, Malaysia’s economy used to be larger than these countries. However, while the economies of these countries have since expanded rapidly, Malaysia’s GDP per capita stagnated in contrast. Today, South Korea’s economy has grown to three times larger than Malaysia.

Additionally, the GDP per capita of South Korea, the Czech Republic and Estonia have grown to over US$20,000 to become advanced countries today, while Poland is expected to follow suit next year.

The key reason why Malaysia’s economy stagnated is because its wages stagnated relative to these countries. Due to Malaysia’s wages stagnating, its domestic consumption also stagnated. Given that there is lack of demand in the market, domestic profits therefore also stagnated, thereby resulting in its economy stagnating.

The chart below compares Malaysia’s minimum wage with these countries. Today, South Korea’s minimum wage is almost 5 times higher than Malaysia, and the minimum wages of Czech Republic, Estonia, and Poland are about 2.5 times higher. Malaysia’s minimum wage data dates back to only 2013 because this was the year it was introduced.

As seen from the chart, the minimum wages of the other countries have been growing rapidly, while Malaysia’s minimum wage stagnated which poses a stark contrast.

Data source: Malaysia, other countries

Faster minimum wage increases lead to average wages rising faster as well. For example, a study in the United Kingdom found that raising the minimum wage led to wages for workers at other wage levels increasing as well, because businesses “attempted to preserve wage structures within their organization”.

Indeed, South Korea’s minimum wage has been growing the most rapidly, and its average wage is also growing the fastest. Today, South Korea’s average wage is over four times higher than Malaysia. Czech Republic and Estonia’s average wages are 3 times higher and Poland’s average wage is twice as high.

Again, while the average wages of the other countries have been growing more rapidly, Malaysia’s average wage stagnated contrastly. 

Data source: Malaysia, other countries

When comparing the total wages in the economy (or the compensation of employees), the availability of longer-term data allows us to have a better sense of how badly Malaysia’s wages have stagnated.

Up until the late-1970s, Malaysia’s total wages per capita were actually higher than South Korea, and were in fact over three times higher in the early-1970s. Today however, the tables have turned and South Korea’s total wages per capita are about four times higher than Malaysia. The total wages per capita of Czech Republic and Estonia were also similar to Malaysia’s at one point, but have grown to be about 3.5 times that of Malaysia, while Poland is twice as high.

Data source: Malaysia (1), (2), other countries. Note (1): The charts in this comparison illustrate data up until 2019, so as to show the general trend prior to the Covid-19 disruptions. Note (2): Malaysia’s data is not complete and the available data is denoted by a pink dot. The red line joins up the pink dots and provides an indication of the general trend. This applies to other similar charts as well.

Due to how slow Malaysia’s wages have been growing, this led to its household consumption expenditure per capita being lower than the other countries as well.

Malaysia used to have a higher household consumption expenditure than South Korea prior to the late-1970s, but South Korea overtook Malaysia after the former sped up its wage growth.

Data source: Malaysia, other countries

And because Malaysia’s wages and household consumption expenditures have been growing slower than the other countries, the relative stagnant demand means that domestic businesses have difficulty growing, and the total profits per capita in the economy (or gross operating surplus) are therefore also growing more slowly than the other countries.

From having higher total profits than South Korea, Malaysia then fell behind from the early-1980s onwards, as wages and household consumption expenditure also fell behind.

Given the stagnant wages and profits, Malaysia’s GDP per capita has thus been growing more slowly than these countries as a result. Malaysia’s GDP per capita used to be three times higher than South Korea in the early-1970s, but today, it is South Korea which has a GDP per capita three times that of Malaysia. Estonia and Poland also overtook Malaysia from the mid-1990s.

We have been fed the notion that it is necessary for wages to be depressed in order to attract investments and grow the economy, but the examples of these countries show that it is the opposite that is true – these countries have grown their wages faster than Malaysia, and have seen their economies grown faster as well.

Malaysia used to have higher wages and household consumption expenditures, and therefore higher profits and economic growth than these countries. However, after Malaysia suppressed its wage growth, its economy fell behind these countries.

Data source: World Bank

The disparity is most apparent when we compare between the sets of countries below.
In the charts below, we can see that when comparing South Korea (light blue lines) and Czech Republic (dark blue lines), their per capita total wages, household consumption expenditures, total profits and economies were growing more closely with with one another up until the 2008 economic crisis.

However, after the crisis, South Korea continued raising its minimum wage, and thereby allowed its total wages, household consumption expenditure, total profits and economy to keep growing. However, the Czech Republic stopped growing its minimum wage from 2008 to 2013, resulting in its total wages, household consumption expenditure, total profits and economy stagnating and falling behind South Korea.

It was only until 2013 when the Czech Republic started increasing its minimum wage again that its total wages, household consumption expenditure, total profits and economy picked up again to grow back in tandem with South Korea. But the damage was done, the Czech Republic lost five years of growth and was not able to catch back up with South Korea.

When comparing between Estonia and Poland, we can see a similar trend. In the late-1990s, the per capita total wages, household consumption expenditures, total profits and economies of Estonia and Poland were also growing more closely with one another.

However, after the 1997 economic crisis, Poland decided to slow down its minimum wage increases. From 2002 to 2007, Poland decided to depress the growth of its minimum wage, resulting in its total wages, household consumption expenditure, total profits and economy falling behind Estonia.

Poland soon learned from its mistake and decided to grow its minimum wage faster, and while this helped Poland recover, Estonia has been growing so quickly that it has left Poland behind.

Estonia and Poland expanded so quickly because after the fall of the Soviet Union, they wanted to develop rapidly in order to leave Russia’s orbit. The Eastern European countries therefore left behind their centrally-planned economies and reorientated and restructured themselves towards the Western European economic model. From the mid-1990s onwards, they started rapidly increasing their minimum wages, and as they became more competitive and productive, the need for skilled workers also resulted in wages rising even further, and contributing to economic growth.

In fact, when comparing only Malaysia and Poland, we can see that Poland’s per capita wages, household consumption and GDP were at a similar level as Malaysia in the mid-1990s.

When Poland grew its minimum wage faster in the late-1990s, it then started growing much faster than Malaysia. When it suppressed its minimum wage growth from 2002 to 2007, its per capita wages, household consumption and GDP stagnated and grew as slowly as Malaysia, but then it started growing faster again thereafter when its minimum wage started rising more rapidly, widening the gap between it and Malaysia. The 2008 economic crisis slowed down Poland’s growth for a bit, but it has since then drawn even further apart from Malaysia.  

Note especially that the ebbs and flows of household consumption expenditure and GDP follow that of wages. In other words, when wages grow, so does the economy. When wages stagnate, so too does the economy.

Estonia grew faster than Poland because its minimum wage was growing faster, which spurred its average wage to grow faster, and thus its economy as a whole growing faster as well. But because Poland’s minimum wage grew comparatively slower, its average wage was not pushed to grow faster.

As can be seen in the charts below, we can see that across these countries, average wage growth tends to follow that of the minimum wage, so in the years when minimum wage stagnates, average wage stagnates as well. On the other hand, when the minimum wage grows faster, it spurs the average wage to grow even faster. This is why if Malaysia wants overall wages to grow faster, the point isn’t to adopt the Progressive Wage Model. Rather, it is to grow the minimum wage faster, so that wages at other wage levels can grow faster.

When we compare Malaysia with South Korea, it gives us a better idea as to how the slower growths in Malaysia’s wages led to its economy growing more slowly than South Korea. Prior to the 1973 oil crisis, Malaysia’s per capita total wages, household consumption expenditure, total profits and economy was higher than South Korea.

However, in the 1970s, South Korea had accumulated more capital and decided to change its economic strategy from a labor-intensive to a capital-intensive one, and thereby decided to increase wages faster than other countries in the region. As a result, South Korea’s per capita total wages, household consumption expenditure, total profits and economy started growing faster than Malaysia, and overtook Malaysia by the late-1970s to early-1980s. As wages rose, so did worker skills and the sophistication of South Korea’s industries, and thereby allowing wages to grow even further, and the economy to expand even more.

On the other hand, Malaysia’s stagnant wages prevented skills from rising as fast and together with the stagnant domestic consumption, resulted in the economy further stagnating.

After the 1985 economic recession, South Korea’s per capita wages and household consumption expenditure also kept growing, resulting in its economic growth escalating as well. On the other hand, Malaysia’s household consumption expenditure instead declined in the few years thereafter, resulting in its economy declining as well, before picking back up.

Even after the 1997 economic crisis, South Korea continued on its path of rapidly growing its wages, resulting in its household consumption expenditure and economy growing rapidly, while that of Malaysia stagnated. As such, the two economies started growing further and further apart.

Since 2000, South Korea’s minimum wage was growing by an average of 9% to 10% a year. Today, South Korea’s wages and economy have grown to being on par as Japan.

South Korea and Malaysia’s responses during the economic crises are noteworthy. South Korea would use the crises as opportunities to expand wages and thus domestic consumption, which in turn grew its economy. Malaysia would shrink wages which shrunk domestic consumption and the economy.

As such, one key reason why Malaysia fell behind South Korea is because since the 1970s, South Korea adopted a strong and focused wage-growth policy which enabled the country to become one of the most powerful countries in the world today, ranking the 12th largest by GDP, while Malaysia stagnated and ranks 35th. In 1980, South Korea was only 28th.

Malaysian prime minister Anwar Ibrahim is therefore right when he said that Malaysia is “caught in a vicious cycle” of “low wages, low profits, and a lack of competitiveness”.Malaysia needs to grow wages much faster if it wants to achieve the same outcome as South Korea.

Singapore similarly decided in the 1970s that it would move away from labor-intensive industries into producing higher-value goods. During the 1973 oil crisis, instead of depressing wages, Singapore decided to increase wages significantly in 1973 and 1974 in order to help workers cope with the high inflation. Singapore’s chief economic advisor, Albert Winsemius, also cautioned in the late-1970s that if Singapore’s wages remained low, it would be “caught in a low wage trap”, and recommended pushing up wages in order to break out of the cycle, and to force labor-intensive industries to upgrade. From the late-1970s to early-1980s, Singapore’s wages were therefore raised rapidly in order to “discourage low-skilled intensive labor industries in favor of more high-tech and high value-added enterprises”. In 1979, 1980, and 1981, Singapore’s wages rose by 20%, 19%, and 19%, respectively. While wage growth slowed down for a few years after the 1985 economic recession, Singapore’s overall wages continued growing rapidly thereafter, enabling the growth of domestic consumption and profits, and economic growth to accelerate as well. If Malaysia had similarly followed Winsemius’s advice, its economy could have grown as quickly as Singapore’s has.

In the charts below, we can see how Singapore’s per capita household consumption expenditure, profits and economy have been growing rapidly due in large part to the high growth in wages, and how South Korea and Estonia are also growing rapidly alongside it, while Malaysia remains stagnated.

In the last two to three decades, while wages at the top continued rising rapidly in Singapore, wages at the bottom were held back, which leads to Singapore become highly unequal, and one of the most unequal countries among the advanced countries. In 2021, its government finally implemented a six-year plan to spike up wages in low-income sectors to remedy the situation.

When comparing with a few other fast-growing countries, the same pattern can be seen.

In fact, comparing Malaysia with Romania can perhaps give us guidance as to how best Malaysia can develop at its current stage. In the last decade or so, Romania’s per capita wages, household consumption expenditure, profits and GDP (see the black lines in the charts below) were about the same level as Malaysia (see the red lines). However, since 2017, Romania started growing faster to overtake Malaysia, and is also catching up with Poland (see the green lines).

The reason why Romania has been able to catch up with Poland is because from 2017, it started raising its minimum wage more rapidly. In 2014, Romania’s minimum wage was as low as Malaysia, and both their minimum wages were only half that of Poland. Today, Romania’s minimum wage has grown to about 75% of Poland’s, while Malaysia’s has stagnated and declined to only about one-third that of Poland. Due to how fast Romania’s minimum wage has been growing, its average wage has also caught up with that of Poland, while Malaysia’s minimum wage has stagnated.

But not only that, Romania has continued to raise its minimum wage as quickly as Poland. Poland announced that it planned to increase wages by about 20% next year compared to the start of this year, while Romania will raise its minimum wage by about 25%. Both their minimum wages will be raised by about RM800 (US$177) next year.

Due to how fast it is growing, Romania’s GDP per capita is expected to grow to over US$20,000 to become an advanced country next year, just as Poland will.

On the contrary, Malaysia has fallen behind because its wages are growing too slowly, leading to its economy stagnating as well. If Malaysia starts increasing its minimum wage as Romania did in the last decade, it could possibly enable Malaysia to become an advanced country by the turn of the decade.

Data source: Minimum wage (Malaysia, other countries), Average wage (Malaysia, Poland, Romania (1), (2), (3))

The best way to look at how suppressing wage growth can lead to the economy stagnating is to compare between Taiwan and South Korea. I’ve been writing about Taiwan’s low wages for the last few years, and when comparing between the two countries, Taiwan’s wages and economy used to be larger than South Korea. However, Taiwan stopped growing its minimum wage for many years after 1997 and allowed wages to stagnate, resulting in South Korea overtaking Taiwan and Taiwan falling behind. Today, South Korea has the highest minimum wage in Asia while Taiwan’s minimum wage has become one of the lowest among the advanced countries.

Indeed, as the European Central Bank explained, household consumption expenditure is a key driver of economic growth, and as the growth of Malaysia’s household consumption expenditure slowed, so has its economy.

And as wages are a key driver for the growth of household income and household consumption expenditure, the slower growth in Malaysia’s wages has also led to its household consumption expenditure growing more slowly, and thus its economic growth.

In reality, the GDP is a function of wages and domestic consumption. When wages grow, domestic consumption grows, then domestic profits grow, and so the GDP. When wages stagnate, so do the rest.

The data in other countries therefore show that raising the minimum wage faster can have net positive effects to Malaysia’s economy. Not only can workers earn enough for the cost of living in the country, their higher wage earnings also push up domestic consumption, which in turn grows the profits of domestic businesses and Malaysia’s economy.

Singapore and South Korea understood this concept in the 1970s, and have thus used high wage growth to expand their economies into being the largest in the world today. This is a lesson that several Central and Eastern European countries understood in the 1990s, which have seen their economies expand rapidly since. A subset of Eastern European countries including Romania and Bulgaria are now gaining this insight and have started growing faster in the last decade.

When announcing the MADANI Economy framework, prime minister Anwar Ibrahim acknowledged that Malaysia’s wages are low, and that wealth needs to be shared in order to “build a more equitable and prosperous society”. As such, he said: “The success of economic structural reforms should be assessed in terms of how far it can create more jobs with meaningful wages for all Malaysians.”

If Malaysia can successfully embark on its new approach of high wage-led growth, this can enable Malaysia to be the first to grow faster than the rest of developing Asia in this new era, and enable it to become the next advanced country in Asia.

In the next part of this article, we look at how much faster the growing rate of Malaysia’s minimum wage will enable workers to earn more adequately for the country’s cost of living, as well as enable Malaysia to become a leading country in Asia.

READ NEXT: Taiwan’s Focus On Low-Cost Manufacturing Has Led to a Lack of Innovation in Its Economy

TNL Editor: Kim Chan (@thenewslensintl)

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