What you need to know
If Malaysia wants to become one of the 30 largest economies globally, one way it can do so is to implement a seven-year plan to raise its minimum wage.
Malaysia’s government is reviewing its minimum wage and considers adopting Singapore’s Progressive Wage Model to raise its wages with a faster rate of growth.
In the first part of this article, I compared Malaysia with other countries of similar economic development to show that the reason why Malaysia’s economy has not been growing as fast as the other countries is due to the country’s low wage levels. Indeed, countries like South Korea, Estonia, the Czech Republic, and Poland had similar GDP per capita as Malaysia before but after they sped up their minimum wage growths, their economies have far surpassed Malaysia.
In this part of the article, I will look at the extent that Malaysia’s minimum wage could be raised if it follows Singapore’s Progressive Wage Model, and also look at the benefits that raising its minimum wage more rapidly can have to its economy.
The Malaysian government has been discussing the adoption of the Progressive Wage Model, and plans to table a policy paper on this at the National Economic Action Council (NEAC) this month. I explained in the previous article that this model was introduced in various low-income sectors in Singapore starting from 2015 but even so, the minimum wages in each sector remained low and stagnant.
After the Covid-19 disruptions and the accompanying cost of living rises, Singapore’s government finally realized the need to raise wages faster, and thus implemented six-year plans to rapidly grow the minimum wages in the various sectors. For example, from 2022 to 2028, the minimum wage of cleaning workers will grow by 84% to RM8,388 (US$1,856), and in the security sector, it will grow by 145% to RM12,235 (US$2,708).
If Malaysia is to adopt the model, it should be seeking to similarly enact a multi-year plan to dramatically lift Malaysia’s minimum wage. If following Singapore’s growth rates above, it could see Malaysia’s minimum wage growing to between RM2,767 (US$612) and RM3,672 (US$813) by 2029. As discussed in the previous part of the article, the economies of the Central and Eastern European countries have been growing much faster than Malaysia because their minimum wages have been rising rapidly. Faster wage growths will lead to higher domestic consumption and thereby the profits of domestic businesses, leading to higher economic growth.
If Malaysia’s minimum wage were to grow as fast as Singapore’s Progressive Wage Model, its minimum wage would be able to grow as fast as these countries and enable its economy to catch up with these countries.
Even so, note that the other emerging economies are also implementing plans to grow their minimum wages as well (see the dashed lines in the chart below). For example, Poland plans to raise its minimum wage by over RM800 (US$177) next year to RM4,964 (US$1,099), while Estonia is implementing a four-year plan which could see its minimum wage increase by almost RM2,000 (US$443) to RM5,620 (US$1,244) by 2027.
A minimum wage of RM2,767 (US$612) to RM3,672 (US$813) is also the amount that would be needed for a basic standard of living in Malaysia.
According to Numbeo’s cost of living estimator, an individual would need to earn about RM2,756 (US$610) in order to have a basic standard of living in Johor Bahru while an individual would need to earn about RM3,365 (US$745) in order to do so in Kuala Lumpur. In other words, Malaysia’s current minimum wage is only adequate to meet about 45% of the basic cost of living needs in Kuala Lumpur and about 55% of the needs in Johor Bahru.
Back in 2018, a report by Malaysia’s central bank calculated that RM2,700 (US$598) would be the minimum income needed for an individual to “survive” in Kuala Lumpur. Accounting for inflation, this amount would be over RM3,000 (US$664) today, which aligns with the data on Numbeo.
Malaysia’s minister of economy Rafizi Ramli said that Malaysia’s minimum wage increases are intended to ensure that “people’s income increases periodically in line with the rising cost of living”, but given that Malaysia’s current minimum wage is severely inadequate for even a basic standard of living in the country, the minimum wage needs to not only rise “in line” with the cost of living, it needs to rise even faster, and not only “periodically”, but until the minimum wage reaches an adequate level.
Malaysian prime minister Anwar Ibrahim announced the ‘MADANI Economy’ framework last week to review Malaysia’s minimum wage and improve Malaysia’s quality of life. A goal of the framework is to “make Malaysia the leader of the Asian economy,” but Anwar acknowledged that in order to do so, Malaysia’s economic structure needs to be revamped.
If Malaysia is to continue to be “a leader in the Southeast Asian region”, it therefore needs to maintain its lead in terms of wages, so that its economy will grow at a commensurate level.
As it is, the two major parties which won Thailand’s recent general election, Move Forward and Pheu Thai, have promised to increase Thailand’s minimum wage to 450 baht a day this year and 600 baht by 2027, respectively, which means that Thailand’s minimum wage could grow to RM1,805 (US$399) this year and to RM2,406 (US$532) by 2027. This will lead to their minimum wage surpassing Malaysia’s current minimum wage by close to RM1,000 (US$221). I previously wrote about how Thailand's faster minimum wage growth will also benefit its economy by helping to reduce unemployment and raise productivity.
In order to remain competitive with Thailand, Malaysia would thus need to implement a multi-year plan to raise its minimum wage. If Malaysia were to implement minimum wage increases similar to Singapore’s six-year wage growth plans, it would enable Malaysia’s minimum wage to keep up with Thailand, and thus, maintain its economic competitiveness. By doing so, Malaysia and Thailand can also spur and support each other to grow faster, so that they can transform and inspire the region with their new models of economic growth based on higher wages, to become one of the most powerful countries in the world.
When comparing the adequacy of minimum wage with the basic cost of living needs, Malaysia’s current minimum wage is the least adequate among the countries mentioned in this article. Calculating based on Numbeo’s cost of living estimator, Malaysia’s minimum wage is only able to meet about 45% of the basic cost of living in the country, putting house rentals into account, , while South Korea’s minimum wage would be able to fully cover people’s basic cost of living in the country. Poland’s minimum wage would be adequate for about 60% of the country’s basic needs, and Estonia’s would be adequate for over half of its basic needs.
Among higher-income and more advanced countries like those in Western Europe, their wages have reached a level more adequate for their basic living needs, and they do not need to grow their minimum wages as quickly in order to catch up. But for emerging economies like those in Central and Eastern Europe, their wages are still less adequate and they have therefore been raising their wages much more rapidly in order to catch up. Since 2013, the Czech Republic, Estonia, and Poland have been increasing their minimum wages by an average of about 8% to 9% annually in order to do so.
However, Malaysia’s minimum wage has only been increasing by an average of only 5.5%. At this rate, it would take two decades for Malaysia’s minimum wage to become adequate for the basic cost of living today.
Higher wages would enable consumers to spend more domestically, which would allow domestic businesses to earn more profits. Given that domestic sectors make up the bulk of the overall economy, higher domestic profits would thus enable the overall economy to expand faster, as the examples of other countries have shown.
For the sake of illustration, if Malaysia’s wages had continued to grow after the 1973 oil crisis and the 1985 economic recession, and as fast as South Korea did, Malaysia’s GDP per capita could have grown to US$35,000 today, like South Korea has. And if Malaysia’s wages had continued to grow after the 1997 economic crisis just as Estonia and Czech Republic did, its economy could have grown to US$25,000 to US$30,000 today, just as these countries have. In other words, Malaysia’s GDP per capita could have grown to the level of that of a developed country if it had grown its wages as quickly as these countries.
Nevertheless, if Malaysia’s government decides to grow the country’s minimum wage rapidly for the next decade or so, it could potentially enable Malaysia’s GDP per capita to surpass US$20,000 in the next decade and achieve its goal of becoming a developed country. As an indication, for South Korea, Estonia ,and the Czech Republic, it took them between 9 to 13 years to grow their GDP per capita from around US$10,000 to US$20,000, based on their rapid wage growth.
When announcing the MADANI Economy framework, Malaysian prime minister Anwar Ibrahim also declared his aim of transforming Malaysia’s economy into one of the 30 largest in the world, from its position of 37th last year.
If we compare Malaysia with other advanced countries with similar population sizes, Canada’s GDP ranked 9th, Australia ranked 12th and Poland ranked 21st. The rankings of these countries show the potential that Malaysia can achieve, based on its population size.
If Malaysia is aiming to become one of the world’s 30 largest economies, then it should be aiming to be close to where Poland is today.
South Korea’s population is about twice that of Malaysia’s, and in U.S. dollar terms, it currently ranks 13th though in Malaysian Ringgit terms, it has surpassed Australia. In 1960, South Korea’s GDP per capita was closer to that of Malaysia, and was only about 10% the size of Australia but it has grown so quickly that today, it has grown to be on par with Australia.
As mentioned in the first part of this article, the reason why South Korea’s economy has been growing so rapidly is because it has been growing its wages rapidly as well. South Korea’s minimum wage has been growing the fastest among these countries, which has allowed it to narrow the gap between it, and Australia and Canada, and which also explains why its GDP has been rising rapidly as compared to the other countries. (Note that South Korea has a population twice the size of Australia and Germany, and thus even though its minimum wage is lower than that of the other two countries, when multiplied by its population, its GDP is on par with theirs.)
Indeed, countries with higher minimum wages also have higher GDP, and when comparing between countries with similar population sizes, Malaysia has the lowest minimum wage and thus the lowest GDP among these groups of countries. Australia and Canada have the highest minimum wage and also the highest GDP. Poland is raising its minimum wage rapidly in order to catch up with the other advanced countries.
Malaysia’s minimum wage is not only the lowest but also stagnant as compared to the other countries, and if it aims to become one of the world’s 30 largest economies, then it would need to implement a multi-year plan to dramatically grow its minimum wage.
As discussed in the previous part of the article, Romania’s per capita wages, household consumption expenditure, profits and GDP were at a similar level as Malaysia and were growing at the same rate. However, from 2017, Romania decided to raise its minimum wage more rapidly, which has allowed it to grow faster than Malaysia, and catch up with Poland.
As such, if Malaysia wants to become one of the 30 largest economies globally, one way it can do so is to implement a seven-year plan to raise its minimum wage at the same rate as Romania. To achieve the same minimum wage growth as Romania, Malaysia can institute a plan to raise the minimum wage by 15% or RM350 (US$77) annually until 2030. This would be similar to Malaysia adopting the six-year plan as mandated for Singapore’s security and cleaning sectors under the Progressive Wage Model.
If such a plan is followed through, it would enable Malaysia’s minimum wage to grow fast enough to boost domestic consumption and profits, and give Malaysia a good chance of becoming an advanced country by the early-2030s.
Malaysia’s businesses need a new mindset
Last month, Malaysia’s economy minister Rafizi Ramli said the government is financially constrained when it comes to increasing the minimum wage, and warned about the “risk” of inflation when increasing the minimum wage.
The thing to note however is that generally, higher wages lead to higher consumer prices, this is a natural economic phenomenon. And even when wages do not rise, businesses will still raise prices anyway in order to earn higher profits, as we learned from Taiwan’s situation in the late-1990s and 2000s. In such a case, productivity gains are then not being fairly shared with workers and are absorbed by businesses, but in the end the stagnant domestic consumption will still weaken business growth in the longer term. So the point isn’t about whether higher wages will lead to higher prices. The point is that prices will rise anyway, and if wages can rise fast enough to be faster than price increases, it can then enable purchasing powers to rise and benefit workers overall.
In the other countries in this comparison, their wages have been rising rapidly, which therefore allowed wage increases to be higher than consumer price increases, and thereby increasing the purchasing powers in these countries. However, in Malaysia, because wages have been growing too slowly, this enabled consumer price increases to eat up much of the wage growth, and thereby constraining purchasing powers, and raising household debt, as prime minister Anwar Ibrahim pointed out.
Indeed, a review of 20 studies in the U.S. found that increasing the minimum wage by 10% leads to overall prices increasing by only 0.4% while food prices will increase by no more than 4%. Another study by the United Kingdom’s government also found that a 10% increase in minimum wage would only lead to prices increasing by 0.23% and 1.10%. In other words, faster minimum wage increases can enable purchasing powers to increase, even as prices increase. The problem arises when the minimum wage increases too slowly, and allows price increases to overpower it, which leads to stagnant demand, debt and slow overall growth.
As such, because Malaysia’s wages have been growing too slowly, this meant it has been difficult to rely on growing domestic consumption to earn higher profits. Businesses therefore resort to increasing consumer prices even faster in order to earn higher profits. As a result, Malaysia’s domestic profits have been increasing faster than wages, as can be seen in the chart below.
On the other hand, when comparing the other Central and Eastern European countries, due to how fast their wages have been increasing, this enabled their wages to grow faster than domestic profits. Yet it does not mean that their profits are growing slowly. In fact, their dollar-profits are growing even faster than Malaysia, not in spite of their faster wage growth, but because of their faster wage growth.
Indeed, in 1970, Malaysia’s non-manufacturing profits per capita was RM422 (US$93) while that of South Korea was lower, at RM149 (US$33). However, today, South Korea’s non-manufacturing profits per capita have grown to RM37,764 (US$8,358) while Malaysia’s profits are only RM20,218 (US$4,474).
In 2020, Malaysia’s wage share of 37.2% is the lowest among these groups of countries compared (see chart on the left in chart below), while its profit share of 60.1% is the highest among this group of countries (see chart on the right). This might give the illusion that Malaysia’s businesses are earning high profits.
But when we look at it in terms of the actual Ringgit value, Malaysia’s total profits are actually the lowest among these countries (see chart on the right in the chart below).
As such, because Malaysia’s wages are low (see chart on left), this led to low household consumption expenditures, low profits, and thus a much lower GDP per capita as compared to these countries.
Malaysia’s high profit share therefore masks the fact that its wages and economy are growing too slowly. If Malaysia’s wages were to have grown as quickly as these countries, the profits of its businesses would be much higher today as well, and Malaysia would have achieved its goal of becoming a developed high-income country a long time ago.
After Malaysian prime minister Anwar Ibrahim announced the MADANI Economy framework, president of the Small and Medium Enterprises Association of Malaysia (Samenta) William Ng said that, “revising the wages cannot be done rashly and must be accompanied by improvement in labor productivity and profit margins.” However, the fact of the matter is that Malaysia’s profits are already increasing faster than wages when compared with other countries, but wages are still growing slowly. In other words, Malaysia’s productivity gains are not being fairly shared with workers.
The other way to look at it thus is that Malaysia’s businesses have been retaining profits for themselves more so than the other countries, and are not sharing revenue growth fairly with workers.
Ng also said: “much of the reason for wage stagnation is structural in nature,” such as a “declining learning culture”, and that, “these cannot be solved by simply forcing businesses to pay more”. However, research shows that it is when productivity gains are not shared with workers, that they lose motivation at work, when they realize that they are not being compensated fairly for their work. Businesses have not right to blame workers for losing their motivation to learn when businesses do not share productivity gains with workers fairly.
As we have seen in this article, it is by increasing wages that will increase domestic demand and labor productivity, and thereby profits. If Ng does not think that wages should be increased at a faster pace, this will only lead to Malaysia’s productivity and profits further stagnating. Anwar therefore rightfully recognized that in order to rebalance the economy, “benefits of growth must be distributed equitably, and rakyat’s wages must be commensurate with their work output”. When productivity gains are fairly shared with workers, this allows wages to rise faster which in turn allows productivity to rise faster as well, and leading to a virtuous cycle upwards for technological, profit, and economic growth.
Anwar also pointed out that one of the issues “plaguing [Malaysia’s] economic system is the problem of premature industrial contraction”. Indeed, when we compare Malaysia with other economies at a similar stage of economic development, while they are becoming more and more technologically complex (or are able to produce more innovative and productive technologies), Malaysia’s technology complexity has instead been stagnant. I explained previously that countries with higher wages also tend to have higher technology complexity, as the higher wages incentivize firms to put a greater focus on investing in innovation and moving towards higher-value production.
A key reason why Malaysia's manufacturing sector lost its potential is therefore due to the low wages which resulted in its manufacturing sector losing its ability to transform into higher-value manufacturing, and preventing Malaysia from competing with the other advanced manufacturing countries like South Korea, Germany, Sweden and Switzerland.
On the other hand, Malaysia is also no longer able to compete on costs with other lower-cost manufacturing countries today. This has left Malaysia in limbo as it is no longer cost-competitive but has not developed its high-value industries to an adequate level to compete. Anwar is therefore right to reorient Malaysia’s economy and to abandon the low-wage model, so that this can create the impetus to “revitalize the industrial sector and drive new economic growth”.
As Alessandro Caiani, Alberto Russo and Mauro Gallegati explained in their study, “a distribution more favorable to workers does not compromise firms’ profitability, but rather strengthen it by creating a more favorable macroeconomic environment, which encourages further innovations, stimulates investment, and sustains economic growth.” The researchers explained that, “faster growth of low- and middle-level workers’ wages, relative to managers’, generally exert beneficial effects on the economy and allows to counteract the labor-saving effects of technological progress,” which in turn “improves public finance, reducing public debt-GDP ratios; it increases firms’ profitability; it contributes to dampen the volatility of main aggregates when technological change proceeds at faster pace.”
Malaysia should not be sidetracked by the Progressive Wage Model
By comparing with other countries which used to be at a similar stage of development as Malaysia, this enables us to compare their growth pathways, and to see why Malaysia fell behind.
These countries have been able to grow their economies rapidly by increasing their minimum wages rapidly, which thus drove total wages in their economies to expand rapidly, thereby spurring the growths of domestic consumption and profits, as well as their economies.
Due to Malaysia’s stagnant wages, it is exploring the possibility of adopting Singapore’s progressive wage model in order to grow wages. But the examples of the Central and Eastern European countries show that the key action that Malaysia needs to do is to grow its minimum wage faster.
This is in fact the lesson Singapore learned as well. The Progressive Wage Model was implemented in 2015 but wages were still growing slowly. Thus by 2021, the government finally decided to implement six-year plans to increase the minimum wages of workers under the model by as much as 145% or RM7,237 (US$1,602). While it has not been said, this is a tactic admission that the progressive wage model doesn’t work, and that in order for wages to grow, the minimum wage for each sector needs to be grown at a faster rate.
Moreover, as explained in the first part of this article, faster minimum wage growth will also lead to wages at other wage levels growing faster as well and thus higher median wages for middle-income workers. Malaysia's Economy Minister Rafizi Ramli said that the biggest unintended consequence for the country's minimum wage is that it has "actually dragged down skilled workers' salaries". He said that because the minimum wage is low, "it became the reference salary even for a skilled worker, ... [which] distorts everyone else’s pay." He is right in saying this, but he then says that the way to uplift wages for skilled workers is to implement a Progressive Wage Model, and that the minimum wage is "only meant for unskilled workers". But this is a strange way to look at the problem. The fundamental reason the minimum wage is dragging down everyone's wages is because it is too low. If the minimum wage is not uplifted to a level that can address basic living needs, then when wages as a whole are still low, even wages set under the Progressive Wage Model won't be able to be set at a much higher level. The key therefore is to ensure that even wages at the bottom are adequate, to push wages higher up. Rafizi also said that in this discussion, the "largest stakeholders are employers". But shouldn't it be the workers?
The president of the Associated Chinese Chambers of Commerce and Industry of Malaysia, Low Kian Chuan, said that the Progressive Wage Model is “a win-win model for both employees and employers as it is a wage structure to uplift the low wages of workers through upgrading skills and improving productivity”. Samenta president William Ng also used the same rhetoric when he said that, “when the labor productivity improves, businesses will be able to pay far higher, and everybody wins”. But such a perspective is ill-informed.
Singapore’s progressive wage model was introduced on the assumption that workers needed to be higher-skilled in order for their wages to grow. But the evidence shows that it is when wages grow, that workers will become higher-skilled and more innovative, resulting in firms being more productive as well. The economy will in turn produce higher-value products, and thereby grows even faster. In other words, waiting for workers to become higher-skilled in order to pay them higher wages is to put the cart before the horse. It is by increasing wages that workers will become more motivated, skilled and productive.
As the Social Protection Contributors’ Advisory Association Malaysia (SPCAAM) says, the Progressive Wage Model is “another charade and delaying tactic used to deny workers their rights. There is no ‘win-win’ as businesses have been winning big by exploiting workers for decades.”
Businesses would therefore need to abandon the idea that they need to wait for productivity and profits to rise in order to raise wages. Singapore tried that and it did not work, which is why it has implemented six-year plans to hike wages. The examples of other countries and research also show that it is by raising wages faster that productivity and profits will rise faster. This is how South Korea overtook Malaysia in the 1970s and grew to be on par with Australia, to become one of the 15 largest economies in the world today.
Raise the minimum wage to the level of basic living standard
Anwar’s MADANI Economy framework and the review of Malaysia’s minimum wage is therefore a step in the right direction. Most importantly, Malaysia needs to implement a multi-year plan to raise wages faster. If it can follow in the footsteps of the Eastern European countries which have raised wages rapidly after the fall of the Iron Curtain, Malaysia can potentially grow to become an advanced country within 10 to 15 years, and easily achieve its goal of becoming among the world’s 30 largest economies.
So really, it is not about whether Malaysia should adopt the Progressive Wage Model. Even if Malaysia adopted the model, but its minimum wage continues to remain low, it will not do much to resolve Malaysia’s wage and economic stagnation, it will just be window dressing. If the economy is to be more productive and grow faster, wages need to grow faster.
If there is one lesson to be learned from the progressive wage model however, it is that the government should provide wage subsidies to help businesses tide through the transition of wage increases.
As to how much the minimum wage should be raised, once it is raised to a level that is adequate for a basic standard of living, this would allow all individuals in society to spend at a level that would enable them to meet all their basic needs, and enable the economy to achieve an optimal level of domestic consumption, and thereby profit and economic growth.
Under the MADANI Economy framework, prime minister Anwar Ibrahim has announced a review of the country’s minimum wage. For a start, the government should work with civil society and the public to calculate an accurate reflection of the minimum income workers need to have a basic standard of living, and then implement a multi-year plan to raise the minimum wage to this level. And if Malaysia truly believes Singapore’s progressive wage model should be followed, then it should also implement a similar six-year plan to double Malaysia’s minimum wage.
READ NEXT: Malaysia Does Not Need the Progressive Wage Model, It Needs To Raise Minimum Wage Faster
TNL Editor: Kim Chan (@thenewslensintl)
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