Gradual minimum wage hike better

“The government needs to consider the timing, magnitude and quantum on this matter carefully,” Sunway University economics professor Dr Yeah Kim Leng (file pic) told StarBiz.

PETALING JAYA: The imminent hike in the minimum wage has caught the private sector off guard, with some cautioning the move may squeeze the economy.

"The increase of 25% in the minimum wage is sharp – from RM1,200 to RM1,500. We are still at the early stages of an economic recovery and a number of economies are still not out of the woods yet.

"The government needs to consider the timing, magnitude and quantum on this matter carefully," Sunway University economics professor Dr Yeah Kim Leng told StarBiz.

"We are also in a situation now where inflationary pressures are high due to the rise in input costs.

"I expect that there would be businesses that have no choice but to pass on the cost increases to the consumer sooner or later," he added.

Yeah said that at worst, some companies will shut down while others would experience some kind of a squeeze in their profit margins.

"The economy would likely feel higher inflationary pressures and there could be a situation where there would be a wage price inflation spiral, whereby people would clamour for more wage increases – especially those who are above the minimum wage level.

"If this happens, then it would defeat the whole purpose of a minimum wage increase as it erodes people’s purchasing power and neutralises or offsets any wage increase," he said.

Yeah said that the jump of 25% was significant and suggested the government plan instead for a gradual increase in the minimum wage that is staggered over a period of two years.

"Hopefully, the economy would have fully recovered in two years.

"Bear in mind, this is happening at a time on top of the strong increase in input costs. The 25% rise adds another layer of shock to the economy," Yeah said.

Meanwhile, the Malaysia Semiconductor Industry Association (MSIA) strongly urged the government to consider a more gradual increase in the minimum wage, to be spread out over the next three years.

"This will allow businesses time to gradually make adjustments to the wage structure, and to link productivity to wages, balancing between business survival, business competitiveness and the minimum wage," MSIA said in a statement.

MSIA president Datuk Seri Wong Siew Hai said: "The RM300 increase from RM1,200 to RM1,500 starting from May 1, 2022 is a substantial increase of 25% in basic pay.

"Electrical and electronics (E&E) companies do not have sufficient time to make adjustments to the wage structure and productivity improvements in order to remain competitive," Wong added.

MSIA also added that a gradual transition would help the E&E industry have an opportunity to be competitive, grow and prosper.

Malaysian Employers Federation (MEF) president Datuk Syed Hussain Syed Husman stressed in a statement that the increase in the minimum wage should be done in stages.

"A sudden increase of between 25% and 36% of the minimum wage rate is putting a lot of financial pressure on businesses, especially since most businesses are trying to rebuild their businesses that had been impacted by Covid-19 and the big floods," Syed Hussain said.

"Generally, the small and medium enterprises (SMEs) are still grappling with the efforts to recover their business due to the devastating impact of Covid-19 and the big floods in late December 2021. The decision to postpone the RM1,500 minimum wage implementation will make them more sustainable and more resilient" Syed Hussain added.

MEF added that SMEs, which constitute about 98% of all businesses in Malaysia, should be given a reasonable chance to recover their businesses first before the RM1,500 minimum wage is implemented.

"MEF supports the increase but it has to be gradually implemented. It is to be noted that not all local companies have the same financial ability," Syed Hussain said.

Meanwhile, Rakuten Trade head of equity sales Vincent Lau said that the labour-intensive industries would be most impacted by the increase in the minimum wage.

"These are mainly the glove makers and the electronics manufacturing services sectors. It will add on to cost pressures for companies. This is expected to impact the non-listed corporates the most and the family-operated small and medium-sized businesses," Lau told StarBiz.

The planned minimum wage hike to RM1,500 per month will be implemented nationwide for certain companies – initially the big firms and government-linked companies – effective May 1.

Notably, the minimum wage was last revised about two years ago on Feb 1, 2020.

CGS-CIMB said that the sectors that were likely to be affected by the 25% increase in the minimum wage are the plantation, manufacturing, construction and services segments.

These would broadly include the manufacturers of gloves, travel, food and beverage, hotel, retail and other related industries.

"The higher minimum wage will lead to the increased cost of goods and services for companies, which are likely to partially pass this on to consumers in the second half of 2022," CGS-CIMB said in its report.

However it noted that for companies that were not able to pass on the higher cost due to weak demand, profit margins and earnings could fall.

"On the bright side, the higher minimum wage will boost the purchasing power of the low-income group and help them cope with the rising cost of living, which is slightly positive for the consumer sector," the research house said.

"The higher minimum wage will also allow Malaysia to attract workers, and in some instances, speed up the decision to automate processes. The mid-level minimum wage in Indonesia, the Philippines, Thailand and Vietnam ranges from US$157 (RM659.95) to US$270 (RM1134.94) per month," it added.

TA Research said that it was quite surprised with the decision, given the earlier assurance that the minimum wage would not be raised so soon.

"Earlier, the government had said that the revised minimum wage would only be implemented by the end of the year. He mentioned that there may be certain sectors which will be exempted from implementing the minimum wage, adding that this exclusion may be for a period of about two years," TA Research said.

"Though the new minimum wage is past due, as it should be announced last February, we previously note that the increase should be postponed as most businesses are still in the recovery mode following the pandemic and the floods at the end of last year," it added.

TA Research also noted that the increase in wages would also raise overall consumption and help support domestic demand.

This is because low-income groups tend to have a higher marginal propensity to consume and purchase products, it said.

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