PETALING JAYA: The decision to exempt micro, small and medium enterprises (MSMEs) from the next minimum-wage increase could leave nearly half of Malaysia’s workforce outside the reach of a higher wage floor, prompting concerns that efforts to shield smaller firms from higher labour costs could come at the expense of workers’ wage growth.
According to the Statistics Department, MSMEs employed 8.09 million people, or 48.7% of the country’s workforce, in 2025.
“This means almost half of the workers will not benefit from the minimum-wage increase. And we are back to square one.
“Square one here means that people are still contending with low wages and affordability,” Monitoring Sustainability of Globalization director Charles Santiago told StarBiz.
In August, the government began reviewing the RM1,700 monthly minimum wage, with the rate now being considered for an increase to RM2,000.
The RM1,700 minimum wage has been in force since August 2025, replacing the RM1,500 rate introduced in May 2022, which had replaced the RM1,100 minimum wage introduced in January 2019.
Last Saturday, Prime Minister Datuk Seri Anwar Ibrahim said it was untenable for companies to make billions of ringgit in profits while workers continued to earn just RM1,700.
However, on Wednesday, the Cabinet said MSMEs would be exempted from the new minimum-wage increase for the time being, with the government instead looking at other measures to help raise wages in the MSME sector, including wage subsidies under the Progressive Wage Policy.
“There is a contradiction there. The excuse is that MSMEs cannot afford higher wages.
“But MSME’s gross domestic product grew 5.7% in 2025, faster than the overall economy’s 5.2%, while labour productivity rose 4.1% to RM85,299 per worker a year.
“For every RM100 our economy produces, workers only receive about RM34.
“The government promised to raise it to RM40 by 2025 under the 12th Malaysia Plan but had missed it,” Santiago said.
Instead of a blanket exemption, the government could support MSMEs through buffer funds, pointing to measures in South Korea and Japan, and/or make the Progressive Wage Policy mandatory.
“When South Korea raised its minimum wage sharply in 2018, it kept one wage for everyone and gave small firms a monthly subsidy for each low-paid worker.
“Firms that got the help kept their staff,” he said.
UOB senior economist Julia Goh said a key risk from the exemption is greater labour mobility, as workers may switch employers for better pay.
“While higher wages should encourage productivity gains, firms that do not adjust wages accordingly may struggle to attract and retain workers, leading to labour shortages and higher turnover.
“Rather than capping wage growth, policy should focus on helping MSMEs become more productive,” she said.
UCSI University Malaysia finance associate professor and CME research fellow Dr Liew Chee Yoong said the Cabinet’s proposed use of the Progressive Wage Policy provides one avenue, but its effectiveness will depend on how many employers participate and how many workers benefit.
“The government could share the transition cost through temporary, targeted wage subsidies, supported by productivity grants, training and working-capital assistance.
“A predictable implementation schedule would also help firms plan for higher payroll costs.
“Assistance should prioritise businesses facing genuine financial constraints and be conditional on verified wage increases, with subsidies gradually withdrawn as firms adjust,” he said.
Liew noted a prolonged exemption could widen wage disparities between workers in smaller and larger firms, constrain workers’ purchasing power and weaken incentives for businesses to improve productivity.
Sunway University economics professor Yeah Kim Leng said the exemption protects MSME employment in the short term but dilutes the demand-stimulating and poverty-reducing effects of a higher wage floor.
He noted MSMEs’ performance varies widely, with firms in the bottom 20% to 30% most likely to struggle with a higher minimum wage.
To this end, Yeah said the government could give such companies time to adjust through targeted wage incentives or subsidies for a defined period, ideally tapering over time, alongside tax reliefs or grants to improve workers’ skills and productivity, reduce business costs and encourage automation.
“From an employment perspective, the labour market is functioning well, with unemployment low at around 3%.
“However, it performs less well on wages, as the median wage remains below RM3,000, and wage distribution is skewed toward the low end, leaving disparity wide.“
Sharper increases in the cost of living have also eroded the purchasing power of wage income.
“The issue is structural rather than purely social or cultural, and that active labour market initiatives, including regulatory support, are needed to spur faster and more inclusive wage growth,” he said.
