Wage stagnation and productivity

Creating an economy in which employers compete for productive and skilled workers matched with high productivity growth would raise wages.

IN Malaysia, the trend towards wage stagnation or “slow and moderate” wage growth has caught the attention of policymakers, compelling them to find new ways to make work pay more and be more predictable.

There were explanations for these wage trends, mainly as the product of economic and industrial structures and policies, social forces as well as supply and demand-side mismatch and shift linked to the skill set, productivity and technological change, which has favoured the more skilled over the less skilled.

The diffusion of low-wage and skilled jobs in the manufacturing and services sectors since the 1980s, that included labour-intensive industries, and the presence of low-skilled foreign workers have distorted the wage-setting mechanism, leading to a suppression of local market wages.

Additionally, the presence of undocumented workers who are vulnerable to the employers’ exploitation also undercut not only the wages of these workers but also those in similar fields.

The collective behaviour (or oligopolistic power) of the employers enabled them not only to reap as profits most of the productivity gains but also exerted reduced bargaining power for workers.

The share of compensation of employees to gross domestic product at 35.1% in 2021 was lower compared to the Philippines (36.7%), Singapore (37.9%), Taiwan (43%), South Korea (47.2%) and Japan (52.3%).

Despite the implementation of minimum wage (introduced in January 2013), productivity-linked wage system, the collective wage agreement, and wage support scheme to help improve the income of workers, they did not yield a significant impact on the wage structure of employees.

It should be surprising that the minimum wage policy has not only led to wage compression, causing stagnated average wage growth of the low-skilled and semi-skilled workers, but also used by some employers for benchmarking the starting pay of fresh graduates.

Median monthly wage of graduates grew by 7.1% per annum to RM2,066 in 2019 (RM1,800 in 2017) before declining by 11.3% per annum to RM1,624 monthly in 2022 (RM1,550 in 2020).

The numbers are telling. The median monthly wages of employees in the formal sector had grown by 4.1% per annum to RM2,424 in 2022 from RM1,500 in 2010.

It is not only moderate increases in nominal wages that should capture public attention, but rather the enduring weakness of real wage growth, which had increased by 3.1% per annum for the same period.

Between 2011 and 2021, annual real wage growth in Malaysia was 2.4% per annum, compared with 3.1% in Thailand and 4% in Vietnam.

As at the first quarter of 2023, of a total of 6.45 million employees in the formal sector, 73% of them earned less than RM5,000 a month, and 47% earned below the latest poverty line of RM2,589 a month.

More than half (56%) of total workers earned below the proposed “living wage” (RM3,047 monthly), which is defined as the minimum income necessary for a worker to afford adequate shelter, food and some forms of social participation and financial security.

According to the World Bank, stagnating wage growth has made Malaysia one the countries with the lowest household savings for the low and semi-skilled workers.

In the presence of a “dualistic” tendency of the economy, there is growing polarisation between a lower share of skilled employees in high-wage and high-productivity sectors and a growing mass of low and semi-skilled workers employed in low-productivity and low-wage sectors.

As at the fourth quarter of 2023, Malaysia’s share of skilled employment (those who are employed in managerial, professional or technician roles) was at 27.9%, followed by semi-skilled workers (59.9%) and low-skilled employment (11.9%).

The wage gap between low-skilled and high-skilled workers has widened over the last decade. In 2010, the gap between these groups was RM1,800 in 2010, and by 2022, the gap has widened to RM2,871 a month (RM2,474 in 2021), causing low-skilled workers not to be able to catch up with high-skilled workers.

No matter how we measure it, wage growth (accompanied by the productivity improvement) has not been rising fast enough relative to rising cost of living and eroded earnings power of the vast majority of the workforce. It makes many households vulnerable to economic and employment shocks and live financially precarious lives.

It is a deep concern that trends in moderate wage growth have profound consequences for the low-income households’ living standards.

For the bottom 40 income households, wage-related income accounts for the majority of their income, in addition to social safety protection systems safeguarded by the wage-based contribution to pension, and social insurance.

The slow and moderate wage growth and persistent deterioration in real wages as well as lower wage share not only worsen income inequality and slow living-standard growth but also cause permanent scarring effects on the labour productivity and national economic output.

The key economic policy challenge is what could and should be done to counter the persistent wage gap between low-skilled, semi-skilled and high-skilled workers. As the nation’s income and wealth continues to grow, what policies can we adopt to enable everyone to participate in a shared economic prosperity?

The pilot run project of the Progressive Wage Model (PWM) or Dasar Gaji Progresif, starting in June-August 2024, marks a significant step in addressing wage disparities and enhancing the Malaysian workforce’s skill set through training and productivity improvement.

The PWM has three basic features: voluntary implementation, incentive-based and productivity-related.

This voluntary participation pilot programme will involve 1,000 domestic micro, small, and medium enterprises from five sectors (construction, manufacturing, wholesale and retail trade, repair of motor vehicles and motorcycles, information and communication, and professional, scientific, and technical activities).

Based on the employers’ statistics registered through Portal Assist Perkeso as of May 29, 2024, a total of 290,659 employers are eligible to apply for the financial incentive under the PWM for the five sectors.

The focus is on those companies having Malaysian workers (excluding foreign workers) earning between RM1,500 and RM4,999 monthly basic wage covering 4.3 million employees or 66.4% of total employees in the formal sector.

Participating employers will receive financial incentives for up to 12 months, amounting to RM200 monthly for each entry-level employee and RM300 for non-entry-level workers.

The incentives are contingent upon employers submitting documentation for their employees’ participation in government-certified training programmes (at least 21 training hours during the period January to August 2024).

Since opening for the registration, about 500 companies have registered their interest to participate in this pilot run. A total of RM50mil has been allocated for this pilot project and it may be extended till June 2025.

How will the PWM benefit both employers and employees? The employers will be incentivised to hire employees that have the potential to perform better under this wage-linked to productivity and skills model.

Motivating employees through better pay, better working conditions, skills development and career progression can raise their productivity and help contribute to firms’ business growth.

The firms that participate voluntarily in the PWM will be in a competitive advantage of having better skilled and competent new workers as well as retain existing workers relative to those firms not participating in PWM.

Some employers may hesitate to participate in the scheme as they worry about bearing the fixed labour cost after the expiry of a one-year financial incentive. The business decision would have to consider all aspects, including finding a balance between fair workers’ compensation and investing in skills development, sustaining business growth and financial health.

The PWM intends to assist the firms’ transition towards creating better wage structure for the targeted employees. It is not a permanent feature to incentivise the firms as over-reliance on it would lead to a subsidy syndrome.

The firms and employers have to embrace a productivity-linked wage system, provide job-related training, reskilling and upskilling to their employees, which will be crucial in responding to industry and market trend changes, as well as an important contributor to innovation, productivity and wage growth.

Better wage structure for the Malaysian employees should not solely be determined by the government’s intervention through the minimum wage and PWM as well as other labour policies. Market environment, economic forces, the employees’ competencies and skill set are ultimately businesses’ consideration in the wage setting.

More importantly, employees must show strong initiatives for self-improvement and development and have the right attitude to learn new skills to keep pace with the industry’s needs.

The government needs to support industries restructuring towards high value-added industries and automation as well as attract high-quality private investment so as to generate demand for manpower with high skill sets and getting higher wages.

Creating an economy in which employers compete for productive and skilled workers matched with high productivity growth would raise wages.

The quality of our education, learning institutions as well as technical and vocational education and training must be enhanced to offer a clear career pathway for the workers with skill set credentials and competencies.

Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed are the writer’s own.

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