Higher wages – a key reform agenda

WHEN the Madani Economy framework was launched at the end of July last year, one of the key challenges that were identified was the low labour share of income at just 32.4% as well as the low monthly median wages of RM2,250 based on 2022 data.

Fast forward to 2024, Malaysia’s median wages have increased to RM2,844 as at the first quarter of this year, a jump of 26.4% compared with the level seen in 2022.

Under the Madani framework, the government has charted the nation’s course over the next 10 years with ambitious targets, among them the goal of decent jobs and fair wages, with a labour share of income target of 45%.

Although a long way from the target, last week’s announcement by Prime Minister Datuk Seri Anwar Ibrahim on the increase in civil servants’ pay is expected to get the ball rolling.

Productivity gains?

Wage growth typically follows from productivity gains and of course, in normal circumstances, it is also indexed against inflation to ensure real wage growth is achieved. In Malaysia’s case, productivity growth slowed to just 0.7% year-on-year (y-o-y) in 2023 from the robust 5.4% growth achieved in the preceding year.

Compared with the pre-pandemic level in 2019, productivity growth in 2023 was only 2.7% higher.

This year, with the 5.1% growth in the economy in the first half, productivity gains, as measured by value added per employment, were also modest, rising by just 2.6% y-o-y in the first half of this year, according to the Statistics Department’s latest data.

Measured by productivity per hour worked, growth slowed to just 2.2% in the first half of this year.

When it comes to wages and productivity, there are two sides to the argument. Employers tend to use productivity as a yardstick for higher wages, while for employees, higher salaries can translate to a higher commitment to perform better.

Raising wages also increases job satisfaction as well as motivates them to do better. Staff retention ratio too will improve while employee turnover will decrease as workers see their contribution to the company appreciated.

Positive spillover

In the “Economic Outlook 2024 Report” released last year under a featured article entitled “Wages as a Source of Growth”, it was shown using the Computable General Equilibrium model carried out by the Centre for Future Labour Market Studies (EU-ERA), wage growth is seen as having a positive effect on macroeconomic indicators.

The model suggests that a 3% rise in wages could lead to a 5.6% increase in nominal gross domestic product (GDP), a 4.2% jump in productivity, and at the same time reduce income inequality by 2.2%.

Correspondingly, a 5% rise in wages will see the nominal GDP rising by 6.5%, productivity will improve by 5.4% and income inequality will narrow by 2.5%.

The model suggests that higher wages are good for the economy.

The report further noted that the issue of low wages in Malaysia is linked to productivity growth, with the prevailing belief among employers that productivity should rise before wages are increased.

For some employees, higher wages are all that matters, but there is a growing appreciation for non-monetary rewards, particularly among the younger generation.

These include working from home, training and development, better employee perks, and a good working environment with a positive culture. In the end, it is not just about the money, but also about overall job satisfaction, which in some way, is unmeasurable.

Minimum wage review

The minimum wage takes into consideration Poverty Line Income (PLI), median income, inflation, productivity growth, and unemployment.

Thus, ultimately, the minimum wage should be set at a level that is at least higher than the PLI threshold.

Even based on the absolute PLI of RM2,589 per month in 2022, the current minimum wage at RM1,500 per month seems to suggest we are at least 40% below the absolute PLI.

For minimum wage calculations, the right benchmark is the relative PLI, which is defined as households earning between the absolute PLI and 50% of the national median monthly household income.

Based on the 2022 median monthly household income of RM6,338, the 50% of the national median is RM3,169.

This suggests that the current minimum wage is not even half of the relative PLI based on 2022 data!

Surely an adjustment to the nation’s minimum wage is timely and must be addressed appropriately.

Malaysia should raise its minimum wage to about RM2,000 from 2025 onwards and to RM2,200 per month by 2026. Future increases should be adjusted annually for productivity gains as well as inflation rates.

Although this will still be well below the absolute and relative PLI data, the 33% increase in minimum wages from the current level is seen as a big jump for certain labour-intensive low-skill industries.

Of course, corporates are free to reward employees with even higher wages, as even at RM2,000 per month, it is not easy to make ends meet, especially when compared with Bank Negara’s 2018 findings, which indicated that living wages should be at least RM2,700 per month.

Raising wages will allow for more equitable income distribution among employees, and failure to do so will see our target of achieving 45% labour share of income a distant milestone.

With civil servants’ minimum wages set to increase to at least RM2,000 per month by Jan 1, 2026, it is only natural that the private sector takes the cue and follow suit.

As the labour share of income is a ratio where the size of the economy in ringgit terms serves as the denominator, assuming nominal growth of 6%-7% is attained in 2024 and 2025, the labour share of income has to increase at a faster pace to have a meaningful increase from the last reported ratio of 32.4%.

Only then will Malaysia be on the right path to achieving its target of 45% by 2035. Hence, with higher civil servants’ wages, an increase in the minimum wage to at least RM2,000 effective next year will likely exert upward pressure on wages at the lower tier as well.

Expect backlash

Wages are sensitive issues for employer-based organisations such as the Malaysian Employers Federation and other interested parties, who tend to be more concerned about the impact on employers rather than employees.

The most common argument is that higher wages will result in companies going under and lead to a higher cost of living as “everything will go up in price”.

The thinking here is misguided as the labour share of income is less than one-third while the gross operating surplus among businesses is two-thirds of national income.

Clearly, corporations are making good money but just simply refuse to pay better wages, preferring instead to hire cheap labour by using foreign workers.

In addition, as this column has pointed out before, wages on average account for only about 10% of the total cost for most businesses. A 20%-30% increase in wages is not going to cause a big dent in the profitability of companies.

Yes, in certain industries, where wage cost could be as high as 20%-25%, it may be material, but a quick calculation suggests that even in these cases, the actual impact is not significant.

Businesses are also in for a better future with higher wages, as this will drive consumer demand, which in turn suggests a better growth prospect for most businesses due to a wider market reach and increased consumers’ affordability.

While salary increases may lead to price adjustments by businesses due to the higher cost of doing business, these increases should be modest. The winners will be wage earners with higher disposable income.

While Malaysia has taken baby steps in removing subsidies for diesel, it is hoped that with the civil servants’ pay adjustments, to be followed by higher minimum wages, the government will be more ready to remove petrol subsidies gradually.

Malaysia must not only make attempts to remove subsidies for RON95 gradually but in time to begin taxing the fuel to ensure the government not only saves on subsidies but generates income via taxes from the sale of petrol.

Once the structural problem related to low wages is addressed, Malaysia’s future growth prospects will be much more promising as we have raised the floor, allowing Malaysians to enjoy decent living standards and one step closer to achieving a higher labour share of income ratio.

Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.