Higher wages is the solution

THE average Malaysian is struggling with cost of living issues, compounded by slower growth of median household income and continued rise in spending on basic necessities.

The findings in the fifth edition of Khazanah Research Institute’s State of Households report for 2019 to 2022, released last week, are not new. Many households have been burdened by inflation that has far outstripped wage increases since the economy reopened after the Covid-19 pandemic.

The report, released about three weeks before Budget 2025 is tabled on Oct 18, notes that there recovery lagged substantially with median household income 12% below the pre-Covid-19 trajectory, while mean household income was 13% below.

This means income inequality has widened as higher earners benefited more than the rest. This also impacted disposable income, which remained relatively stagnant in the review period compared to the upward trend from 2012 to 2019.

Increasing the wage scale to a living wage is the most important and immediate remedy. The government aims to increase wage share of national income to 45% by 2035 from 32.4% in 2022 through the Madani Economy framework.

As with any set of policies, however, this could be gradual and tied to economic growth and productivity. The main platform for implementing wage growth is the Progressive Wage Policy (PWP) which is in its pilot phase.

The PWP entails wage increments for workers through upskilling or re-skilling, with government support through wage subsidies to employers and enhancements. These are expected to be included in Budget 2025.

With all the touted high-value investments coming in, it is hoped the enhancements can accelerate wage growth through placements for workers and fresh graduates. There is also talk of a higher minimum wage being introduced in Budget 2025, but the problem is how employers use it as a benchmark for wage scales under which graduates get only slightly more than the current minimum wage of RM1,500.

It was reported that the minimum wage may be raised to RM1,800 or even to as high as RM2,000 in Budget 2025.

Even if raised to RM2,000, this would not be a living wage. To understand the scale of the gap between what many are earning and the reality of costs, one can turn to data from the Statistics Department, where shows that nearly a third of employees in the formal sector earned below RM2,000 in March 2024, compared with the median wage of RM2,844 in the same month.

In 2016, a single adult living in the Klang Valley by renting needed at least RM2,700 as a living wage, according to a 2018 Bank Negara report.

The living wage now is probably much higher now, especially with the surge in prices stemming from the pandemic lockdowns and supply-chain issues.

A wage rise will also help stem the decline in disposable income, which the report noted affected lower- and middle-income households. Many had to withdraw their retirement savings from the Employees’ Provident Fund (EPF) under the various relief programmes. Those under 30 and in the lowest income group were the hardest hit as over 90% did not have the basic savings target for their age group.

The EPF only covers the private sector or 60% of the total labour force. While civil servants are getting a pay rise, it is hoped that Budget 2025 will have more initiatives for those in the informal sector such as gig workers, as done in Budget 2024.

A fifth of all workers are in the informal sector today, most of whom probably have no savings plan. Even among the 8.6 million active EPF members, only a third have reached the basic savings threshold of RM240,000.

Besides targeted subsidies, higher wages means putting cash into the pockets of those who need it most. Following the Covid-19 pandemic, there are now more people in poverty than ever, and urban households saw poverty rates rise to 4.5% in 2022, up from 3.8% in 2019.

When people have more disposable income, they can choose what to spend their money on.

When incomes rises, so does spending. Expenditure has risen quite a bit for poorer households as well as urban ones.

From 2019 to 2022, lower-income households recorded a higher share of consumption expenditure than higher-income households, according to the report. Households spend most of their money on housing and utilities, food at home and dining out, and transportation.