Of minimum wage, income inequality and salary ratios

I WAS looking through some of my old Google Docs on the subject of new hires. In the document, we were looking at paying a fresh grad for an entry-level position about RM2,000.

This was from about 2007. In the 15 years since, it turns out that RM2,000 for a fresh grad in an entry-level position is still fairly common.

I can’t remember precisely, but I think back then you could get a plate of chicken rice in KL for maybe RM4 or RM5? Maybe less? Today, RM 10 for that same plate wouldn’t be too surprising.

Given the recent discussions around minimum wage, I thought I would list some questions that have always made me wonder. Spoiler alert: this article remains somewhat agnostic on the question of minimum wage.

Another important caveat is that, somewhat to my regret, I have never taken an economics class, and haven’t analysed any real data.

The following consists of nothing more than the anecdotal observations of one humble columnist. Please take all my guesstimated numbers with a grain of salt.

One question to start with: how much should a person or family earn in order to live comfortably in the Klang Valley? (I know there’s a whole lot more to Malaysia than the Klang Valley, but that’s the only place I’m anywhere near qualified to write about.)

I believe the current minimum wage is RM1,150, and the current proposal is to raise it to RM1,500.

I think it’s fair to say that even with RM1,500, an individual will struggle to get through the month in KL, much less one with a family.

The thing I’ve always found strange is that I (and maybe you as well?) also know people who probably don’t feel that they can live comfortably and "worry-free" on RM10,000 a month.

Obviously, what we’re talking about here are different lifestyles. What I think is worth reflecting on is just how different those lifestyles are, for two people living in the same city.

I have a friend who has worked overseas for the greater part of his career now. On one of his trips back he asked me something like: “Nat, I hear everyone complaining about how bad the economy is, and how they’re not making enough ... But I go to the mall, and see that ridiculously overpriced restaurants and shops are all full!”

I have also found this to be something of a strange contradiction.

Again, this is based only on anecdotal observations, and not scientific data, but I dare say wages have not gone up much in recent years and decades.

This is perhaps even more true for low wage earners, fresh graduates, and such.

In the restaurants my friend was probably referring to, it’s fairly common to see meals costing upwards of RM30, coffee upwards of RM10, and so on. And indeed, most of them seem to be doing OK.

So who is eating at these places, and how much are they earning? (Perhaps another question we should ask is: what are the profit margins at these restaurants, and how much are they paying their staff?)

I think at even the cheapest places you can eat at nowadays, you can’t get a meal with meat for less than RM5 (another good reason to eat less meat?).

One of Malaysia’s more unique/interesting features is that the price difference between eating out and cooking at home is significantly smaller than in many other countries.

The flipside of that is, we aren’t saving an arm or a leg simply by cooking instead of eating out.

Doing some very quick and dirty guesstimates, looking at the current minimum wage and fresh graduate salaries, food alone might take up maybe a third or even half the monthly income of people earning at those levels.

I arrived at that estimate by budgeting RM15 a day for 30 days, making it a total of RM 450 – which at some of KL’s fancier (and usually well patronised) restaurants, can easily be the cost of lunch for one family.

Such fancy restaurants are unlikely to survive if only a tiny proportion of KLites are able to eat there, so there must be a decent, sizeable customer base able to spend on one meal what some individuals or families might budget for food for a whole month.

Obviously, the problem we are getting into here is one of income inequality.

I’m sure there are many studies and analyses that have been done regarding what happens when societies experience growing income inequality.

I’m not qualified to summarise these studies well, but perhaps it is sufficient to "conclude" that: skyrocketing income inequality isn’t good. Bad things tend to happen. Very bad things.

Of course, Malaysia isn’t alone in this. Income inequality is a huge global problem. Who knows, if you transferred the money as is, maybe one meal for a minimum wage worker in KL can feed someone for half a week, in some poorer part of the world.

In any case, this brings us back to the question of minimum wage.

I think it is reasonable to say that this is not a black-and-white issue.

There are obviously compelling arguments to support the implementation of a decent minimum wage.

The biggest is that we should always do our very best as a society to ensure that no one gets left behind.

Everyone who works should be able to at least afford the most basic necessities to lead a dignified life. There can hardly be any argument against that.

The devil as usual is in the details.

I suppose one common argument against minimum wage is that it is an artificial measure that distorts "pure" market forces. It may also disincentivise companies from hiring full-time workers with proper benefits, in favour of hiring more contract staff with less benefits.

In another example, let’s say a company hires four people, with salaries of RM1,200, RM1,300, RM1,600 and RM1,700 respectively. If the minimum wage is changed to RM1,500, then to some extent, there is some equilibrium that has been disturbed, and it’s uncertain whether the two higher wage earners (who obviously aren’t making much either) in this example will feel that they have been unfairly treated somehow.

In any case, I had best leave a more detailed examination of the question of minimum wages to economists and labour experts who are eminently more qualified than me.

Based on superficial observations, it does seem that we are gravitating towards an increasingly severe income inequality crisis.

Another global trend is one where the top individuals in a company are paid more and more and more, while the low wage earners are stuck or earning even less.

One of the most memorable representations of this was the end credits of one of the funniest movies I’ve watched, The Other Guys.

Of particular interest are the statistics at 1:47 of this video, which details the average salary ratio of a CEO against that of an average employee (presumably in the United States).

In 1918, it was 8:1. In 1990, it was 107:1 (up about 13 times, in 72 years). In 2010, it was 319:1 (up about three times in 20 years). It looks like the number is 351:1 in 2020.

This ratio suggests something like one day’s work by a CEO is worth about the same as, say, a full year’s work by another employee.

I confess, at first I thought this was the ratio of the CEO’s salary to the lowest-paid employee. It’s actually the ratio of the CEO’s salary to that of an average worker. I can’t imagine what the ratio would be to the lowest-paid worker.

I’m personally not so "communist" as to believe that everyone in a company deserves to be paid the same, but surely some of these wage gaps are getting a little too crazy.

Some companies have taken an innovative approach to this problem. In the Mondragon Corporation in Spain.

“At Mondragon, there are agreed-upon wage ratios between executive work and field or factory work which earns a minimum wage. These ratios range from 3:1 to 9:1 in different cooperatives and average 5:1. That is, the general manager of an average Mondragon cooperative earns no more than 5 times as much as the theoretical minimum wage paid in their cooperative... The wage ratio of a cooperative is decided periodically by its worker-owners through a democratic vote.”

I’m sure some would think that a company with such radical ideas would surely not last long, in competition with all the other heavy hitters in the world.

In fact, Mondragon has been around since 1956, is the seventh-largest Spanish company in terms of asset turnover, and employed 81,507 people as of 2019.

Perhaps there are many lessons we should be learning from such companies.

NATHANIEL TAN works with Projek #BangsaMalaysia. Twitter: @NatAsasi, Email: [e-mail]. #BangsaMalaysia #NextGenDemocracy.