Price Floor- Minimum Wage in Malaysia

   According to an article called PM: Minimum Monthly Wage is RM900 from The Star (30April 2012), the author stated that the Prime Minister of Malaysia has set the minimum monthly wage as RM900 for the private sector employees. Below is an excerpt from The Star,

PUTRAJAYA: The minimum monthly wage for private sector employees in the Peninsular has been set at RM900 and RM800 for those in Sarawak, Sabah and Labuan, said Prime Minister Datuk Seri Najib Tun Razak on Monday.

It works out to RM4.33 per hour for those in the Peninsular while employees in Sarawak, Sabah and Federal Territory of Labuan are to be paid a minimum of RM3.85 per hour.

                 

 Based on the article above, the government has imposed RM900 as the minimum wage. This is due to the fact that Malaysia’s Prime Minister, Datuk Seri Najib Tun Razak wants to drive our country towards becoming a high-income nation. In my opinion, this move by the government will cause a roller coaster effect to the workers in Malaysia where some people will be thrilled whereas the rest of them will be unhappy. Even though most workers in Malaysia are pleased with the idea of having a higher standard of living, but there are some pros and cons that these workers might have to deal with because of the enforcement of the minimum wage.

   Before getting into details with that, let’s take a look at what is happening now.   For each one of us, the labor market is the market that influences the job we get and the wages we earn. Firms decide how much labor to demand, and the lower the wage rate, the greater is the quantity demanded. Households decide how much labor to supply, the higher the wage rate, the greater is the quantity of labor supplied. The wage rate adjusts to make the quantity of labor demanded equal to the quantity supplied. At this rate, the minimum wage of RM900 is called a price floor. Minimum wage laws dictate the lowest price for labor that any employer may pay.

                 

                                               

     Referring to the graph above, the x-axis represents the quantity of labor and the y-axis represents the rate of wage. When the minimum wage is higher than the equilibrium wage, the market is going to be distorted. From the employer’s point of view, since the wage rate increases from W0 to W1, now the quantity of labor decreases from L0 to L2.  This means that the employer can afford lesser labors to work in his or her company. From the employee’s point of view, since the wage rate increases from W0 to W1, the quantity supply of labor will be increased from L0 to L1. This means that more people are going to be willing to work.

   When this happens, there will be an oversupply of labor where quantity supplied of labors exceeds the quantity demanded for labors. Because of the oversupply of labor, at current time, there will be more people looking for jobs due to the increase of wages. Unemployment rate increases at this stage since the employers are forced by the government to pay more wages to their employees and consequently, they can’t afford to hire more employees. Thus, the minimum wage raises the income of those workers who have jobs, but it lowers the incomes of those workers who cannot find jobs.

   As mentioned earlier, there will be happy and unhappy people at the same time after the government imposes the minimum wage in our country. In my opinion, unemployed people especially inexperienced teenagers are definitely categorized into the happy people. These types of people are probably unemployed because of their lack of skills, abilities and experiences. Even though they know that they are lacking in so many ways, I think that unemployed people will definitely take advantage of this situation to apply for available jobs in the private sector and get at least RM900 as their monthly wage. Because of this, there will be unhappy people, which are probably the labors who are already receiving RM900 as their monthly wage before the enforcement from the government. These people would not be pleased with the idea of the newcomers getting the same wages as themselves when they have worked so hard for it. To overcome this problem, I am sure that their current wages must be increased so that their seniority would be compensated properly and everyone will be satisfied.  Therefore, the increase of the minimum wage would result in the increase of wages for all employees in the private sector. As I see it, this increase in wages is not a worry to the Malaysian government. On the other hand, it should worry the private sector indeed. According to the statistics, Malaysia’s wages are already higher than all the Asean countries except for Singapore. But it is indeed higher than China. This might deter both domestic and foreign investors. If investments don’t come in, the number of new jobs created would be diminished. Thus, increasing the unemployment rate.  

    In my opinion, there are also some benefits of the government imposing the minimum wage in Malaysia. One of them includes higher contributions to the Employees Provident Fund (EPF) as the leftovers will go some way to shore up the retirement savings of many Malaysians. Hence, companies will see an increase in their payments to the EPF. Introducing a minimum wage policy can also address the issue of the over-presence of foreign unskilled workers by attracting more Malaysians to enter the labor market. This is crucial in some sectors such as plantation, agriculture, construction and services. As Malaysia aspires to become a high-income developed nation, it is vital for wages to be increased. It is another way to escape the middle-income trap. Furthermore, I believe that the minimum wage increase will benefit firms and employers in terms of reducing the turnover rate of workers and improving productivity of their workers. By increasing their wages, the employees will feel better about their own respective jobs. This way, the job performance of the employees will be enhanced. Consequently, the tendency to quit their jobs and looking for other jobs will also be reduced.

     Despite the established economic theory, there is still some active debate regarding the consequences. Setting a rate that provides employees with a sustainable wage while minimizing the impact on unemployment requires a delicate balancing act.

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