LETTER to the EDITOR

28 September 2018

FOR IMMEDIATE RELEASE

THE NEW MINIMUM WAGE IS STILL TOO LOW

1. The Pakatan Harapan government had recently announced an increase to Malaysia’s minimum wage to RM1,050
a month or RM5.05 an hour, effective 1st January 2019. This announcement received mixed reviews with
predictable support from employers but disappointment from almost everyone else.

2. For employers, represented by groups such as the Federation of Malaysian Manufacturers (FMM), they have stated
that the new minimum wage is ‘reasonable’ even though they had also recommended the government to maintain
it at the previous level citing “hefty increases in the cost of doing business”.

3. On the side of employees, the Malaysian Trade Union Congress (MTUC) had considered the increase of the
minimum wage by RM50 to be “beggarly” and indicates that the new government has the same dismissive attitude
towards the poor as the previous one. For the MTUC, anything less than RM1,500 is unacceptable as even migrant
workers in the construction sector will not accept anything less than RM70 a day. Fifteen days of work is all it takes
for such a migrant worker to get to RM1,050 a month.

4. What is a fair minimum wage for Malaysia? Majlis Tindakan Ekonomi Melayu (MTEM) has pondered this question
and for a start, comparing Malaysia with Poland and Turkey is instructive as these two economies are not too far
ahead of Malaysia in terms of GDP (nominal) per capita. The values for Malaysia, Poland and Turkey are $9,813,
$13,823 and $10,512, respectively. Of course, It comes as no surprise that the minimum wages in Poland and
Turkey are higher than in Malaysia.

5. What is surprising is the quantum of difference between minimum wages of the three countries. In Poland and
Turkey, after converting to Ringgit Malaysia, their minimum wages are RM15.49 and RM8.26 an hour, respectively.
Malaysia’s minimum wage as mentioned before is a measly RM5.05. What is it about Turkey and Poland that
allows their labour to deserve a much higher minimum wage than Malaysian ones?

6. In 2014, a letter to President Obama jointly written by more than 600 economists which included 7 Nobel Prize
winners in Economic Sciences argued that the weight of evidence shows that there has been little to no negative
effect on the employment of minimum-wage workers even during a weak labour market after increases to the
minimum wage.

7. Research by Yusof Saari et. al (2016) concluded that the implementation of the minimum wage for Malaysia in
2016 did not result in higher unemployment. It was most beneficial to ethnic Indians who experienced a 21.5%
decline in poverty levels. By comparison, Malays only experienced an 11.47% drop and the Chinese an even lower
1.15% decline. For Malays, the lower decline is due to low income Malays being much more prevalent in the
informal sector than Indians. As for the Chinese, there were simply so few of them that earned below the minimum
wage for them to benefit much from the increase.

8. The spirit of the New Economic Policy was predicated on the eradication of economic identification especially of
that between ethnicities. Based on the available evidence, MTEM considers further increases of the minimum wage
in line with inflation to be an essential tool to narrow the economic gap between regions, class and ethnicity.
9. Why does Malaysia need a higher minimum wage than RM1,050?

a. According to Bank Negara, a single adult needs at least RM2,700 to live a decent life in Kuala Lumpur. RM4,500
is the equivalent for a couple and while it is not twice as much it is still far more than if the couple individually
only earns an RM1,050 minimum wage.

b. Purchasing Power Boost - The income boost for the bottom half of society will stimulate national economic
growth and benefit everyone else due to increased economic activity.

c. Reduce Dependence on Foreign Labor - A higher minimum wage will make low-skilled foreign labor less
attractive and encourage the labor market to migrate towards better paying jobs that require more skill and
technology. Further rationalization (reduction) of the total number of foreign workers in Malaysia (currently 6
million) to 4 million will further create a truer ‘supply and demand’ situation which will naturally translates into
higher wages.

d. Productivity Increase - With a higher minimum wage, employers will be more incentivized to increase the
efficiency of their operations by increasing the productivity of their employees which is an essential pre-requisite
to higher wages. The need to innovate will also be more pressing as companies find it more cost-effective to
invest in the latest equipment and technologies instead of just throwing increasingly expensive labor towards a
task.

e. FDI Loss - Opponents of increasing the minimum wage argue that Foreign Direct Investment (FDI) will be
negatively affected due to higher operating costs. Historical data from 2013 (minimum wage in Malaysia was
first implemented on 1st January 2013) to 2017 shows that FDI as a percentage of GDP has been mostly stable
at between 2 to 5 percent annually.

f. Pakatan Harapan Promise - Pakatan had pledged in their pre-election manifesto that the minimum wage will be
raised to RM1,500 by the end of their term in government. MTEM however, rejects that the RM500 increase
should be subsidized especially for large and medium-sized companies. We estimate that the labour component
for medium and large companies will only increase by about 1 to 2% only with such an increase. However, the
government should consider aiding small and micro businesses.

10. MTEM recommends the following to the federal government:

a. A stratified minimum wage structure to account for different costs of living across different states in Malaysia.
States with a higher cost of living such as Kuala Lumpur should have a higher minimum wage to compensate
for the higher cost of living.

b. The setting of a minimum wage must also consider the realities of a variety of industrial sectors. Sectors such
as agriculture and especially the palm oil industry may require a lower minimum wage as the vast majority of
their labour force are migrant workers.

c. Offer tax incentives for small and micro businesses who can pay the minimum wage as such enterprises may
not have a sufficiently large revenue base to sustain the imposition of a higher minimum wage.

d. Exclude teenagers from the minimum wage. For the very young, gaining work experience is valuable for their
long-term career development and employers may find them an attractive hire for jobs that require minimal skills
and zero experience.

11. A higher and fairer minimum wage is an integral part towards pushing Malaysia towards a high-income nation and
will require intense discussion and debate between employers, employees, civil societies and the government. The
end result must be one that is win-win for all segments of society. As it is, even the new and improved minimum
wage of RM1,050 is too low and cannot be considered a win for the bottom half of society.

12. It is understandable that the new Government needs to consider the current dire economic circumstances like the
national debt, forex volatility and the national dependency on foreign labor. However, we hope the government will
increase the minimum wage sooner rather than later. The new government of Malaysia must be able to do better
than the previous one in the pursuit of shared prosperity for all, regardless of ethnicity, class or region.

AHMAD YAZID OTHMAN

Chief Executive Officer, MTEM