I found this interesting since both the current government and the opposition want to increase the national minimum wage in their manifesto.
Let me quote from both of those sides:
From “Parti Biru”:
Meningkatkan gaji minimum pekerja secara berperingkat kepada sekurang-kurangnya RM1,500 dalam tempoh lima tahun.
From “Parti Merah”:
Kadar gaji minimum akan dinaikkan kepada RM1,500 sebulan di seluruh negara dalam penggal pertama pentadbiran Kerajaan Pakatan Harapan, dan kami akan menyemak kadar ini setiap 2 tahun.
Alright. Let me tell you a story (this is fictional, any similiarity in real life events is just coincidence).
Let’s say I am a manager for a well known fashion company for women (wedding dresses, everyday clothing, hijab, well you get the idea) in the country. On monthly basis, my total revenue is RM40,000.
In a month, let’s say I spend RM10,000 on capital (for textiles, electricity, gas for the company car)
In terms of labour, lets say I have 10 employees, and I pay them RM1,200 on monthly basis. That means, on monthly basis, my labor cost is RM12,000 (RM1,200 multiply with 10 employees).
Sum it all up, my total cost is RM22,0000.
That means my gross revenue is RM18,000 (Total revenue – total costs).
Stay with me on this, this is going to get tricky.
Let’s say tomorrow, the government imposes a new law, saying that the national minimum wage is RM1,500.
Ceteris peribus, my capital is still RM10,000, and I still make RM40,000. But can you count my total labor cost?
That’s right. RM15,000 (RM1,500 multiply with 10 employees).
Meaning that my gross revenue now is RM15,000. Meaning that after minimum wage increase, I have to pay an extra RM3,000 on labor. In other word, my labor costs now had become a little bit expensive.
This explains why companies in Malaysia in the end of last year made a noise on the minimum wage increase. If I were the manager, and I insist to have a gross revenue of RM18,000 per month, i have two choices : (i) Lay off some of my workers, or (ii) cut some costs on capital (no more using the company car, take Grab instead since it is cheaper).
This is just a story I made. But there were numerous studies also pointed out that an increase in minimum wage had a little impact on employment.
To be frank, I am not that worried if the government wants to increase the minimum wage. What worries is me is when minimum wage starts to hurt the economy. There were numbers of studies back up the point I made. (Refer appendix). The study on Seattle was also a great example, since it raised the same question last year.
The rule of thumb is, a minimum wage should be around 40-45% of the national median income (the research is 12 years old, but still relevant). At this moment, the median income for Malaysia is RM1,721 (RM1,685 for female). Meaning that the optimal amount should be around RM690.
What I am trying to imply here, regardless of your school of thought whether minimum wage should be pegged to median wage, or inflation, is that policy makers should not play around with minimum wage. I think it is fair enough that we are giving some sort of insurance for employees, but one thing we don’t really talk about is that the companies are the ones who make the investments.
I wouldn’t mind if 3 years down the road, our national median income goes up to RM4,000. But I don’t see this happening that soon.
Are There Long-Run Effects of the Minimum Wage – Isaac Sorkin
Three Out of Four Economists Recommend Raising the Minimum Wage! A Closer Look at the Debate Surrounding Seattle’s Minimum Wage Ordinance – Erica Bergman
Optimal minimum wage policy in competitive labor markets – David Lee & Emmanuel Saez