Working poor need minimum wage

COMMENT Malaysia has been an economic success, with its GDP per capita annual income growing from about US$1,145 in 1970 to US$4,030 in 2000, at constant US$2,000 rates, according to the World Bank. This means a strong GDP growth rate of roughly seven percent every year for those three decades.

However, this growth has come from a low labour cost, which has allowed Malaysia to remain competitive globally. Malaysia's 2020 goal of becoming a high income developed nation means that we can no longer rely on cheap labour to give us a competitive edge.

Decades of subsidies have allowed employers to continue to suppress wages, resulting in the constant decline in the purchasing power of workers, based on their wages.

Furthermore, according to the New Economic Model (NEM), a hefty 40 percent of Malaysian households still earn less than RM1,500 a month, which is not enough to sustain a decent standard of living for a family. For these reasons, it is necessary for cheap labour to end, from both the economic and humanitarian points of view.

The NEM recognises that Malaysia needs to invest in new technology, training and skills and innovation in order to achieve the status of a high income economy and a higher standard of living.

A flexible and fairer minimum wage policy is complementary to this and is a more direct way to force Malaysian firms to modernise and invest as the NEM advises. This is explained later in the 'Implications' section.

The Malaysian Trades Union Congress (MTUC) has proposed a national minimum wage of RM900 plus RM300 as cost of living allowance. This is a high minimum wage level as it is about 60 percent of the average wage.

Consequently, it is likely to result in high rates of non-compliance and job losses, and therefore have little positive effect on the objectives it sets out to achieve.

Tripartite wages councils needed

A national minimum wage also leaves no flexibility for employers to deal with the varying market conditions specific to each sector.

We call for tripartite Wages Councils for each low paying sector to determine a basic minimum wage through collective bargaining agreements between workers, employers and government representatives.

Agreements should be extended erga omnes (in relation to everyone) to all workers in that sector. In addition, state governments will be able to recommend a higher and fairer minimum wage than the basic rate set, which will help to take into account the different costs of living in each state.

The aim of minimum wage should be to protect the workers without unduly limiting the flexibility of employers to allow Malaysia to remain competitive at the global level.

Raises the standard of living

A minimum wage undoubtedly helps to improve the standard of living of the poorest Malaysians who need it the most. This fits in with the NEM and the goal of a high income country with a high standard of living and quality of life.

Encourages investment in technology and machinery

Malaysia's low labour cost has allowed employers to avoid investments in new technology and machinery. By increasing the cost of labour, capital becomes relatively less expensive and firms will seek opportunities to invest in labour-saving capital. This is a vital step towards modernisation and in the transformation into a developed country. It will also result in the training of workers to use such technology and therefore, the acquisition of higher level skills.

Encourages innovation and R&D

With higher labour costs, employers will be encouraged to innovate and seek new ways to carry out existing operational methods. With new methods come requirements for new skills and a higher skilled workforce. Innovation also has the advantage that it can be passed between firms, leading to higher overall efficiency and higher economic growth.

Promotes investment in training and skills development

In response to minimum wage, employers will seek to get more value from their employees. They will invest in training to ensure the skills of their workers develop and thus they become more productive. The acquisition of higher level skills is an essential process in becoming a high income country and is a key part of the NEM.

Improves productivity

With investment in technology, training and innovation, the productivity of workers will increase. It will also increase as employers pay more attention to increasing efficiency, reducing resource wastage and increasing work intensification.

Employees are also likely to increase their productivity through an increased motivation to work harder, as higher wages will make them feel more valued and increase work ethics as employers demand more return from the higher cost of employing workers.

Aligns private sector wages with public sector wages

Public sector workers are relatively well paid and have recently had a 35% increase in salary and a 100% increase in the cost of living allowance. With higher wages, many workers have been attracted to the public sector at a cost to the private sector, which is losing out in both quality and quantity of workers.

In order to reach the goal of being a developed nation by 2020, the NEM sees the private sector as the engine of growth. It is therefore vital for the private sector to encourage the workers back and an essential way to achieve this is a minimum wage policy.

Stimulates economic growth

An increase in wages means higher incomes, which in turn results in increased spending and generating demand for goods and services. This in turn will in turn increase the demand for labour.

Higher incomes also result in higher savings, which contributes to increased investment as resources saved by individuals and deposited in banks can be lent to businesses for investment. Both higher spending and saving will lead to higher economic growth.

Promotes foreign investment

A minimum wage that results in the increased training and skills of workers is likely to attract foreign investment to Malaysia as the cost of labour here will still be relatively cheaper than in the West, and yet higher skilled. Attracting foreign investment is another key objective of the NEM.

Aligns Malaysia with international standards

Malaysia is behind the international standard of having legislation or binding collective bargaining for minimum wage, which 90 percent of the countries currently have. Although Malaysia has minimum wage practised by a few sectors (catering, hotel, Penang stevedores, shop assistants and cinema workers), it is a recognised fact that these minimum wages are insufficient to provide a decent standard of living and are rarely updated to be of significance.

Existing collective bargaining agreements in sectors with trade unions also do not cover the majority of the lower paid working population. Therefore, a more comprehensive minimum wage policy is needed.

The impact on foreign workers is hard to predict. While a higher wage will attract more Malaysians to work, it may also attract more foreign workers if the minimum wage includes them. However, the exclusion of foreign workers from the minimum wage could lead to an increased demand for foreign labour by employers , as this would mean a lower labour cost than Malaysian workers.

If foreign workers are excluded from the minimum wage policy, it would need to be accompanied by some form of quota regulation, for example specifying that foreign workers should not make up more than 10% of an employer's workforce.

One of the main reasons foreign labour has flourished in Malaysia is because they do the work that the locals don't want to do - typically 3D or dirty, dangerous and demeaning work. Better health and safety regulations have to be put in place if Malaysians are to be encouraged to do such work. Making foreign labour more costly by making visas and work permits more expensive or compulsory will also help to lower the demand for foreign labour in the long run.

We believe the collective bargaining agreement is the best method for setting minimum wage as there is significant evidence from the International Labour Organisation, which has found it to be accurate in setting wages close to a worker's value.

Relate wages to workers' productivity

Collective bargaining has been found to closely relate workers' wages to their productivity and to improve the transmission between economic growth and the growth of wages. This means that workers' wages will be able to keep up with price increases and thus maintain their purchasing power.

Furthermore, centralised or coordinated bargaining is linked with lower overall wage disparity. This is why we call for national wages councils to set a basic rate for each sector.

As they are tripartite central bodies, they will take in to account the needs and interests of the government, employers and workers.

Collective bargaining benefits a broad spectrum of workers and includes working conditions such as hours of work and quality of employment, rather than just a legislative minimum wage. As collective bargaining reflects the needs of employers as well as employees, it allows firms to continue to be flexible under different market conditions and a changing global scene.

The main argument against minimum wage is that it will increase unemployment, as employers will reduce their demand for labour as labour costs increase. Several respected studies, including that by the International Labour Organisation and the Organisation for Economic Cooperation and Development (OECD), have found little or no significant unemployment effect from the implementation of a minimum wage.

We believe tripartite collective bargaining will ensure that minimum wage is set at an appropriate level so that employers will not find the increase in cost too significant and their demand for labour will not fall.

A minimum wage is necessary for Malaysia to become the high income economy it aspires to be. It encourages firms to stop relying on cheap labour and instead focus on innovation, technology and skills development, an essential process in modernisation and in becoming a developed nation.

Collective bargaining carried out by central bodies offers the best method of setting a minimum wage by reducing overall wage inequalities and linking wages to productivity and economic growth. State governments can recommend higher and fairer minimum wages for their respective states to reflect cost of living in different parts of Malaysia.

In order for Malaysia to reach developed country status, along with a minimum wage policy, it is also essential that government subsidies are reduced or removed and more flexibility is given to employers in hiring and firing. Furthermore, while a minimum wage does assist the poor, it only benefits the working poor, therefore a comprehensive safety net is needed to protect the poor in general and the out-of-work poor.

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KHAW VEON SZU is a political analyst and LINDSEY ALLWRIGHT is an intern with Sedar Institute. Opinions expressed in this article are the personal views of the writers and should not be attributed to any organisation they are connected with.