Minimum wage order 2012 Malaysia

According to the announcement of our PM Datuk Seri Najib Razak on eve of Labour Day 30 April, the minimum wage order will be enacted in 1 January 2013, which is the minimum wage of employees in Peninsular Malaysia is RM900 whereas the minimum wage in east Malaysia is RM800. This is the first time government set up a price floor for employees.

A minimum wage order is a price floor set by government that the employee’s salary must be paid at least a certain wage rate. The purpose of government impose a price floor is to help the lower income group, to ease their financial burden in daily life, and also increase the average income of Malaysian and to shorten the gap between rich and poor. The economical point of view found that the effects of Minimum wage order will bring more economics disadvantages compare to advantages, and the employees could be the most hurt ironically.

When the price floor Pm is set higher than the equilibrium price Pe, the changes in price create movement along demand and supply curves, or changes in quantity demanded from Qe to Qm.

At this higher price set by government, the people are more willing to find a job, thus they want the supply the jobs until point B. However, firms are not willing to offer job thus they only wish to supply till point A. Since there are more people looking for jobs but not many firms are willing to offer jobs, the distance from A to B represents a shortage of employment.

Firms are on the short side of the market. They are the first ones to stop trade, because of the price control, and the consequent firms’ lesser willingness to demand for jobs, there are gains from trades that are no longer made. A deadweight loss zone occurred in the grey triangle area.

The firm surplus (upper blue triangle area) is able to offer a higher wage rate which is higher than the minimum wage, but no doubt their surplus will be shrinking by the price floor level. Same goes to consumer surplus (bottom blue triangle area).

Since the job vacancies are getting less now, people would have to fight for jobs. Normally the higher educated people or smart people will have the advantages to grab the jobs and the rest mostly are depend on luck. All these activities are opportunity cost that has been wasted in finding vacancies. The loss in job search is represented by the pink rectangular area.

 Now the firms have more power to bargain with the applicants. Some firms will just based on first come first serve basis, some will raise the qualification of applicants like they are required to have SPM holder to get the jobs. Since the hiring cost is high, they may consider purchasing machines to replace the labor work. For those who are still not able to get the jobs, they will try to offer a lower wage in order to get the jobs or so called black market.

The gazette of minimum wage order will give a great impact to the small and medium enterprises (SMEs) of Malaysia. SMEs make up 99.2% of the Malaysian economy and accounted for 59% of the workforce. Due to the small capital scale, SMEs lack of modern machines and highly dependent on low-skilled workers. The average net profit margin of SMEs are 3%-5%. A raise in minimum wage at the range of RM800-RM1000 will definitely shrink down their profit margin which is already low. In fact, most of the SMEs are the outsourcing companies of multi-national companies (MNC). The MNC will outsource their contracts to foreign countries which can offer lower price such as China, Thailand, Vietnam and etc. Eighty percent of SMEs could be forced to shut down due to the lack of competitive manufacturing cost.

Since this is the first time Malaysia government enacted a minimum wage order, let see the lessons we can learn from the other country who are enforcing the order currently. 

In New York USA, a study found that a 23.7% raises in wage rate could significant reduce the employment rate of New York youths. The high school leavers are not willing to continue their study in tertiary institutions since they can get the wages which is close to a degree holder can get. People may think that why study so hard since they already can get a well paid jobs without any specific skills required.

So in the end, minimum wage policy can only benefit those who are able to get the jobs. But in general, it will cause unemployment, black labor market, dependency on low cost foreign labors as well as inflation.

Besides than creating unemployment, the minimum wage order will also decrease the competitiveness of the whole nation. There is no way to increase the income level of the nation by manipulating the wage rate, tax or subsidy. The only way is to work hard, be productivity. When the competitiveness of a nation increase, the wage rate will also increase automatically. That’s what our fourth PM Tun Dr. Mathir appealed: “learn from the east”. As we can see from Japan having $34,294 GDP per capita, nowadays South Korea is catching the pace as well.