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Barry Ooi Economist barry@ram.my Jason Fong Economist jason@ram.my

Briefing to RAM Rating analysts. Economists’ perspectives on Malaysia’s minimum wage mechanism. Barry Ooi Economist barry@ram.com.my Jason Fong Economist jason@ram.com.my. 15 th May, 2012. Outline. The current labour market. I. Overview.

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Barry Ooi Economist barry@ram.my Jason Fong Economist jason@ram.my

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  1. Briefing to RAM Rating analysts Economists’ perspectives on Malaysia’s minimum wage mechanism Barry Ooi Economist barry@ram.com.my Jason Fong Economist jason@ram.com.my 15th May, 2012

  2. Outline

  3. The current labour market I. Overview Low unemployment rate, an appropriate time to structurally adjust labour markets Large proportion of working age population (15-64) not actively looking for jobs Proportion of educated workforce has increased since 2000 … but sizable proportion still educated below tertiary levels

  4. The current labour market I. Overview A large proportion of employed population in wholesale & retail sector (16%). Reduction of labour-intensive industries (e.g. textiles) due to the rise of China Faster growth for certain higher skill segments Lower demand for specific lower skilled segments Growth in lower skilled workers

  5. The current labour market I. Overview • Employers’ wage bargaining position • Domestic inflation (and wages) do not fully reflect global price movements • Inadequate wage transparency • Weak union powers and representation • Young demographic profile, with significant proportion not in labour force • Immigration laws that benefit labour-intensive production • Employees’ wage bargaining position • Domestic hiring and firing procedures can be long and costly • Lower migration costs • Low unemployment rate

  6. Rationale for the minimum wage mechanism I. Overview • Wage bargaining process is perceived as being lopsided to the employer • Asymmetric information (i.e. employers know more of the labour market than employees) allows employers to capture surplus • Anecdotal evidence suggest that the pace of urban inflation has increased the number of exploited workers • Elastic labour supply conditions (i.e. near unlimited supply) in urban centres for low skilled jobs has depressed wages and caused their standard of living to diminish • Cost of living pressures have not been adequately translated into wage growth; increasing demands for a ‘living wage’ level • Improving social welfare • Encourages individuals to gain lawful employment, particularly for those outside the labour force • Facilitate or accelerating structural upgrading • Increasing the relative cost of labour inputs will encourage firms to adopt more efficient production strategies such as labour-saving techniques or increasing capital-intensity

  7. What we know so far I. Overview • Minimum wage rates • Peninsular Malaysia – RM900 • Sabah and Sarawak – RM800 (to be equalized over time) • Implementation in 6 months; 12 months for micro enterprises • Allows sufficient time for pricing adjustments (firms) and to coordinate inflationary expectations (firms/workers) • The value includes cash, cash incentives and various allowances • For the plantation industry, the RM200 gratuitous payment can be converted to be part of the minimum wage • Applies to foreign workers • But excludes trainees, apprentices and domestic servants

  8. Do we need it? II. Perspectives • Theoretically, • A ‘market-based mechanism’ will be just as efficient in distributing a firms returns • Other laws which indirectly affect the labour market can be put into place to optimize social returns • There are rich countries without a minimum wage mechanism • Singapore, Germany, Brunei, Austria, Denmark, Finland, Iceland, Qatar, Bahrain, Sweden, Switzerland, UAE and Italy ~ most European economies have a Gini coefficient below 0.30 • Therefore, not a prerequisite for a high income nation, growth or income inequality

  9. Do we need it? II. Perspectives • In the manufacturing sector, • Long-run productivity growth tracks well with average real wage (i.e. inflation-adjusted) growth • Is indicative of market-based mechanisms in this particular sector. • Although, growth trend of wages tend to be very ‘sticky’ CAGR (1995-2011) Value added per worker…… 3.7% Average real wage…………….3.0%

  10. Do We Need It? II. Perspectives

  11. Labour markets II. Perspectives Wages Wages S0 Supply of labour Unemployed Unemployed S cheaplabour W min wage? W min wage? We Demand for labour Demand for labour Q min wage? Qe Q min wage? Qe Quantity of labour Quantity of labour Decrease in employment Decrease in employment • Outcome on labour markets is uncertain, • Differs by sector – labour needs and cost of physical capital varies by sector • Current wages may not be at equilibrium, and the minimum wage may have brought it to equilibrium

  12. Labour markets II. Perspectives • Recent economic literature has shown minimal to no adverse effects on employment (eg. Card & Krueger (1994), Metcalf (2008), Lemos (2008)) • Possible reasons: • minimum wage too low • incomplete coverage • impact on hours instead of employment • time horizons • “stepping stone” jobs • non-compliance • offsets • uncompetitive labor markets • pass on costs through prices • lower profits • increased productivity

  13. Labour markets II. Perspectives • Regional examples of minimum wage show little to no correlation between wage increases and employment.

  14. Labour markets II. Perspectives • Average wages for most workers in Malaysia are above minimum wage. • Employers may shed foreign labour instead of domestic labour. • Malaysia’s push towards high-income nation requires shift away from cheap labour. • Unemployment rate in Malaysia still below natural rate.

  15. Inflation II. Perspectives Minimum wage mechanism and inflation Firms pass on costs directly to consumers Inflation ‘Cost push’ Minimum wage is implemented ‘Demand pull’ Additional domestic consumption Increase in pay of lower-skilled workers Revision of firm-wide pay scales (?)

  16. Inflation II. Perspectives Concerns • A significant proportion of the nation’s CPI weights are in ‘food away from home’ (analogous for industries which are heavily reliant on labour). Impact of a minimum wage would likely affect urban consumers through this channel. • Inflation is affected by both cost and demand channels, increasing the risk of a wage-price spiral • Higher labour input costs can be detrimental for firms which face significant global competition or at depressed margins.

  17. Inflation II. Perspectives

  18. Industry-specific concerns II. Perspectives

  19. Conclusion III. Summary Minimum Wage • Costs • Unemployment: little recent empirical evidence • Inflation: depends on how firms adjust costs, but expected to be minimal • Ample space for movements on either factor • Benefits • Redresses power imbalance between employer and employee • Reduces urban poverty • Improves welfare • Helps lift productivity Unable to gauge appropriateness of RM800-900 level at present Overall impact expected to be minimal

  20. Thank you RAM Economics Research Level 19, The Gardens South Tower Mid Valley City, LingkaranSyed Putra 59200 Kuala Lumpur Tel: (603) 7628 1101 / Fax: (603) 7620 8255 www.ram.com.my

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