Experts who spoke to FMT Business reiterated the fact that pay increases must be tied to raising productivity. They also expressed concern over the impact it will have on government expenditure.
Penjana Kapital CEO Taufiq Iskandar said wealth creation and income distribution should be based on productivity.
He said interventionist measures such as the proposed subsidy for private sector wages had proven essential to prevent unemployment.
On the other hand, they were less effective in promoting skills enhancement efforts or making workers more productive, he added.
Taufiq said the government needed to ensure that any subsidy to raise the wages of private sector workers must also serve as an incentive for employers to help reskill and upskill their employees.
On Thursday, Prime Minister Anwar Ibrahim announced that the government planned to provide funds to raise the salaries of employees to help ease their financial burden.
Anwar said the proposal, which had been discussed in the cabinet, would see the government allocated RM1 billion to RM2 billion to raise private sector employees’ wages.
It would see average wages raised from RM2,000 to RM2,200 per month, he added.
Taufiq also questioned how the government would finance the subsidy given the limited fiscal space it now has. “Some trade-offs may be necessary and prioritisation would be required,” he said.
“There are merits in this proposal, but the devil is in the implementation,” he added.
Professor James Chin of the University of Tasmania agreed that a wage increase “is not so bad” if it came with a rise in productivity.
“But if you give it the way you do for civil servants without asking for (higher) productivity in return, it will be an economic disaster,” he said.
Center for Market Education CEO Carmelo Ferlito said the move “does not seem to be in line” with the spirit of the Madani Economy, which is aimed at boosting Malaysia’s competitiveness.
He said the arbitrary distribution criteria would likely distort the production structure and cause inflation instead.
Other options
Malaysia University of Science and Technology (MUST) economics professor Geoffrey Williams said that rather than subsidise private sector wages to raise take-home pay, the government should make changes in regulations and the taxation system.
He said the government could give preferential access to contracts for companies that adopted a progressive wage model or improve enforcement of existing laws on minimum wage.
He said policies on flexible work hours and work-from-home arrangements could also be introduced to enable people to take on multiple jobs in the gig economy to earn some extra money.
Williams said a reverse income tax (a form of universal basic income) could be introduced to give tax credits to people earning below a threshold.
“For instance, the government could give a RM200 tax credit for everyone earning below RM2,000 a month,” he added.
Williams said this would be less costly and the benefit would go directly to the employee. “It can also be scaled up to give different amounts to different people depending on need,” he added.
He said a wage subsidy like the one introduced during the Covid-19 pandemic could cost up to RM24 billion a year, making it very expensive. “Giving it through the employer and not directly to the worker also brings the risk of leakages and abuse,” he added.
On the other hand, he said, a tax credit of RM200 per month for each of the 2.2 million Malaysians on formal contracts in the private sector who earn below RM2,000 would come up to only RM5.4 billion.
“For RM2 billion, each of the 2.2 million workers could get a RM74.25 tax credit every month,” he added.
The theory versus the practice
According to KSI Strategic Institute for Asia Pacific research director Voon Zhen Yi the government’s rationale is based on the theory that with higher wages, workers would be more productive given that their financial burden would be reduced.
Increased productivity would also lead to higher revenue for businesses, which would enable them to pay their employees even higher salaries, he told FMT Business.
Voon said that with higher taxable incomes tax collection would also rise, and that would enable the government to replenish its coffers more effectively.