According to the study by an international e-commerce company, Malaysia ranked 55th out of 64 countries for having constant minimum wage rates since last year, joining countries like Israel, Armenia, Peru and Vietnam.

Malaysia’s minimum wage policy was introduced in 2013 amid debate over the consequences it could have, including the loss of employment and inflation.

Nine years on, these issues continue to be debated and the rising cost of living over the years has led to calls for the government to move away from a minimum wage in favour of a living wage.

FMT takes a closer look at this issue.

What is a minimum wage?

A minimum wage is the lowest amount of remuneration that an employer is required to pay employees for work performed during a given period. It is a legally binding limit and employers are not allowed to pay below this even under contracts or collective agreements.

In 2013, the minimum wage was RM900 per month (RM4.33 per hour) for Peninsular Malaysia and RM800 per month (RM3.85 per hour) for East Malaysia. By 2020, it was raised to RM1,200 (RM5.77 per hour).

History

Malaysia established the minimum wage in 2013 across all sectors except in the domestic sector.

Before this, the country only had the Wages Councils Act 1947 which was established for workers who were vulnerable to low pay and had inadequate collective bargaining arrangements. The government was empowered to establish councils for certain non-unionised sectors of the workforce, made up of government, workers’ and employers’ representatives.

How is minimum wage decided?

Two different rates apply – one rate for Peninsular Malaysia, and another for Sabah, Sarawak and the Federal Territory of Labuan. The rates are discussed and set by the National Wages Consultative Council (NWCC) periodically following a list of criteria such as labour productivity, competitiveness, unemployment and cost of living.

The council is a tripartite advisory body set up by law. It also includes technical experts. Before making recommendations, the council must have consultations with the public on the rate and coverage as well as collect data, analyse it and disseminate research on wages and socio-economic factors in the country.

Who benefits from minimum wage?

When the minimum wage policy was introduced in Malaysia, a report by Bank Negara Malaysia stated that it would affect close to “one-third of the workforce”.

It was envisaged that the policy would play an important role to address inefficiencies in the labour market and to improve the social welfare of low-paid workers.

Geoffrey Williams of the Malaysia University of Science and Technology said minimum wages benefit low-paid workers, especially those with poor employment rights who are vulnerable to exploitation by their employers.

“Foreign workers, in particular, are often exploited and can’t enforce their contracts in court,” he said.

What went wrong?

Subsequently, a 2018 Bank Negara report stated that a national, sector-wide minimum wage would cushion wage inequality but workers are still unfairly compensated for their productivity across most sectors.

This suggests that Malaysia’s current wage productivity levels are misaligned.

Williams pointed out that wages should reflect the value of what workers produce or the services they offer. As productivity rises, so should wages.

Malaysia’s minimum wage is similar to most countries, but it does not rise each year in line with inflation. Some employers have also been adjusting the hours of employees to pay less than the allocated minimum wage of RM1,200 per month.

“This is common practice among younger employees who are often offered positions as interns or temporary workers, so they don’t qualify for minimum wage. Trainees and gig economy workers also don’t qualify because they aren’t formal employees,” he said.

These discrepancies create income inequality and would widen social inequality.

He said this would in turn affect the long-term growth potential, living standards and quality of life for a larger group of people.

“It’s a vicious downward cycle. When productivity falls, economic growth and incomes are damaged. The economy can become stuck in a low-wage, low value-adding cycle with more people eventually falling into the lower-income category as we are seeing now,” he said.

Recommendations

To counter these effects, Williams recommends that the government control prices in the short term.

“In the long term, however, minimum wage should be replaced with an income tax credit, sometimes called a negative income tax. In this model, everyone who works but is paid below a basic income threshold is given a credit to top up their income while everyone who earns above the threshold pays tax as normal,” he told FMT.

The threshold is based on a living wage or universal basic income calculation and set to be affordable to make sure it is effective and not abused.

“We already have something like this in the form of the wage subsidy programme, but it needs to be reviewed and revised to increase efficiency and then included in a full reform of the social protection system,” he said.