Universiti Malaya senior lecturer Goh Lim Thye told FMT that while low unemployment has its benefits, it must be balanced with growth in productivity and careful management of inflationary pressures.
The failure to increase productivity to meet rising demand leads to rising prices and, by extension, higher inflation.
On Monday, the statistics department announced that the unemployment rate in December last year stood at 3.1%, the lowest in nearly 10 years. In that decade, the unemployment rate hit a high of 4.64% in 2021.
Low unemployment results in labour shortage, which forces businesses to offer higher wages to secure talent in a tight labour market.
Businesses inevitably pass the additional cost to consumers by raising prices of goods and services.
Goh said that with low unemployment, inflation also rises. However, he added, the risk of higher inflation can be moderated by a growth in productivity and monetary policy responses.
“If productivity rises alongside wages, inflationary pressures can be mitigated,” he added.
Malaysia’s inflation rate stood at 1.8% last year. It was 2.5% in 2023, 3.3% in 2022 and 2.5% in 2021.
Goh said that while Bank Negara Malaysia (BNM) has kept the overnight policy rate (OPR) steady at 3% since May 2023, the central bank may consider future rate hikes if inflation escalates due to increasingly strong job growth, rising wages, and subsidy reductions.
For instance, he pointed out, the US Federal Reserve raised interest rates from near 0% to 5.50% from March 2022 to July 2023 to counter inflation driven by low unemployment and higher wage growth.
“If inflation rises, BNM may adopt a similar strategy by raising interest rates to manage demand-driven inflation,” he said.
“Instead of relying solely on monetary policy, improving productivity is crucial to ensure that wage growth aligns with economic output. This can ease inflationary pressure,” he added.
If productivity does not rise in tandem with wages, businesses face higher labour costs without corresponding increases in output. To maintain profitability, they are likely to raise prices, which leads to higher inflation.
On the other hand, if productivity rises alongside wages, businesses can afford to pay higher wages without raising prices, thereby helping to keep inflation in check.
Goh said that apart from encouraging businesses to integrate advanced technology and AI-driven processes to boost productivity, they could focus on upskilling their workforce by investing in technical and vocational training.
In fact, he said, this is crucial especially in high-growth industries such as manufacturing, renewable energy, and digital services.
In welcoming the good news, Bank Muamalat Malaysia Bhd chief economist Afzanizam Rashid said this means that more Malaysians are now gainfully employed.
This, he told FMT, would translate into an increase in spending, leading to economic growth.
However, he said, inflation remains the “main concern” especially in the context of policy adjustments such as targeted RON95 subsidies — which are part of the government’s strategy to reduce leakage and improve spending efficiency.
Afzanizam observed that BNM has chosen to give a wide range of 2.0% to 3.5% in its inflation rate forecast for 2025 compared with a low of 1.8% in 2024.
However, he also noted that the government has put in place measure to mitigate the impact of higher cost of living through a significant boost to the Sumbangan Tunai Rahmah and Sumbangan Asas Rahmah initiatives by raising the allocation to RM13 billion for this year compared with RM10 billion last year.
He added that the government should place greater importance on surveillance and monitoring while also enhancing enforcement of existing laws to curtail profiteering by irresponsible businesses.