Minimum wage hike could see people lose jobs, says expert

Senior fellow with IDEAS says higher minimum wage will affect 1.3 million low-skilled workers, with companies turning to automation or moving out of Malaysia.
PETALING JAYA: A think tank has warned of the potential impact that increasing the minimum wage would have on more than one million low-skilled workers in the country.
In an interview with FMT, Carmelo Ferlito, a senior fellow at the Institute for Democracy and Economic Affairs (IDEAS), said minimum wage policies posed the biggest risk to low-skilled workers because employers might lose the incentive to hire workers who did not possess a value equal to their pay.
Recently, PKR’s Wong Chen, who is part of the Pakatan Harapan policy group, told FMT about the coalition’s plan to increase the current minimum wage of RM1,000 in Peninsular Malaysia and RM920 in Sabah and Sarawak to a standard RM1,500 across the board if it comes to power.
Currently, the minimum wage policy is reviewed once every two years by the National Wages Consultative Council (NWCC), a tripartite body comprising the government, employers and employees.
But Ferlito, an economist by training, said increasing the minimum wage might see low-skilled workers replaced by machines.
Human resources ministry statistics put Malaysia’s low-skilled workforce at 1.3 million people as of 2015.
“After the latest increase in minimum wage, the shopping mall in front of my house replaced all the parking cashiers with auto-pay machines,” he said.
Automation, he said, was a big expense, but in the long run, for many employers it would be a more sensible investment compared with having to pay higher wages, as well as EPF contributions.
“This is a case of typical technological unemployment, but it was not created by capitalistic development or free market, but by government intervention.”
He added that most of the debate on the policy was strictly political, as, according to official statistics, in 2014 only 1.6% of the population was earning less than RM1,000 per month.
Since its implementation in 2013, minimum wage has been a contentious issue among politicians, industry players and workers groups.
“Even if we admit that minimum wage supporters’ hearts are in the right place, we have to recognise that they don’t see the relationship between skills and wages,” Ferlito said.
He said forcing a company to pay wages higher than the value of the worker’s contribution would only encourage employers to look for alternatives.
“It goes beyond companies opting for automation which results in layoffs. Some companies may decide to take their business elsewhere to reduce their operating costs, and other countries in the region are now very competitive.”
In recent times, big names such as British American Tobacco, JVC, Seagate and Western Digital have packed up and moved their operations to other countries in the region for several reasons, including lower operating costs.
“A higher minimum wage will not help make Malaysia more attractive as it adds to operating costs and only makes the country less competitive.”
Minimum wage policies differ from country to country in Asean, with some countries setting monthly or daily minimum wages or having different rates depending on the province or region within the country.
Malaysia’s RM1,000 minimum wage is equivalent to US$233 per month, which is higher than the average minimum wage in neighbouring Indonesia, Vietnam, Thailand and Philippines.
Letting the market decide
Ferlito said the way forward for Malaysia was to allow the free market to do its job, where the employer pays a wage according to the value of productivity.
“Free competition between businesses and employees will ensure the appropriate wages for the appropriate level of productivity.
“This is the only way we can support workers to be sustainable because when wages aren’t fixed at a certain level, workers will look to improve their knowledge and skills to boost their productivity and be able to demand higher wages.”
Ferlito said in 1970, only 0.1% of Malaysians were earning more than RM5,000. In 2014, the figure was 45.1%.
This, he said, did not happen because of the minimum wage, but because Malaysian workers grew in terms of skills and knowledge over the years, enabling them to demand higher wages.
He said it couldn’t be denied that over the past decades, Malaysia had built a business-friendly environment, drawing investors from around the world with its blend of free market ideas and government intervention.
But Ferlito said that growing government intervention at the expense of free market ideas, such as the direct management of entities like government-linked companies (GLCs), had generated a constantly growing need for cash for the government itself.
“Such a need is reflected in recent reforms, such as the goods and services tax (GST). Malaysia now has to choose which way to follow in order to gain more competitiveness on the global scenario and build a sound growth path.”
He said if Malaysia continued to go down the path of more government intervention, not only in matters such as minimum wage or employee welfare programmes, like most advanced democracies in the West, but also with a high involvement in business, the government would need more money, which could only come with higher taxes.
This, he said, would transform Malaysia from a comfortable destination for investment and business to a “fiscal hell”, which could lead to economic and political problems.
The situation, he added, was similar to that of Italy, with the country moving in six decades from being an attractive investment destination to being one of the least business friendly countries in Europe, with a general corporate fiscal pressure of close to 70%.
Alternatively, he said, Malaysia could turn towards a radical free market system in order to get businesses to flourish, bringing a higher degree of wealth for everybody. But this required the government backing off from involvement in business.
“The example of the West, where free market ideals have now been put aside for political purposes, shows why we shouldn’t follow their footsteps.”
He said Malaysia moving towards a freer and open market would benefit the economy and the people, but noted that this change must come from the people and not just politicians.
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