Sunday 19 May 2024
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This article first appeared in The Edge Malaysia Weekly on April 11, 2022 - April 17, 2022

THE government’s move to raise the minimum wage from RM1,200 to RM1,500 with effect from May 1 has been met with resistance as the country transitions to endemicity against a backdrop of nascent economic recovery, global inflation and geopolitical tensions arising from the Russian invasion of Ukraine.

Just a week after Bank Negara Malaysia governor Tan Sri Nor Shamsiah Mohd Yunus urged for an orderly and transparent implementation of the new minimum wage to ensure the move supports economic growth, 11 associations in the palm oil industry issued a statement calling for its postponement followed by a phased implementation to provide a “soft landing on its impacts”.

In an April 6 statement, the associations, which included the Malaysian Estate Owners’ Association and the National Association of Smallholders Malaysia, said that while they supported the revision, a “correct approach” was necessary.

“The 36% increase (from the RM1,100 level in rural areas) in minimum wage by May 1 is a significant hike for planters in rural areas recovering from the Covid-19 pandemic amid crop losses, worker shortage, movement restrictions and higher input costs. Its roll-out will also entail the recalibration of hourly or daily rates and revision of previous benchmarks used for wage calculations, including for piece-rated work. There will be ripple or knock-on effects across the board on the cost of production that cannot be retracted once introduced,” it said.

Sunway University Business School professor of economics Dr Yeah Kim Leng tells The Edge that a phased implementation may be less disruptive, especially for small and medium enterprises (SMEs) that are dependent on low wages.

“This cuts across a fairly broad number of sectors and industries covering agriculture, manufacturing and services. Staggering the wage increase will give employers time to improve productivity,” he says, adding that the minimum wage hike presents a shock to businesses, as it is multiples of the current inflation rate.

Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio Economic Research Centre, agrees that a steep increase in wages will have a significant impact on many businesses, especially those in rural areas.

“Small companies may need to reduce employment [to cope with the increased cost of labour],” he says.

Of concern are the knock-on effects of the new minimum wage on performance incentives and overtime, as employers are also facing higher cost burdens in the current inflationary environment.

In a boxed article in its Economic and Monetary Review 2021 (EMR 2021), Bank Negara highlights the importance of remaining watchful for signs of price pressures “spreading persistently” to the rest of the economy.

“More broad-based and persistent price increases could cause long-term inflation expectations to become unanchored, leading to second-round effects as businesses keep increasing prices in anticipation of higher inflation, or wages increase in an upward spiral as workers persistently demand higher wages to make up for the expected losses in purchasing power,” it says.

Bank Negara also points out, however, that this remains a tail risk and that, for 2022, while the inflation outlook is subject to upside risks, headline inflation is projected to remain manageable.

“In terms of timing, we need to consider these impending impacts on the economy,” Yeah cautions. “At this juncture, we also don’t know the extent of workers who are paid minimum wage. So, that needs greater clarity.”

Information on the number of workers and their distribution by sectors and geographical locations who are receiving minimum wage will enable the impact of the wage increase to be assessed, given the varying capacity of the different industries to absorb the labour cost increase and the difference in cost of living by location, he explains.

“The shock from the 25% increase is more likely to lead to higher inflation, which could negate the benefits of increased wages for the lower-income group, as it would reduce the workers’ purchasing power,” Yeah adds.

As to whether the pushback from the 11 palm oil industry associations would embolden more trade groups to request an extension of time before raising wages, Yeah notes that there may need to be a “compromise”.

“It would be reasonable to spread the 25% increase over a few years [instead],” he points out, cautioning against a postponement of the minimum wage increment, as it was long overdue and necessary to move the country up the value chain.

The minimum wage was last revised on Feb 1, 2020. It was increased by RM100, to RM1,200, during the tabling of Budget 2020.

In 2018, the Pakatan Harapan government promised to increase the minimum wage to RM1,500 within five years of its administration as its 14th general election promise.

On March 11, Prime Minister Datuk Seri Ismail Sabri Yaakob was reported to have said that permanent employees of government-linked companies (GLCs) and government-linked investment companies (GLICs) would be paid at least RM1,500 a month to address cost-of-living challenges.

Later, on March 19, Ismail Sabri said at the Umno general assembly 2021 that a postponement of enforcement for “micro companies with few workers and low income” was being discussed by Minister of Human Resources Datuk Seri M Saravanan and Minister of Entrepreneur Development and Cooperatives Tan Sri Noh Omar.

Noh Omar said in subsequent news reports that micro SMEs would be exempted from applying the RM1,500 minimum wage rate from May 1, but he was later quoted as saying that the matter was still under discussion.

While there has been resistance, several corporations — including Sime Darby Plantation Bhd and Gamuda Bhd — have publicly stated their support for the increase in the minimum wage.

In fact, Gamuda said it would increase the minimum wage from RM1,200 to RM1,600 for foreign workers effective from May 1, in line with the construction group’s commitment to mitigate against worsening social inequity.

Malaysian Trades Union Congress president Datuk Abdul Halim Mansor stresses that no business should be exempt from the revised minimum wage policy.

“[Employers] facing any difficulty in implementing it should appeal via the official channel stated in the Employment Act 1955. Note that the RM1,500 minimum wage is defined by weekly, daily and hourly work. A month’s work constitutes 26 working days, with eight working hours per day, not including overtime,” he explains.

Acknowledging that exempting smaller-income business groups from the increase in minimum wage could be hard to implement, Yeah suggests government subsidies for affected small firms instead.

“Measures to reduce the impact of the policy can be designed to help the micro SMEs, so that targeted assistance can be designed to be a part of post-Covid-19 rebuilding efforts,” he says.

“Businesses that fail to survive in spite of targeted assistance indicate a lack of viability and can be encouraged to relocate to other countries where they can increase productivity.”

Meanwhile, the Federation of Malaysian Manufacturers (FMM) last month called for a progressive adjustment to the minimum wage to support business sustainability, which would then allow employers to continue to plan for salary increments in 2022 and further address cost-of-living pressures.

Productivity yet to be restored

While industries debate and adjust to the hike in minimum wage, labour shortage is still a lingering problem in the aftermath of the pandemic, where border closures led to a freeze in the hiring of foreign workers.

“Although international borders have opened and there is now more traction in the travel and retail industries, hotels are running at only 40% capacity, owing to worker shortage. In the plantation sector, current crude palm oil prices may be high, but there aren’t sufficient workers for the harvest. Any silver lining for Malaysia is not without encumbrances for now,” Lee notes.

FMM president Tan Sri Soh Thian Lai says that, with external demand expected to pick up in the coming months, the industries desperately need to fill their labour shortages, especially in the unskilled category with foreign workers. It is estimated that the manufacturing and manufacturing-related services industry would need 600,000 workers to fill its manpower gaps.

The FMM-Malaysian Institute of Economic Research Business Conditions Survey conducted from Jan 5 to Feb 10 showed optimism for the first half of 2022, as it indicated a pickup in sales both for domestic and export markets.

“In tandem with that, both production volume and capacity utilisation also improved. The industry has also indicated an expectation of expanding employment, which indicate improvement to productivity levels within the industry. At the same time, the anticipated improvements in capital investment also imply that capital productivity is expected to grow,” says Soh.

Measures to curb the pandemic since 2020 had led to high employment, which came in at 4.5% that year from 3.3% the year before.

It remained elevated at 4.6% in 2021, but Bank Negara’s EMR 2021 said the slight increase in the unemployment rate was due mainly to a faster growth in the labour force relative to employment, following the re-entry of workers into the labour market during the year.

With the Omicron variant running its course through communities, productivity is expected to be affected because of worker absenteeism.

According to EMR 2021, developments surrounding labour productivity were mixed and partly reflected the impact of pandemic containment measures on the labour market in 2020 and 2021.

It noted that productivity, as measured by real value-added per hour, declined by 2.6% in 2021 (2020: 3.4%), owing mainly to the larger increase in total hours worked compared to output, relative to the significant decline in hours worked in 2020, particularly during the nation’s first Movement Control Order from March 18 to 31, 2020.

Meanwhile labour productivity measured by real value-added per worker increased by 1.8% in 2021 compared with a drop of 5.5% in 2020, owing to the more significant increase in output relative to employment.

The manufacturing sector recorded the largest improvement by 6.8%, driven mainly by the electrical and electronics as well as petroleum, chemical, rubber and plastic products subsectors. Services sector productivity also improved slightly, registering a marginal positive growth of 0.5% in 2021 compared with -6% in 2020, amid the gradual normalisation of economic activity, the report said.


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