This article first appeared in The Edge Malaysia Weekly on August 14, 2023 - August 20, 2023

GENERALLY, low wages are a known structural challenge for many Malaysians, one that not only impedes their ability to save for old age but also limits the government’s hand when it comes to considerations on imposing broad-based taxes. As the cost of food and basic necessities rise, politicians are pressured to dole out subsidies as well as cash transfers to calm unrest among a large group of the electorate looking to cope with the higher cost of living.

That half of Malaysians earn less than RM2,600 (US$567) a month — below the “living wage” of RM2,700 that Bank Negara Malaysia reckons an adult living in Kuala Lumpur needs to make to cover not just basic necessities but also allow social participation and some savings — means that policy action is necessary to raise incomes faster for the majority of locals.

The intent to raise wages for the majority was probably why lifting the labour share of income to 45% within 10 years from 32.4% in 2022 was one of the seven mission targets listed by Prime Minister Datuk Seri Anwar Ibrahim when presenting the Madani Economy framework on July 27.

He is not the first to make higher employee income share a socioeconomic target. The government had targeted to lift the share of compensation to employees to 40% by 2020 under the 11th Malaysia Plan (2015-2020). Under the Shared Prosperity Vision 2030 tabled by the previous administration in late 2019, labour share of income was targeted to rise to 48% by 2030 to be closer to that of developed countries.

Labour share of income did rise from 35% in 2015 to 37.4% in 2020, but slipped to 35.1% in 2021 and 32.4% in 2022, data from the Department of Statistics Malaysia show.

While there is general agreement that wages need to move higher alongside productivity and there is a need to pay fair wages for work rendered, there are differing views, however, on whether targeting a 45% labour income share is the best way forward for the Malaysia that is looking to shore up capital investments to bolster the country’s strategic capacity.

“Unless the government is willing to part with tax income, lifting the labour share of income to 45% means reducing the share of capital [returns] to below 55% [from 67% in 2022]. Can both happen — keeping investors [owners of capital] happy and willing to invest more capex (capital expenditure) while making them pay higher wages to employees?” an observer asks, noting that there will be no investment flow if the perceived returns are deemed unattractive.

“In developed countries where specialised services by highly-paid professionals are the mainstay of the economy, labour income share is of course high because GDP output is basically due to the professional skills [labour]. As an economy whose output requires intensive capital investment in manufacturing facilities [heavy machinery and equipment], however, one cannot expect that same level of labour income share even if both are high-income economies. One has got to take into consideration the make-up of the economy,” the observer adds.

Researchers at the Khazanah Research Institute (KRI), for instance, had previously noted that it would not be a zero-sum game if policymakers took into consideration labour income dispersion — basically factors such as skill levels, education and market conditions — when working out a broader solution to lift incomes as well as encourage investments.

In a working paper dated January 2020, researchers at KRI suggested that policymakers “focus on the distributional aspects of labour income as a policy goal, as the labour income share is neither a good indicator of income inequality, nor a good driver to reduce it”.

There is a need for policymakers to consider whether “anchoring inequality on a higher labour income share may be at odds with Malaysia’s ambition of technological upgrading and moving towards higher productivity, capital-intensive modes of production” as there is evidence suggesting “a disconcerting trade-off between the country’s growth and distribution objectives”, they said.

According to their literature as well as regression analysis, there have been instances when the push for higher labour income share has been associated with the underlying trend of premature deindustrialisation — something that Malaysia is trying to reverse, including with the upcoming tabling of the New Industrial Master Plan 2030.

Bank Negara Malaysia, in an article in its 2018 annual report titled “Are Malaysian Workers Paid Fairly?”, also noted that an increase in labour income share does not necessarily guarantee higher wages for workers.In the article, the central bank ’s researchers had, among other things, rightly noted that judicious deliberation and committed action are needed to answer hard questions such as how Malaysia’s taxation and distributive policies can positively impact and enhance the division of incomes.

In any case, if the intended outcome is higher wages, policy should be directed at lifting that specifically in a way that delivers skilled labour that employers want and are willing to pay higher wages for, rather than risk alienating potential investors who naturally want a return on their capital. 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.