KUALA LUMPUR (Oct 12): Employers must raise wages as part of the solution to Malaysia's productivity challenge, according to the Economic Outlook 2024 report.

"The issue of low wages in Malaysia is normally linked to the economy's productivity challenges, with the implied argument that employers should wait for productivity to rise before increasing the wages," the report stated.

"If Malaysia aims to escape the low-wage, low-profit, and low-productivity trap, a cheap labour model of business and economic growth must be counteracted through a concerted effort to raise wages," it added.

Citing The Centre for Future Labour Market Studies' (EU-ERA) 2022 Computable General Equilibrium Model on the effects of higher wages on Malaysia's domestic economy, the report said it found that wage growth had positive impacts on other macroeconomic indicators such as gross domestic product (GDP), labour productivity, and income inequality.

The report also cited a study by Khazanah Research Institute (KRI) on wage growth from 2010 to 2019 which showed that policy interventions were vital to improving wage outcomes

While the impact of a legal floor wage was limited to the lowest wage earners, they were important in raising the income levels of that group and reducing pay inequality.

"The primary lesson of the minimum wage is that progressive, consultative and decisive measures are required to improve the equitability and inclusiveness of the economy.

"Therefore, the focus of current policy efforts needs to ensure significant improvements in the median wage level in the coming years. If the minimum wage is effective in raising wages at the lower end of the distribution, then additional measures should be targeted towards the middle wage earners," it said.

It highlighted the vulnerability of Malaysian households when confronted with rising costs, as their wage increments have arguably been insufficient to provide a buffer against future shocks.

Middle wage earners experienced the slowest growth in their wages, even lower than the lowest 30% group of wage earners, showing that the effects of the minimum wage are limited to the lowest wage earners.

Citing data by KRI and Department of Statistics Malaysia, the Economic Outlook 2024 report stated that the "squeezed middle" comprising those whose wages were between the 45th and almost 80th percentile experienced the slowest monthly wage growth.

However, "the bottom 50% of workers only experienced an increase of the real monthly wage by approximately RM500 during the 2010-2019 period, which translates to a rough increase of RM56 per year", it said.

The report, quoting KRI's study on wage growth from 2010 to 2019, also said the Malaysian labour market relied on policy interventions such as the minimum wage to ensure equitable and inclusive wage growth.

"The study also finds that wage growth is suppressed and broadly regressive without policy measures," it said, adding that a comparison of salary growth between the years where the minimum wage was implemented and the period without demonstrated that wage growth for the bottom 30% of earners were dependent on the legal floor wage.

"Without the government's directive to employers, the wage level would have remained suppressed," it said.

The report said wage stagnation — most commonly defined as wage growth which is slower or barely keeping pace with the rate of inflation or cost of living — is "found to be a central feature of the Malaysian labour market, despite the effects of minimum wage".

Meanwhile, over 70% of working graduates earn below RM2,000 per month, and concerningly, the percentage of those earning between RM1,000 and RM2,000 has increased from 43.7% in 2010 to 54.6% in 2020.

As a consequence, brain drain happens seriously in Malaysia — with about 54% of those who have left the country working in Singapore — driven primarily by the prospect of higher salaries, according to a study by the World Bank in 2010.

“Another consequence of the wage issue is the increasing number of SPM leavers opting for gig work such as e-hailing services instead of continuing their education or developing core skills and capabilities in a career track; preliminary estimates indicate that the gig sector can provide a competitive income compared to fresh graduates,” it said.

The core issue is that the expansion of gig work may not yield favourable returns to the economy if it translates to an increasing share of the workforce forgoing long-term investment in skills and capabilities.

It also mentioned that low wages in Malaysia are often tied to productivity challenges. Some argue employers should wait for productivity growth before raising wages, but this overlooks the role of higher wages in boosting productivity.

As a response to these intertwined challenges, the report emphasises the need for nations to embrace a vision of wage growth as a source rather than just a consequence of economic growth.

Click here to read more about the Economic Report 2023/2024.