This article first appeared in The Edge Malaysia Weekly on October 14, 2024 - October 20, 2024

MALAYSIA needs to hasten a slew of reforms to raise wages and break the stagnating labour share of income ahead of an impending rise in the cost of living in a briskly growing economy, say economists.

While unemployment in the country hovers at around 3%, a level considered near full employment by economists, the share of income going to employees remains stagnant at just over a third of economic output. This figure falls short of the government’s medium-term target.

The government also needs to step up its efforts to shrink income inequality over the longer term on top of the recently announced initiatives, say economists.

“Wage growth has struggled to keep pace with inflation, leaving many workers with stagnating real incomes and diminished purchasing power,” says Doris Liew, an economist and public policy expert at the Institute for Democracy and Economic Affairs (IDEAS).

The removal of subsidy is expected to drive up prices in key areas, not only in the targeted commodities such as fuel and utilities, but also lead to wider inflationary effect on food and daily necessities, she cautions.

The official forecast calls for a headline inflation rate of 2% to 3.5% in 2024, even after considering the effects of the fuel subsidy rationalisation. Bank Negara Malaysia governor Datuk Seri Abdul Rasheed Ghaffour remarked in August that “headline inflation is unlikely to exceed 3% for the year”.

Malaysia has been trying to lower a long-running fiscal deficit that stretches back to the 1997/98 Asian financial crisis. This year, the government is targeting to narrow its budget gap as a proportion of gross domestic product (GDP) to 4.3% from 5% last year.

The key is removing fuel subsidies, which have been widely panned by economists as being wasteful.

The government recently removed the blanket subsidy on diesel and is expected to extend the subsidy rationalisation to RON95 petrol, currently capped at RM2.05 per litre. The rationalisation exercise is projected to save RM4 billion annually.

Several other items are up for review, including the price ceiling of local white rice by October, and other essential goods such as sugar.

“Wage adjustment becomes crucial to maintaining, if not improving, the current standard of living. Without timely and adequate wage growth, more Malaysians could struggle to meet their basic needs, pushing the economy further into a cycle of weak consumer demand and sluggish growth,” says Liew.

Employee compensation as a percentage of GDP was only 33.1% in 2023, falling short of the government’s target of 40% by 2025. The monthly household income average of RM8,479 was still below the target of RM10,065 by 2025.

Part of the problem is Malaysia’s business model that largely relies on low-skilled labour. For decades, an abundance of cheap, low-skilled foreign labour has depressed wages while allowing firms to keep costs low.

That current structure of Malaysia’s economy contributes to the problem, says Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre. A key issue is the workforce composition, particularly the ratio of low-skilled to highly skilled workers in the formal sector, he notes.

Low- and semi-skilled workers make up more than two-thirds of the labour force, according to the Department of Statistics. More than one-third of graduates are in low- to semi-skilled jobs, the latest data from 2023 show.

“In order to increase the labour share of income, there needs to be a focus on improving the skill levels of the workforce. The share of labour income would rise with higher demand for higher-skilled jobs and the workforce itself becomes more skilled,” says Lee.

Despite the post-Covid recovery, Malaysian employers are still in a “cautious recovery phase”, seeking to maintain a balance between maintaining financial health and offering competitive salaries, a spokesperson with online employment platform JobStreet tells The Edge.

The increments have remained “modest” even as 87% of companies reported that the actual salary increase in 2023 either met or exceeded the initial budget, says JobStreet. Companies are likely aiming for financial stability and gradual growth rather than aggressive salary increases, it notes.

The government will relook at the minimum wage this year under a law that mandates a review at least once in two years. The last review, implemented in May 2022, set a monthly minimum wage of RM1,500 applicable to all sectors nationwide for employers with five or more workers.

To further nudge firms, the government has launched a pilot project of the progressive wage model and the policy will be fully implemented in October. The policy is expected to cover four million people earning a monthly salary of between RM1,500 and RM4,999 in the formal sectors.

The majority of employers and workers have provided “positive feedback” on the implementation, Deputy Minister of Human Resources Datuk Seri Abdul Rahman Mohamad said in June. If successful, the policy could help expand the share of labour income by 0.1 to 0.2 percentage point, according to government projections.

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