KUALA LUMPUR (March 31): Malaysia needs more reforms beyond periodic minimum wage revisions as current weakness in income growth threatens consumer spending in the country.
While repeated minimum wage hikes over the past years have supported earnings at the lower end of the income distribution, they have also led to unintended distortions across the broader labour market, particularly through wage compression, according to Bank Negara Malaysia (BNM).
“Rather than encouraging broad-based wage growth, it is observed that the minimum wage has not proportionally raised wages for workers in the middle of the pay distribution,” BNM said in its Economic and Monetary Review 2025.
The situation, which the central bank described as wage bunching, narrowed pay differentials between low- and semi-skilled workers while limiting wage progression and weakening incentives for skills upgrading.
Low wages have long been a sore point for a large majority of Malaysians grappling with rising cost of living even as the country’s economy expanded rapidly and productivity improved significantly.
For years now, employees' share of labour income has largely stagnated at a little over one-third of Malaysia’s economic output and below the government’s target. Private consumption, including household and business spending, remains a key engine of economic growth for Malaysia.
Income remains the primary driver of private consumption among Malaysians, as it determines households’ purchasing power and anchors expectations of future spending, BNM highlighted.
“Wages caught up with the cumulative productivity gains only in 2024,” the central bank said. “Undoubtedly, Malaysia’s labour productivity performance has room for improvement relative to aspirational comparators.”
Malaysia’s productivity growth averaged 2.8% between 2021 and 2024 as compared to peers like Singapore, which grew 3.4% over the same period.
Need for broader wage-setting framework
To achieve more durable income gains, BNM called for the development of complementary wage-setting mechanisms, including wage guidelines, living wage benchmarks and more coordinated frameworks that link wage growth to productivity, competitiveness and price stability.
The central bank highlighted an international example like Japan’s “Shunto” system, an annual, economy-wide wage negotiation process, as a model that helps align wage increases with macroeconomic conditions and anchors expectations across industries.
“Adapting these principles to Malaysia’s context would help rebalance bargaining power and ensure that rising productivity consistently translates into higher incomes for workers,” BNM said.
There are some structural factors that underpin Malaysia’s subdued wage outcomes ranging from lack of sufficient high-skilled, high-paying jobs in recent years to the continued reliance on low-cost foreign labour.
The persistently weak wage growth could have longer-term implications for household spending, the central bank flagged.
Under standard economic frameworks, consumption decisions are shaped not only by current income but also by expectations of future earnings. Slower wage growth may prompt households to moderate spending.
Some households may sustain consumption by drawing down savings, increasing borrowings or relying on policy support. However, prolonged dependence on such non-income channels raises sustainability risks, particularly in an environment of elevated household debt, BNM warned.