This article first appeared in Forum, The Edge Malaysia Weekly on October 19, 2026 - October 25, 2026
Out of every ringgit of income the Malaysian economy generated last year, less than 34 sen went to employees as compensation. In 2019, it was closer to 36 sen. The difference may look small on paper, but for an economy of more than RM2 trillion, my back-of-the-envelope estimate puts it at around RM40 billion last year. The contrast with advanced economies is starker. In Japan, South Korea, the UK, the US and the European Union, compensation of employees as a share of gross domestic product ranged from about 47% to 52% in 2024. The fact that employees in Malaysia still capture such a modest share of national income helps explain why wages have moved steadily up the policy agenda in recent years.
The minimum wage increase announced in Budget 2027 is the latest step in that direction. From June 2027, the wage floor will rise from RM1,700 to RM2,000, the third increase since 2022, with the government estimating that this proposed measure will benefit more than four million workers. Yet the conversation that followed quickly turned to prices. Higher wages, the familiar concern goes, will lead to higher prices. To be fair, some price increases are likely. Wages and prices tend to move together, and we cannot expect pay to rise while prices stand still. The more important question is whether pay rises faster than prices, so that workers are better off on a net basis. In other words, we should be protecting the real wage, not the nominal number.
On that measure, there is good reason to think workers will come out ahead. A 17.6% increase in the minimum wage does not mean a 17.6% increase in prices. Labour is only one component of a firm’s costs, and minimum-wage workers make up only part of that. The price effect is likely to be larger in labour-intensive services. For a worker who receives the increase, the outcome is likely a net gain where pay rises while cost of living increases by only a smaller fraction, provided the increase does not set off broader price rises across the economy.
Admittedly, that does not mean the cost disappears. It has to be shared between consumers and businesses, and firms are not starting from a comfortable position. Producer prices rose 10.7% year on year in August, but only part of that has been passed on to consumers given the still manageable consumer price inflation rate. This suggests that firms have absorbed much of it within their margins. Business sentiment remains sluggish, with the rising cost of doing business still among firms’ top concerns. For many firms, the higher wage floor will arrive before they have fully worked through this year’s cost shock.
The reach of the new floor is also wide. In March 2026, one in four formal employees earned below RM2,000, and nearly one in five fell within the narrow RM1,700 to RM1,999 band. For these workers, and for consumer spending more broadly, this is good news as lower-income households tend to spend most of any additional income and it would result in a notable proportion of workers seeing an improvement in spending capacity. The flipside is that a broad base of employers will need to budget for higher wages, unless they are micro, small and medium enterprises with annual sales below RM50 million, which are exempted.
How that cost is shared matters as much as its size. Where firms are unable to pass on costs in full, part of the adjustment will come from margins. Where costs are passed on, the increase should be fair. As a rule of thumb, a reasonable price increase should broadly reflect the share of minimum-wage labour in a firm’s costs. Increases well beyond that deserve scrutiny, which calls for close monitoring by the relevant authorities. This will help ensure that a wage increase does not become cover for broader price hikes. More importantly, businesses, in turn, must accept that paying more for talent is part of competing for it.
Even a fair pass-through, however, does not guarantee that workers end up better off. Workers outside the higher floor will face any price increases without a matching raise. Large, irregular increases do not serve businesses well either. The minimum wage had risen to RM1,500 in 2022, to RM1,700 in 2025 and will reach RM2,000 in June 2027, each step a sizeable cost adjustment that firms must absorb at once.
So, how should policy be framed going forward? A better approach would anchor the minimum wage on sustained real income growth for lower-income workers, through smaller and more predictable and potentially more frequent adjustments. One option is a regular, rules-based review that adjusts the minimum wage for inflation plus a share of productivity growth. This offers workers protection against rising living costs and gives businesses room to plan ahead. Where wages fall behind, targeted support can bridge the gap. The expanded Sumbangan Tunai Rahmah and Sumbangan Asas Rahmah cash aid and electricity protection up to 800kWh help here, particularly for households beyond the reach of the minimum wage.
Granted, RM2,000 is a meaningful step forward, but a figure on a payslip is only a means to an end. The real test of this policy is not whether workers earn RM2,000, but whether that RM2,000 buys more than RM1,700 does today, and whether workers’ share of a growing economy returns to where it once was.
Woon Khai Jhek, CFA is a senior economist and heads the Economic Research department at RAM Rating Services Bhd. His work focuses on macroeconomic, fiscal and state-level analysis, as well as economic forecasting.
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