THE proposed increase in the general minimum wage to RM2,000 and the starting wage for fresh graduates to RM2,500 brings into focus the issue of wage compression. While raising the wage floor can improve the incomes of lower-paid workers, it also raises questions about the returns to higher education. For young people weighing the cost of a degree against their future earnings prospects, a  relatively small wage differential at the point of entry into the workforce may make the investment appear less worthwhile. 

However, the issue is not necessarily the initial wage gap between graduates and non-graduates, but whether wages above the minimum can grow in line with productivity, skills and responsibility. If wages at the bottom rise while those of skilled workers remain stagnant, the wage structure may become  compressed, potentially weakening incentives to invest in higher education or professional upskilling. This is particularly important in a context where households bear substantial education costs. 

A diminishing education premium has been observed in many countries. While the reasons differ, the rising cost of education is likely to be an important factor. When young people face high education costs but find jobs increasingly scarce and starting salaries relatively low, they may begin to question  whether higher education is worth the investment. The response should be to keep higher education financially accessible to young Malaysians and strengthen the connection between education, relevant skills and employment opportunities. Young people need a decent starting point, but just as importantly, a credible path to progress further up the career ladder. 

There has been much discussion about the high level of skill-related underemployment in Malaysia. This refers to workers with tertiary education who are employed in jobs that do not require a higher  education qualification. It is often seen as evidence that the economy is not creating enough quality jobs, or that there is a mismatch between the skills produced by our education system and those  demanded by employers.

This is not unique to Malaysia. Higher-income countries also experience skill-related  underemployment, although some place greater emphasis on time-related underemployment: people who want to work more hours but are unable to do so.  

The Federal Reserve Bank of New York has tracked the employment outcomes of recent American college graduates for many years. Its data show that the share of graduates working in jobs that do not typically require a degree has remained substantial, commonly around 30%to 35% overall.  The rate among recent graduates has been higher at various points, reaching the high 30s and, at times, close to 50%.  

This suggests that graduate underemployment in the US cannot be explained by a shortage of quality jobs alone. Despite being a leader in technological and scientific advancement, the United States still has many graduates working in jobs that do not require a degree. While several factors may explain this phenomenon, the impact of technology is one that deserves particular attention, especially in the  Malaysian context. 

The relationship between education and earnings is also changing as technology reshapes work. The traditional idea of skill-biased technological change (SBTC) holds that new technologies tend to increase demand for skilled workers relative to less-skilled workers. University education is often used as a proxy for skill in this framework. When technology raises demand for highly educated workers,  graduates tend to benefit through better employment prospects and a higher wage premium. 

However, we should be careful about treating a university degree as a guarantee of higher income. A degree is an imperfect proxy for skills, and technological change does not reward every graduate equally. The return depends on what a person knows, the tasks they can perform, and whether employers need those capabilities. As technology changes, some qualifications may remain valuable while particular skills or tasks associated with them become less in demand. 

Task-biased technological change offers a more detailed way of looking at this process. Rather than dividing workers simply into skilled and unskilled groups, it focuses on the tasks performed within jobs. Technology may replace routine tasks, including some tasks carried out by highly educated workers, while complementing tasks that require judgement, problem-solving, interpersonal interaction or the effective use of technology. Many jobs contain a mix of tasks, so technology may change the content of a job rather than eliminate the entire occupation. 

One implication of task-biased technological change is that it helps explain labour-market polarisation, or the hollowing out of the middle. This has been observed in developed economies for decades, where employment and earnings opportunities have increasingly diverged between high- and low-paid occupations, putting pressure on parts of the middle class. Technology can automate routine, rule-based tasks that people acquire through university education, including certain aspects of accounting, engineering and software development. At the same time, some lower-paid manual and service tasks, such as cleaning and delivery, have been more difficult to automate fully. This helps explain why low wage jobs can persist even in technologically advanced economies, although other factors also  influence their pay and employment conditions. 

Seen through this lens, raising the minimum wage floor is more important than ever. As technology  reshapes the demand for different skills and tasks, the resulting market forces could put further pressure on wage growth, particularly for workers in jobs that are more easily substituted or whose  bargaining power is limited. However, raising the floor alone is not enough. It must be accompanied  by measures that help workers move into higher-value tasks and ensure that productivity gains  translate into better wages and career progression. 

For Malaysia, this presents an additional challenge. As the country aspires to move up the technology  value chain, we need to consider not only whether the economy is creating more skilled jobs, but also  what skills those jobs require and how technological change affects the demand for different types of labour. This is particularly important when lower-end wages have lagged behind the cost of living and  the growth of the economy. Moving up the technology value chain should therefore mean more than adopting advanced technologies or producing higher-value goods. It should also enable workers to move into more productive jobs and share in the resulting gains. Otherwise, technological progress  may strengthen the economy’s productive capacity without delivering commensurate improvements  in wages and living standards for a broad section of the workforce. 

Technology can create industries and occupations, raise productivity and help firms produce higher value goods and services. But its benefits are not automatically shared evenly. Some tasks may be  automated, some jobs redesigned, and demand may rise for workers who can complement new  technologies. The outcome depends on business investment, the pace of adoption, training and the  ability of firms and workers to adapt. 

For Malaysia, the policy question is how to ensure that higher wages are accompanied by stronger  productivity and a shift towards higher-value activities. If wages rise without corresponding productivity  improvements, some businesses with limited margins may respond by raising prices, slowing  recruitment, reducing hours or delaying investment. These are risks, not inevitable outcomes. Better wages can also support household spending and encourage firms to move away from business  models that rely heavily on low-cost labour.

Wage policy should therefore not be used in isolation. It needs to be supported by pro-employment policies, social transfers and a sustainable enterprise environment. Social transfers can provide targeted support to households under financial pressure, while wage policy sets a floor for earnings from work. Neither can substitute for productive employment and firms with the capacity to pay better  wages over time. 

Education policy should keep tertiary education and technical and vocational pathways accessible, while strengthening links between institutions and employers. Better information on employment outcomes, work-based learning and continuing skills development can help young people make informed decisions. For businesses, support should encourage investment in productivity, digital tools and staff capabilities rather than simply subsidise wages without addressing the underlying constraints  on growth. 

Ultimately, the minimum wage is an important part of the labour-market framework, but it is not a  complete employment or wage strategy. Raising the wage floor can improve the position of lower-paid workers. The larger challenge is to ensure that education remains an accessible investment, that workers can progress beyond entry-level pay, and that technological change creates opportunities for better jobs rather than simply displacing existing tasks. Success should be measured by whether more Malaysians can move into productive, secure and better-paid employment over time. 

Azizul Amiludin is Senior Resident Fellow at the Malaysian Institute of Economic Research.