What is Going On, PM Najib??

First, I am totally agree that economically, subsidy is inefficient in resources management. It artificially reduce the market price of goods and services and cause inequilibrium. Increasing fiscal spending in subsidy may also caused deficit in government budget and temporarily boost national output and may cause inflation in the long run.

Because of that, our PM policy make perfect sense. However, yesterday, our deputy prime minister announce that government will adjust the wages of certain teachers in Malaysia. These are the senior staff in teaching profession which mostly consist of principles in secondary school. Their wages will increase by RM 2500 to RM3000.

WHAT???

WHY???

First, RM 2500 to RM 3000 is around the average wages of a fresh degree holders in Malaysia. Furthermore, these beneficiaries are all senior staffs in which their wages already at such a high level. Increasing their wages will only causing inefficiency in teaching profession.

Besides, increasing wages of these senior staff will not increase welfare of population as they are minority with incredible level of wages.

Increment in fiscal spending by adjusting wages will have the same effect from macroeconomics point of view as subsidizing petrol. Increase in government spending will cause inflation in the same way.

When we further analyze the situation, more questions surface.

Subsidizing petrol will cause petrol price to stay low and since this is subsidy (and not price ceiling), quantity demanded and quantity supplied will not differ. So inequilibrium may not happen.

Furthermore, maintaining petrol price at low level will have positive effect on supply as cost of production for firms decrease. Increase in production, thus, increase in aggregate supply will cancel off certain portions of demand pull inflation (caused by subsidy) and inflation will be under control.

So, since we know that inflation will be a big macroeconomics problem, subsidy will moderately contributing to inflation while temporarily boost output while wages adjustment will contribute more to inflation and also temporarily boost output. It seems like an easy choice, isn't it?

Furthermore, maintaining petrol price will contribute more to the welfare of Malaysian than wages adjustment since only around 400,000 of teachers in Malaysia and of this 400,000 teachers, only around 1228 of them will get wages adjustment. However we have around 19 million vehicle in Malaysia. Assume some of Malaysian own more than 1 car, it is safe to assume we have at least 5 million car owners.

So, there we go. Subsidy vs Wages increment. Subsidy is better in efficiency and equality. It is more efficient in economy and better welfare in economy as well.