2.5.12

My Analysis on the Minimum Wage Policy in Malaysia

Couple of days ago Human Resource Ministry of Malaysia announced the rate of minimum wage in Malaysia. It is officially RM 900 per month minimum wage for every local labour in Malaysia with exception of labours in house care sector.

The announcement was followed with moderate dissatisfaction from most Malaysia labours as they claimed RM 900 is insignificant compared to the living cost of Malaysia. A moderate level of demonstration was held on labour day yesterday for such purpose.

To be fair, they are right. The minimum wage is insignificant for most Malaysian as RM 900 is almost impossible for anybody that stay in major cities in Malaysia to survive with. However, they should also know that this is the minimum wage, not the recommended wage. Minimum wage should be, well, minimum. Besides, unreasonably high minimum wage could distort the labour market.

So here is my analysis on such matter.

Personally, I think this is a good policy by government. Minimum wage is there to ensure no (or minimum) discrimination on labours especially unskilled labours. This is the policy to protect these unskilled labours in the process of wage bargaining between them and firms. Commonly, unskilled labours are significantly discriminated with unreasonably rate of wage and unable to bargain correctly due to weak communication skills.

For skilled labours, the wage bargaining process should not be distorted. This process will automatically set the equilibrium wage for Malaysia labours. Distorting such process would affect the equilibrium wage, resulting in failure in labour market.

So, on this point, government of Malaysia is doing fine by setting the minimum wage rate just enough to protect the unskilled labours.

Using the simple New Keynesian analysis of price setting-wage setting analysis, setting high rate of minimum wage could result in leftward shift of wage setting curve, resulting in higher rate of involuntary unemployment. It means that setting high rate of minimum wage would not at all help most labours to earn higher wage but probably resulting in many unskilled labours to be unemployed.

Since labour market in Malaysia (and most of the world) is imperfect in information and mobility, setting a minimum wage below the equilibrium wage in labour market could still be efficient. With this, unskilled labours have more information on the rate of wage they should get, thus, eliminating certain level of micro level failures of labour market.

Statistical analysis backs my point. I will compare Malaysia minimum wage policy with several economies in the world. I will use petrol (or gasoline) price as my point of reference as it is the most important variable for any economy and likely to affect the rate of inflation in general.

The economies I will use are Hong Kong, Indonesia, Thailand, US, UK and Japan. Certain economies (such as Singapore) cannot be analyzed as no minimum wage policy is set. Besides, Ron 95 or unleaded grade of petrol will be used as proxy for petrol price.

For Hong Kong, the minimum wage rate is HK$ 28 per hour and petrol price is HK$ 17.15 per litre. Thus, per hour litre of petrol (litre of petrol one hour of wage can buy) is at 1.6327.

For Indonesia, the minimum wage rate is averagely at 5,000 rupiah per hour with petrol price at 10,300 rupiah per litre. This means 0.4854 per hour litre of petrol.

For US, the minimum wage is $7.25 per hour with petrol price at $1.03 per litre. This means 7.0388 per hour litre of petrol.

For UK, minimum wage rate is 5.93 GBP per hour with petrol price at 1.41 GBP per litre. 4.2057 per hour litre of petrol.

For Thailand, minimum wage rate is averagely at 21.94 Baht per hour with petrol price of 55.39 Baht per litre. 0.3961 per hour litre of petrol.

For Japan, minimum wage rate is averagely at 678.5 Yen with petrol price at 152.7 Yen per litre. 4.4434 per hour litre of petrol.

For the case of Malaysia, since we have monthly minimum wage, 2 assumptions have to be made. First, assume that there is no bonus. Next, total working hours are set in 2 groups. First group: 5 working days week with 8 hours per day, which means 40 working hours per week. Second group: 5 working days per week with 9 hours per day, or 5.5 working days with 8 hours per day, which means around 45 working hours per week. 

For the first group (40 working hours per week), per hour wage rate is RM 5.19 and for the second group (45 working hour per week), per hour wage rate is RM 4.62. Since petrol price in Malaysia is RM 1.90, per hour litre of petrol are 2.7328 and 2.4292 respectively for these groups.

Looking at these data, our per hour litre of petrol is relatively lower than UK, US and Japan but higher than HK, Thailand and Indonesia. Since developed economies generally have proportionally higher rate of wages, it is unsurprised that UK, US and Japan per hour litre of petrol are higher than Malaysia. However, Malaysia per hour litre of petrol is higher than HK, effectively meaning that Malaysia minimum wage rate is much more generous than HK minimum wage rate.

 So there is it. The minimum wage is properly scaled compared to other economies and it is properly designed to protect the unskilled labours from discrimination.

Although the policy is good, there is an area that can be improved. Monthly minimum wage rate is not the perfect way of minimum wage settings. Several other variables, such as working days per week, working hours per day etc. could affect the effectiveness of the policy. Thus, minimum wage policy should be set in hourly form to eliminate all the unknown variables.




3 comments:

Marcus said...

Hi! I really like your analysis by comparing minimum wages to the amount of petrol you can purchase for every hour of labour! =)

Luckily indeed Malaysia highly subsidises petrol or otherwise we may only able to buy a much lesser amount of petrol. (other countries do not subsidise petrol ya)

I have never thought of using petrol as comparison, instead I usually compare them with the price of a bowl of noodle.

In HK, a bowl of wanton mee is HKD 24 which is equivalent to RM 12 in Malaysia. And Malaysia sells a bowl at roughly around RM 6 in KL.
This is consistent with starting salary if equivalent job and HK is double the salary of Malaysia.

Another good comparison is the rental price of a room, or per sqft. This is a good rough indicator of where salary levels should be.

By the way, I noticed you have a bloglist which i found particularly useful, I bookmark your site and visit frequently.

I get my malaysia stock news and picks from

www.malaysiastockpicks.blogspot.com

it will be helpful to me and your readers if you can include into your bloglist, well, just a suggestion =)

ru40342 said...

Thank you for the comment.

The point of calculating per hour litre of petrol is to investigate the purchasing power of labours in these economies. The amount of subsidy provided does not alter the result as petrol price is the most dominant variable of general price level. Price of petrol has much greater level of spillover to the prices of other goods and services.

Using food price (wanton mee) or per square feet of rent are not ideal as too many variables involved in the determination of these prices, making it less reliable. Besides, rent and certain food prices are way less important than petrol price in determine the general price level, thus the purchasing power.

Nonetheless, thanks for the recommendation and will consider that in the future analysis.

PENNY STOCK INVESTMENTS said...

Minimun is good.