Yes, I am stupid, and I am sorry to say, we are all stupid. Warren Buffett is stupid, Bill gates is stupid, Barack Obama (obviously) is stupid, late Steve Job is stupid, all of us are stupid. We are probably as stupid as animals.
Yes I know at this point 99 percent of the reader will close this page and start wondering just how stupid the author of this article is claiming these great figures are stupid.
So for the 1 percent that keep reading, allow me to explain. Theories of microeconomic and general equilibrium mention that market failure occur on various sources such as externalities, imperfect information, existence of free riders etc. That means human is deemed rational and only make irrational decision when influenced by negative (or positive) external forces, disrupting the market forces from working its magic of creating point of equilibrium. Even the school of Keynesian agrees that government is needed on the basic of imperfect information. Suppose if information is perfect, with the existence of rational expectation, everyone should be able to make wise and correct decision every time currently and in the future.
However, is that true? Are we capable of obtaining perfect information? Are we interested in getting perfect information? More importantly, if we have perfect information, are we able (and want) to make correct decision?
I do not think so. That's the reason I claim all of us are stupid. For me, people that do not want to get perfect information or cannot make correct decision even with perfect information or know the correct decision yet still want to choose another option are called stupid person.
Now how many of us can claim that we try our best to obtain perfect information in the process of decision making? How many of us can claim that we can make correct decision if we are presented with perfect information? How many of us can claim that we always able to choose the correct option if we know its the correct decision?
The answer: very few.
Let me give you a few examples: in the decision of choosing toothpaste, have you read the label on the toothpaste box? Have you googled the ingredients of the toothpaste? Do you know the differences between various toothpaste besides the packaging? What is the special ingredients in certain toothpaste suitable for sensitive gum?
If most of your answers are NO, then you are stupid.
Another example: All of us know that eating healthily is good for us. We know by eating healthily, we will be able to enjoy our daily life better, we will have more energy in daily activities, we will have better mental strength, thus make us better in most situation in work etc. However, how many of us really maintain healthy eating diet?
Wait!!!!!!! You may say I ignore the concept of utility. Utility of eating delicious (and unhealthy) food may overwhelm the healthy life. I agree but how many of us really quantify the options and determine that? Often when we wanna have unhealthy food, we do not consider the option. We do not make wise decision as we consider eating junk food is the only option. We are not making decision, instead we are blindly selecting the option based on our random instinct.
That still is considered stupid.
Finally, fresh milk. We know almost everything about fresh milk. We know where it comes from, we know the ingredients of fresh milk, we know the taste and colour (lol.). So are we able to make correct decision based on these information? Are we using these information to select the best fresh milk? Or are we simple stick to the brand we always consume? Where are the correlation and causality between the availability of these information and our ability of decision making? How many of us use these information in improving our decision making?
That is stupidity.
For very few of us that try our best in obtaining perfect information legally, use the available information'
to help our decision making scientifically and select the best option with these information, well done, you are rational. You are not stupid.
14.6.12
7.6.12
Malaysia Firms Analysis
Just finished my task in analyzing several Malaysia firms in conjunction with my university and ministry of trade. The project aims at identifying the strengths and weaknesses among Malaysia firms from a different perspectives, from the perspective of an economist.
In short, besides all the irrational determination of costs and lack of skilled labours, I found 2 major problems exist in Malaysia firms.
1. Although the concept of fordism has long been regarded as outdated and not suitable with the dynamic competition of today, I found that this is still being practised in most firms that I observed. Fordism assembly line production causes 1 major problem: difficulty in identifying problem. Since all the works are routinely done, problems are ignored. This cause major disruption in the process of economic value added and more importantly, have spill over effect that will lead to several problems. When such condition arise, the root of these problems is hard to identify, thus making the problem solving process irrelevant. Although most firms are good in problem solving, they are not at all good in identifying problems.
2. This is a major problem for Malaysia not only for firms but government as well. The problem is the problem of cost and benefit projection. Most firms do not scientifically estimate the costs (including opportunity cost) and benefit of a project, making any project irrelevant and insignificant. Of course they may still end up with positive net benefit but the unsystematic risk involved should not be borne and can easily be eliminated. Furthermore, the importance of opportunity cost is often ignored, making the projection of costs and benefit irrelevant. The clearest example of this second problem is marketing project. One of the firms I observed was planning to have a marketing plan to increase their revenue. They planned to have their labours involve in local community service (similar to project "anak angkat"). They wished to have their labours becoming foster children of local elders, gaining their confidence in the firms and increase the value of their brand. However, no proper estimation was done before the project. After 2 months of implementation, the project ended with insignificant increase in revenue. However, the management of this firm concluded that although the project did not produce significant increase in revenue, but the costs involved is minimal and they were satisfied with the project.
I don't think I have to justify what is wrong with this firm and their project. It may sound foolish and we may think we will never do such thing but in reality, most firms and even government do this all the time. Presumption is so routinely practised we are used to it. Presumption such as "if I spend more time study I will earn better grade", "If I invest more in marketing I will get greater revenue" and "1+1=2 so I don't have to know why it works that way" etc.
Problem of identification of problems and problem of scientific projection of costs and benefit are all around firms in Malaysia. They do not think these are problems and they do not take proper action to solve them. They deserve to fail.
In short, besides all the irrational determination of costs and lack of skilled labours, I found 2 major problems exist in Malaysia firms.
1. Although the concept of fordism has long been regarded as outdated and not suitable with the dynamic competition of today, I found that this is still being practised in most firms that I observed. Fordism assembly line production causes 1 major problem: difficulty in identifying problem. Since all the works are routinely done, problems are ignored. This cause major disruption in the process of economic value added and more importantly, have spill over effect that will lead to several problems. When such condition arise, the root of these problems is hard to identify, thus making the problem solving process irrelevant. Although most firms are good in problem solving, they are not at all good in identifying problems.
2. This is a major problem for Malaysia not only for firms but government as well. The problem is the problem of cost and benefit projection. Most firms do not scientifically estimate the costs (including opportunity cost) and benefit of a project, making any project irrelevant and insignificant. Of course they may still end up with positive net benefit but the unsystematic risk involved should not be borne and can easily be eliminated. Furthermore, the importance of opportunity cost is often ignored, making the projection of costs and benefit irrelevant. The clearest example of this second problem is marketing project. One of the firms I observed was planning to have a marketing plan to increase their revenue. They planned to have their labours involve in local community service (similar to project "anak angkat"). They wished to have their labours becoming foster children of local elders, gaining their confidence in the firms and increase the value of their brand. However, no proper estimation was done before the project. After 2 months of implementation, the project ended with insignificant increase in revenue. However, the management of this firm concluded that although the project did not produce significant increase in revenue, but the costs involved is minimal and they were satisfied with the project.
I don't think I have to justify what is wrong with this firm and their project. It may sound foolish and we may think we will never do such thing but in reality, most firms and even government do this all the time. Presumption is so routinely practised we are used to it. Presumption such as "if I spend more time study I will earn better grade", "If I invest more in marketing I will get greater revenue" and "1+1=2 so I don't have to know why it works that way" etc.
Problem of identification of problems and problem of scientific projection of costs and benefit are all around firms in Malaysia. They do not think these are problems and they do not take proper action to solve them. They deserve to fail.
21.5.12
International Museum Day, Not...
May the 18th of every year is the International Museum Day ever since 1977. It is an appropriate day (unlike most other "days" created just to capture commercial expenditure value from consumers) to appreciate the historical value of various items left for us from the past. To celebrate this day, all local museums at Melaka offer free entrance to all visitors on that day.
I love visiting museum. Museum is probably my most visited leisure places. So I spent almost my whole day there, visiting 1 museum after another. What surprise me was the fact that very few visitors around. After some investigation, I found that most people do not know about the International Museum Day. Those who know do not visit as it was a working day. Even if it was a weekend, they still wouldn't visit as they simply have no interest in doing so.
For me that is a sad situation. Most people prefer other forms of entertainment that a museum visit. Most people I know never visited museum before. Most people prefer using an Iphone than looking at a 800-years-old coin.
I was at the Custom museum and they have a log book that is used to record all personal information from visitors. I was surprise that all visitors on the International Museum day are from foreign nations except from 2 Sarawak visitors and myself.
I enjoy my day at those museums and will do so again when I have spare time. I will encourage all the people I know to do so. In the mean time, happy International Museum Day. (although I am 3 days late)
Fresh Graduates = Liabilities?
Employers: Fresh graduates not suitable and are ‘liabilities’
The above link from The Star highlights the opinion of the marketing director of Singapore and Malaysia Kelly Services Sdn. Bhd., a recruitment agency. According to her, fresh graduates need to be retrained before able to contribute to the firm, beside having high demand for the first job and poor communication skills. Thus, hiring fresh graduates is costly for firms and they are considered as liabilities to firms.
I agree with her on the point of unrealistic demand and poor communication skills among fresh graduates. Some fresh graduates overestimate themselves, demanding ridiculous rate of wages, and hope to immediately "cash in" their effort in university study without objective comparison with their skills and value to the firms. Furthermore, some fresh graduates are relatively weak in their communication skills, particularly their English. This thus distort their ability of performing on certain jobs including marketing related works.
However, I strongly disagree with 2 of her points. First, fresh graduates are not liabilities and will never be liabilities to firm. Fresh graduates from reputable universities will certainly be able to offer certain skills unavailable elsewhere. Contribution of fresh graduates can be in the form of hard skills or soft skills. By calling them liabilities basically highlight the failure of top management to harness their strengths.
Secondly, according to her, "companies would rather hire experienced and skilled professionals who can bring instant returns". I highly doubt the validity of this statement. The biggest strength of fresh graduates is their creativity, innovation and ability to transform the dynamics of business world. By going through the process of formal undergraduate (and postgraduate) studies, they are equipped with theories and application skills. The combination of such skills will enable them to change the dynamics of the economy in general.
That's probably is the biggest difference between formal university study and workplace experience. In other words, formal knowledge is the root of a plant while experience is the leaves of the plant. Experience can only help in ways that occurred before and not in unforeseeable circumstances. However, the world of economy is dynamic and constantly changing. New problems will be in the "world of infinity" for experienced person. Since formal tertiary education highlights theoretical knowledge and application, they are trained to handle dynamically new problems.
Certain firms that emphasize on long term prospect will require these fresh graduate to lift them to new levels.
Sadly however, some firms don't. They do not recruit fresh graduates for their strength, rather wish to have them "continue the trend" and takeover the same tasks as the previous labours. They want their "hands" rather than their "brain". They expect fresh graduate to instantly understand the operation of a firm and start generating revenue for a firm.
Recruiting labours is similar to investing in financial assets. We should not aim for immediate positive return and doing so will only expose us to greater risks and may backfire. Labours should be treated as assets for the future and should not be require to instantly generate revenue for firms. Since growth in productivity outpace growth in wage rate, firms are in great position to profit from recruitment, thus ensuring a steady stream of long term income, providing that they can hold the "asset" long enough.
The above link from The Star highlights the opinion of the marketing director of Singapore and Malaysia Kelly Services Sdn. Bhd., a recruitment agency. According to her, fresh graduates need to be retrained before able to contribute to the firm, beside having high demand for the first job and poor communication skills. Thus, hiring fresh graduates is costly for firms and they are considered as liabilities to firms.
I agree with her on the point of unrealistic demand and poor communication skills among fresh graduates. Some fresh graduates overestimate themselves, demanding ridiculous rate of wages, and hope to immediately "cash in" their effort in university study without objective comparison with their skills and value to the firms. Furthermore, some fresh graduates are relatively weak in their communication skills, particularly their English. This thus distort their ability of performing on certain jobs including marketing related works.
However, I strongly disagree with 2 of her points. First, fresh graduates are not liabilities and will never be liabilities to firm. Fresh graduates from reputable universities will certainly be able to offer certain skills unavailable elsewhere. Contribution of fresh graduates can be in the form of hard skills or soft skills. By calling them liabilities basically highlight the failure of top management to harness their strengths.
Secondly, according to her, "companies would rather hire experienced and skilled professionals who can bring instant returns". I highly doubt the validity of this statement. The biggest strength of fresh graduates is their creativity, innovation and ability to transform the dynamics of business world. By going through the process of formal undergraduate (and postgraduate) studies, they are equipped with theories and application skills. The combination of such skills will enable them to change the dynamics of the economy in general.
That's probably is the biggest difference between formal university study and workplace experience. In other words, formal knowledge is the root of a plant while experience is the leaves of the plant. Experience can only help in ways that occurred before and not in unforeseeable circumstances. However, the world of economy is dynamic and constantly changing. New problems will be in the "world of infinity" for experienced person. Since formal tertiary education highlights theoretical knowledge and application, they are trained to handle dynamically new problems.
Certain firms that emphasize on long term prospect will require these fresh graduate to lift them to new levels.
Sadly however, some firms don't. They do not recruit fresh graduates for their strength, rather wish to have them "continue the trend" and takeover the same tasks as the previous labours. They want their "hands" rather than their "brain". They expect fresh graduate to instantly understand the operation of a firm and start generating revenue for a firm.
Recruiting labours is similar to investing in financial assets. We should not aim for immediate positive return and doing so will only expose us to greater risks and may backfire. Labours should be treated as assets for the future and should not be require to instantly generate revenue for firms. Since growth in productivity outpace growth in wage rate, firms are in great position to profit from recruitment, thus ensuring a steady stream of long term income, providing that they can hold the "asset" long enough.
7.5.12
My Analysis on the Minimum Wage Policy in Malaysia Part 2
The second part of my analysis on the minimum wage policy of Malaysia will only focus on three issues: inflation, unemployment and productivity. Many think minimum wage will cause relative rise in the rate of inflation and unemployment in Malaysia in the coming months / years. Many argue that Malaysia labour simply do not have the productivity required for such wage (RM 900 for peninsula Malaysia and RM 800 for East Malaysia), thus discriminating firms operating in Malaysia especially small and medium enterprises (SME). Some even suggest that the policy will distort Malaysia competitiveness in the international trading. Not many people (that I know of) objectively praise the latest labour policy of Malaysia government.
First of all, as mentioned in my previous analysis (PTPTN issue part 1), GDP of Malaysia is RM 766 billion and GNI of Malaysia is RM 740 billion. With a population of 28.25 million, annual per capita GDP and GNI is at RM 27,115.04 and RM 26,194.69 respectively. That's RM 2259.58 and RM 2182.89 monthly per capita GDP and GNI. That's well above the minimum wage set by government. As we all know, setting minimum wage below equilibrium wage will not cause significant unemployment, but only eliminate imperfect information in labour market. However, this may not be the case for Malaysia and we shall investigate.
RM 900 set is just 25 percent above the poverty line of Malaysia (RM 720). Although 25 percent is a significant number, 25 percent above the poverty line is not significantly overpriced. In any part of Malaysia, RM 900 is barely enough for daily expenses, even for the most remote places in peninsula Malaysia.
However, according to a report from Human Resource Ministry of Malaysia, around 34 percent of labours in Malaysia earned less than RM 700 per month, lower than the RM 720 poverty line. The wage rate has only grown 2.6 percent over the past 10 years. That's around 43 percent lower than the average annual GDP growth for the same period (4.5683 percent). The main cause of the problem is the change in labour structure of Malaysia which foreign labour is considered as perfect substitution for unskilled labour in Malaysia. Hence, most firms do not demand unskilled labour if their wage is above the wage rate of foreign labour.
So, for our first issue: will minimum wage policy cause hike in inflation rate: yes, in short run. However, the hike will not be significant as the minimum wage is well below our average income. Slight increase in labour wage rate will not significantly increase the general price level of Malaysia. In the long run, inflation rate will not move at all by the minimum wage policy as expectation of labours adjusted to the level of minimum wage.
Second issue: unemployment. Yes, I agree with most people. Minimum wage policy alone will cause significant number of unemployment in the short run. Since 34 percent of labours are below significantly below the level of minimum wage, a 28.5 percent increase in wage rate (from RM 700 to RM 900) significantly increase the production costs of firms that employ these unskilled labours especially SMEs. 28.5 percent increase in labour costs means that total costs of SMEs could rise as much as 20 percent, well enough for them to change adjust their labour cost structure. Firms will either resort to more cheap foreign labours or simply lay off labours and force the remaining labours to work for longer hours. If firms were to maintain the same level of total costs, it means that as much as 9.69 percent of labours could be substituted with cheap foreign labours. 9.69 percent rise in unemployment rate is disastrous for Malaysia economy.
For that, Malaysia government need to accompany the minimum wage policy with other labour market policy especially foreign labour policy. Adjustment to the structure of Malaysia labour market is needed in order to effectively increase the wealth distribution of Malaysia.
Third issue: productivity. As mentioned before, many argue that the rate of productivity of labours in Malaysia may not increase to the level of minimum wage. However, this is not true. For the past 10 years, rate of increase in productivity outperform rate of increase in wage level by around 40 percent. In other words, labours should earn more. So productivity is not an issue. After all, RM 900 merely means around RM 5 per hour.
So from this relatively simple analysis, minimum wage policy will not cause significant increase in inflation rate and will not have issue on insufficient rate of increment in productivity. The real issue faced by Malaysia under such policy is the structure of labour market. The minimum policy alone might cause relatively severe hike in unemployment rate without the interference of government in handling the foreign labour issue, at least in the short run. In the long run however, this may not be a problem as Malaysia transiting to developed economy.
First of all, as mentioned in my previous analysis (PTPTN issue part 1), GDP of Malaysia is RM 766 billion and GNI of Malaysia is RM 740 billion. With a population of 28.25 million, annual per capita GDP and GNI is at RM 27,115.04 and RM 26,194.69 respectively. That's RM 2259.58 and RM 2182.89 monthly per capita GDP and GNI. That's well above the minimum wage set by government. As we all know, setting minimum wage below equilibrium wage will not cause significant unemployment, but only eliminate imperfect information in labour market. However, this may not be the case for Malaysia and we shall investigate.
RM 900 set is just 25 percent above the poverty line of Malaysia (RM 720). Although 25 percent is a significant number, 25 percent above the poverty line is not significantly overpriced. In any part of Malaysia, RM 900 is barely enough for daily expenses, even for the most remote places in peninsula Malaysia.
However, according to a report from Human Resource Ministry of Malaysia, around 34 percent of labours in Malaysia earned less than RM 700 per month, lower than the RM 720 poverty line. The wage rate has only grown 2.6 percent over the past 10 years. That's around 43 percent lower than the average annual GDP growth for the same period (4.5683 percent). The main cause of the problem is the change in labour structure of Malaysia which foreign labour is considered as perfect substitution for unskilled labour in Malaysia. Hence, most firms do not demand unskilled labour if their wage is above the wage rate of foreign labour.
So, for our first issue: will minimum wage policy cause hike in inflation rate: yes, in short run. However, the hike will not be significant as the minimum wage is well below our average income. Slight increase in labour wage rate will not significantly increase the general price level of Malaysia. In the long run, inflation rate will not move at all by the minimum wage policy as expectation of labours adjusted to the level of minimum wage.
Second issue: unemployment. Yes, I agree with most people. Minimum wage policy alone will cause significant number of unemployment in the short run. Since 34 percent of labours are below significantly below the level of minimum wage, a 28.5 percent increase in wage rate (from RM 700 to RM 900) significantly increase the production costs of firms that employ these unskilled labours especially SMEs. 28.5 percent increase in labour costs means that total costs of SMEs could rise as much as 20 percent, well enough for them to change adjust their labour cost structure. Firms will either resort to more cheap foreign labours or simply lay off labours and force the remaining labours to work for longer hours. If firms were to maintain the same level of total costs, it means that as much as 9.69 percent of labours could be substituted with cheap foreign labours. 9.69 percent rise in unemployment rate is disastrous for Malaysia economy.
For that, Malaysia government need to accompany the minimum wage policy with other labour market policy especially foreign labour policy. Adjustment to the structure of Malaysia labour market is needed in order to effectively increase the wealth distribution of Malaysia.
Third issue: productivity. As mentioned before, many argue that the rate of productivity of labours in Malaysia may not increase to the level of minimum wage. However, this is not true. For the past 10 years, rate of increase in productivity outperform rate of increase in wage level by around 40 percent. In other words, labours should earn more. So productivity is not an issue. After all, RM 900 merely means around RM 5 per hour.
So from this relatively simple analysis, minimum wage policy will not cause significant increase in inflation rate and will not have issue on insufficient rate of increment in productivity. The real issue faced by Malaysia under such policy is the structure of labour market. The minimum policy alone might cause relatively severe hike in unemployment rate without the interference of government in handling the foreign labour issue, at least in the short run. In the long run however, this may not be a problem as Malaysia transiting to developed economy.
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.
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.
26.4.12
Analysis of PTPTN Issue Part 2
Thanks to a comment by a reader who suggeted the difference between full PTPTN loan and fees of study, I will extend my analysis on the validity and possibility of free undergraduate study for all public universities students.
The simple arithmetic mean of full PTPTN loan for all courses taken by the undegraduates in public universities is slightly above RM 25,000 which is RM 8333.33 annually if we assume undergraduate study takes 3 years to complete.
Using the same data as in the previous post (8,000 new enrollment every year), it will cost government and public around RM 666 million to finance 1 batch of students annually or RM 2 billion to finance all undergraduate students in public universities annually. This amounted to RM 70 per capita annually and its more than 3 times compared to the previous analysis.
Using the same rate of opportunity cost (5 percent annually), RM 100 million should be added into the cost structure. So the total cost to fully finance undergraduate studies with full PTPTN loan is RM 2.1 billion or RM 74 per capita annually. How's that compare to the benefit?
As mentioned before, the increase productivity of labours amounted to RM 38 billion to RM 96 billion annually. So, macroeconomic-wise, it is still beneficial for Malaysia to implement such proposition. However, in the short run, the problems (as mentioned in the previous post) faced by Malaysia may prevent such implementation.
Here I want to justify another point: many comments I've seen recently mention about the effect of free higher education to future generation. They claim that free education may jeopardize future generation's opportunity of financing their undergraduate study.
Yes, boost of aggregate demand alone will resulted in short term increase in output but in the long run, the output will not increase and only resulted in inflationary pressure. That is true but investment in higher education will also increase in aggregate supply as labour productivity increases. Increament in aggregare demand and aggregate supply offset each other and general price will not increase significantly (assume that increase in aggregate demand and aggregate supply do not differ significantly). However increase in both will generate growth in output, boosting the long term potential output of Malaysia.
The real question is the burden faced by government and public (through tax) vs growth in output. If output growth outweight tax burden, then this proposition may not only benefit current generation but future generations as well. Since we already established that benefit outweight cost, the proposition could be beneficial to the future generations as well.
The simple arithmetic mean of full PTPTN loan for all courses taken by the undegraduates in public universities is slightly above RM 25,000 which is RM 8333.33 annually if we assume undergraduate study takes 3 years to complete.
Using the same data as in the previous post (8,000 new enrollment every year), it will cost government and public around RM 666 million to finance 1 batch of students annually or RM 2 billion to finance all undergraduate students in public universities annually. This amounted to RM 70 per capita annually and its more than 3 times compared to the previous analysis.
Using the same rate of opportunity cost (5 percent annually), RM 100 million should be added into the cost structure. So the total cost to fully finance undergraduate studies with full PTPTN loan is RM 2.1 billion or RM 74 per capita annually. How's that compare to the benefit?
As mentioned before, the increase productivity of labours amounted to RM 38 billion to RM 96 billion annually. So, macroeconomic-wise, it is still beneficial for Malaysia to implement such proposition. However, in the short run, the problems (as mentioned in the previous post) faced by Malaysia may prevent such implementation.
Here I want to justify another point: many comments I've seen recently mention about the effect of free higher education to future generation. They claim that free education may jeopardize future generation's opportunity of financing their undergraduate study.
Yes, boost of aggregate demand alone will resulted in short term increase in output but in the long run, the output will not increase and only resulted in inflationary pressure. That is true but investment in higher education will also increase in aggregate supply as labour productivity increases. Increament in aggregare demand and aggregate supply offset each other and general price will not increase significantly (assume that increase in aggregate demand and aggregate supply do not differ significantly). However increase in both will generate growth in output, boosting the long term potential output of Malaysia.
The real question is the burden faced by government and public (through tax) vs growth in output. If output growth outweight tax burden, then this proposition may not only benefit current generation but future generations as well. Since we already established that benefit outweight cost, the proposition could be beneficial to the future generations as well.
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