Research and advocacy of progressive and pragmatic policy ideas.
As Malaysia gears up for a possible General Election this year, we ask our political parties what changes to the minimum wage they can offer voters.
By Edwin Goh & Nelleita Omar19 February 2022
Malaysia’s current monthly minimum wage is RM1,200, increasing gradually from RM900 back when it was first implemented in 2012. By law, the next revision is supposed to occur this year. There has been talk that the government will raise it to RM1,500 a month – a significant 25% increase. This has naturally generated extremely contrasting reactions, from employers’ sharp objections, to “it’s high time” from worker groups, to divided analysts.
Whether we will see a RM1,500 minimum wage or not, one fundamental thing remains: the way the minimum wage is set and decided is and has been quite opaque. Although there is a stated ‘formula’ for revisions, the actual level of the minimum wage appears to be determined mostly through negotiations amongst key stakeholders, including the Cabinet and members of the National Wages Consultative Council (NWCC).
Yet, knowing how the minimum wage is set is critical to all working Malaysians. For the lowest paid employees, it sets the legal floor for wages and salaries. For informal workers, it stands as a rough benchmark for the minimum they should be earning from their informal jobs.
Times are changing the discussion. As early as 2018, proponents such Bank Negara Malaysia (BNM), Khazanah Research Institute (KRI) and Malaysia Trade Unions Congress (MTUC) have argued for setting the minimum wage at the level of a ‘living wage’, in other words a level which allows for a reasonable standard of living. BNM has estimated this to be RM2,700 for an unmarried individual in Klang Valley.
The push to clearly define the basis for the minimum wage grew further after the government updated the poverty line income from RM980 to RM2,208 in 2020. The pandemic and the trend of dramatic price increases also increased pressures to rethink the minimum wage.
The current policy approach of negotiating a few hundred ringgits’ increment every two years is clearly insufficient. The electioneering practice of simply promising a certain figure as the new minimum wage is also not good enough. Political parties will have to step up their policy game. In a potential election year, we ask political parties, how do they propose to address Malaysia’s minimum wage long-term? What improved promises can we expect on their manifestos?
Since the Minimum Wage Order* was enacted in 2012, the government has reviewed the minimum wage with advice from the NWCC at least once every two years, as required by the NWCC Act 2011. Between 2012 to 2020, the minimum wage has been raised from RM900 a month for West Malaysia and RM800 for East Malaysia to RM1,200 a month for 56 municipal council areas and RM1,100 a month for other areas (Figure 1). That’s an increase of RM300 over a period of nearly a decade, which works out to an average 3.3% a year, or around an average of 1.5% annually after accounting for inflation. For reference, the average growth of Malaysia’s nominal GDP is around 6.4% during the same period (excluding 2020), or 5.1% in real terms.
*Part 2 of our Fair Work Act Research Series discussed the history of Malaysia’s Minimum Wage Order and explained the institutions behind the minimum wage in Malaysia.
It is not entirely transparent what truly determines the level of the minimum wage. This is perhaps rooted in the very foundations of our minimum wage law which has two conflicting aims: firstly to ensure employees can meet basic needs and secondly, to provide a conducive environment for industrial production.
The first aim, judging by current benchmarks, seems to be of lower priority. Take the Klang Valley. The current minimum wage of RM1,200 is far lower than various ‘basic needs’ estimates, be it BNM’s living wage estimate of RM2,700 for singles, or SWRC’s reference budget level of RM1,870 for unmarried public transport users.
There is a stated minimum wage formula on the NWCC website, which incorporates relevant indicators such as the national poverty line, median income, inflation rate and more. However, judging by the quantum of minimum wage increases over the past decade and the gap between the minimum wage and the living wage, it is hard to say with confidence that the actual minimum wage has adhered to the stated formula.
And so we ask Malaysia’s political parties: What should be the principle or basis governing our minimum wage? How should it be set?
In answering this question, political parties would reveal what they think is the core purpose of a minimum wage. If parties agree that the core purpose of a minimum wage is to ensure that the lowest paid workers can meet the cost of living, the calculation of the statutory minimum wage should be based on a fixed percentage of the national median wage or a formalised calculation of a living wage, or some other clear living costs benchmark. After basic principles are established, then political parties can impress us further if they choose, for example, whether to set different minimum wages by state or region, whether to have specific sectoral provisions, and so on. But the first basic principle for setting the minimum wage is critical.
Setting the minimum wage more firmly and transparently based on a cost of living benchmark would also lend towards more gradual and more forecastable increases. While the mooted figure of RM1,500 is commendable for getting closer to living wage estimates, it is a marked 25% increase from current levels which will be very hard for some companies to bear, particularly in an economy still dealing with COVID-19.
As we argued above, the minimum wage appears to be determined mostly through negotiations amongst key stakeholders. Judging by past media statements vs. the rate of minimum wage increases, it’s fair to conclude that much of the negotiations is driven by pushback from employer groups. Part of the problem here is the patchiness of complementary policy instruments that meaningfully support employers and companies, particularly MSMEs, to make the adjustment towards higher wages. Policy instruments like conditional wage subsidies, for example.
In the absence of holistic and supportive policy instruments, there will always be a high degree of objections to increasing the minimum wage. And so we would like to ask Malaysia’s political parties: how should the country improve the broader policy framework around Malaysia’s minimum wage? What other policy instruments should be implemented?
The question means to shift the policy conversation from debating piecemeal updates of minimum wage figures towards implementing the right policy model for systematic reform. As per Promise 1 above, political parties could offer to update the formula in the Minimum Wage Order to ensure closer alignment with cost of living levels. To accompany that however, complementary measures such as systematic wage subsidies should be designed and added into Malaysia’s minimum wage framework for qualifying employers and companies.
As digitalisation accelerates labour informalisation, more and more Malaysians are taking up new types of informal jobs, such as e-hailing and delivery gig work. This emerging class of informal workers has increasingly exposed the coverage gap of the minimum wage law. In law, only those with formal employment, whether full-time or part-time, are eligible to earn a minimum wage. While the statutory minimum wage is somewhat of a rough benchmark for informal workers’ salaries, there is no law protecting informal workers from being underpaid by employers even if they work full–time.
And so we ask Malaysia’s political parties: How should the current laws on minimum wage be amended to account for different types of informal workers?
As a start, political parties could provide the right of earning a fair minimum wage to informal workers and those without employment contracts by updating the definition of “employment” in the Employment Act 1955 as well as setting minimum conditions into the Contract Act 1950. Regardless of employment status, anyone who works for an equivalent of full-time hours should earn a salary not less than a minimum living wage.
The media and online ‘debates’ on the precise level of the minimum wage masks fundamental underlying policy questions regarding its purpose, model and coverage that had long been missing in Malaysia’s political discussions. In the run up to the 15th General Election, we hope that some brave and forward-thinking political parties would stop discussing minimum wage as a numbers game but instead go the extra mile to develop, communicate and promise meaningful policy reform.
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