Minimum monthly wage gazettes in year 2012

By: Loh Li Min

Based on the article from The Star Online, http://thestar.com.my/news/story.asp?file=/2012/4/30/nation/20120430211402&sec=nation, on 30^th of April 2012 the Malaysia’s Prime Minister Datuk Seri Najib Tun Razak had announced the adjustment of the minimum wage in the Peninsular and also the east Malaysia.

The minimum wage for the private sector workers was fixed at RM 900 per month while for those in Sabah, Sarawak and Labuan is at least RM 800 per month. The employees will be paid RM 4.33 per hour in the Peninsular and in Sabah, Sarawak and Federal Territory of Labuan have a minimum of RM 3.85 per hour. The different minimum wage in Peninsular and east Malaysia is based on wage structures and different living cost in different place. However, it does not affect the income for gardeners and maid. There are employees that demanded the minimum wage to set between RM 1200 and RM 1500 but the government could not implement their wish as it may affect the economy, labor market and also the foreign workers if the minimum wage is set too high.

          This is the first time that Malaysia introduces the minimum wage to support low income of the households and also helping those who are facing extreme poverty. The minimum wage is likely to be welcomed by the employees and also the low income families but eventually there are employers that owned a smaller business claimed that they could not afford it as RM 900 was set too high for them. The rise in minimum wage will affect the profit margins of small business company. Hence, the small businesses will be given one year grace period to adjust to the new system and make the preparation. From my point of view, a minimum wage will also stop a company from exploiting those who have little employment options and it is also fair and dedicates the employees.

       The minimum wage will affect the labor market. The effect of minimum wage can be determined by considering the labor market. According to the panel (A), it shows the labor market which is subject to the forces of demand of labor and supply of labor. The employees determine the supply of labor while the firms determine the demand of labor. If the government does not set the minimum wage, the wage will normally adjust to balance supply of labor and demand of labor. Thus, the labor supply curve will intersect with the labor demand curve to reach the equilibrium.

 

Panel (A)

          On the other hand, panel (B) shows the labor market with a minimum wage. If the minimum wage is above the equilibrium level, the quantity supplied of labor will exceeds the quantity demanded of labor which occur the labor surplus. The minimum wage will increase the incomes of those who have jobs while it lower down the income of those who do not have a job. The circumstances of minimum wage depends on the skill and experience of the worker which means the workers with high skills and experiences will not be affected because their income is well above the minimum wage. For these high skills workers, the minimum wage is not binding.

Panel (B)

          In the labor market, the supply curve determined the marginal social cost while the demand curve determined the marginal social profit from labor. The cost is the leisure forgone and profit is the goods and services produced by the workers. Panel (C) shows the inefficiency of a minimum wage. The minimum wage is above the equilibrium wage and the quantity of labor demanded is less than the efficient quantity of labor. There is a deadweight loss which is shown in a grey triangle due to the quantity of labor demanded is less than the efficient quantity (equilibrium labor). The firm surplus is shown in a green triangle while the employee surplus is shown in a blue triangle. The pink color rectangle shows the potential loss from job research. The total loss from minimum wage is the sum of deadweight loss and the increased in potential loss from job search.

Panel (C)

          In addition, the minimum wage had also affected the teenage labor market. For instance, the increment of 10 percent in the minimum wage will depress the teenage employment between 1 and 3 percent.  However, the increment of 10 percent in the minimum wage does not raise the average wage of teenage by 10 percent. This means a change in minimum wage law does not directly affect those teenagers who are already paid well above the minimum. Thus, a drop in unemployment of 1 to 3 percent is important. The minimum wage increases the wage that teenagers can earn and it has also increased the number of teenagers who choose to look for jobs. When the minimum wage raises, there are some teenagers who are still attending school will choose to drop out and they choose to start working. The teenagers who choose to drop out will displace those teenagers who had already dropped out from the school and now becoming unemployed. 

          Furthermore, there are opponents claimed that the high minimum wage is not the best way to combat poverty. This is because a high minimum wage will encourage the teenagers to drop out their studies from school and it has also prevented the unskilled workers to gain experience and training from work. Moreover, the opponents of minimum wage also point out that not all the minimum wage workers are the head of the household that trying to help their families to escape from poverty. In fact, there are many teenagers from the middle class homes work as a part timer that just to earn extra spending money.

          Finally, the minimum wage is one of the ways to increase the income of the working poor. The government believes that the workers who earn the minimum wage can afford to pay the cost of living as the standard of living is getting higher. Although there are some adverse effects for the minimum wage which including the unemployment, but these effects are small and it actually makes the poor have a better life with a higher income.