More than the bare minimum – adopting the “living wage” in Malaysia

Towards that end, EMIR Research calls for the minimum wage to be reconceptualised as a starting point instead of a benchmark.

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Published in MalayMail, Business Today, The Malaysian Insight, and theSundaily, image by Business Today.

When we sip an Iced Venti Caramel Macchiato from the local Starbucks cafe that costs RM18.50, the friendly barista that made the delectable beverage has to work for around 4 hours to be able to afford the same. That’s on the assumption that Starbucks Malaysia pays the (basic) minimum wage for new market entry or junior baristas. For some of us, having Starbucks on a regular basis barely makes a dent on our “pocket” (i.e., disposable income), if at all. 

Yet there are many in the jobs market who have to make do with the minimum wage which isn’t even enough to keep up with the rising cost of living due to inflationary pressures that’s set against the confluence of supply-chain issues partly driven by geo-economic manipulations (e.g., price setting enabled by market dominance or cartel arrangements) and impact of extreme weather patterns together with the latest geopolitical flareups in Ukraine among others – what more the already pre-existing elevated expenses in a Malaysian urban setting.

On March 19 2022, Prime Minister Dato’ Sri Ismail Sabri bin Yaakob announced that the new minimum wage will be adjusted to RM1500 per month from May 1 2022 onwards. Although this would see a 25% increase from the previous minimum wage rate of RM1200, questions are raised as to whether it’s enough or commensurate with the actual cost of living, especially in the urban conurbations and industrial heartlands of the Klang Valley (and where also more than one-third of the entire population is situated), Iskandar Malaysia, Penang, etc. 

The minimum wage should be a fair reflection of the approximation of the living costs. 

Hence, the gap between the minimum wage and what’s called the “living wage” should never be significant. 

In fact, the aim of the minimum wage should be to approximate the “living wage” as much as possible – under present conditions – until both are “symmetrical” (aligned) or synonymous. 

The basic definition of a “living wage” is that it’s a wage rate that’s high enough for the average worker to maintain a decent/adequate standard of living and appropriate or respectable lifestyle. 

In other words, a “living wage” is the minimum amount an individual or household needs in exercising the basic and fundamental right to a standard of living – which can be measured as above the poverty line income (PLI) now defined as RMM2,208. 

According to Bank Negara’s provisional definition of the “living wage” in its report, “The Living Wage: Beyond Making Ends Meet” (2018), a single would need at least RM2700 and similarly a couple with two children would require RM6500 to “survive” in Kuala Lumpur (p. 5). The calculation is based on 2016 estimates. It’s expected that Bank Negara will now need to revise its provisional estimates in light of recent cost of living and inflationary dynamics.  

The same Bank Negara report also found that after accounting for the increase in cost of living, B40 households only experience a paltry 3.8% growth in real income (p. 2). 

In addition, the right to basic enjoyment of necessities such as utilities should be expanded to include Internet connectivity (which is already, implicitly, a basic right and could well on course to becoming a constitutional right in the future).

Of course, when talking about the rate by which to maintain a normal standard of living, the numbers will vary based on location and level of economic development. Again, a couple with three kids living in highly urbanised Kuala Lumpur is bound to have a higher spending average per month compared to family of the same size in less economically developed Kelantan. 

However, the “living wage” can and should be adaptive in nature – to accommodate the differentials and variations in the specific cost of living at the micro-level as conditioned by regions/locations and economic growth. 

Towards that end, EMIR Research calls for the minimum wage to be reconceptualised as a starting point instead of a benchmark. 

This means that businesses should alter their salary caps/limits according to the cost of living in the area. Meaning that the minimum wage should be taken as the base which is then topped-up by the additional sum to make for an overall salary that more realistically corresponds to the cost of living and hence, the “living wage”.

This means updating the Minimum Wage Order on a regular basis – to provide the guidelines or otherwise a separate ministry/ministerial guidelines which contain the calculations or estimates for the “living wage”. By its very nature, the introduction of a “living wage” isn’t a statutory requirement but businesses that implement it should be entitled to tax incentives and allowances. 

Ideologues who are against the minimum wage (increases), irrespective of the context and circumstances, believe that, by default, the rise of wages due to government-imposed “diktat” undermines or disturbs the so-called “free market” equilibria (“balance” between supply and demand) so that this will result in higher (involuntary) unemployment than otherwise would be the case – since the market can’t clear on the basis of the minimum wage (increases). 

This belief was put to the test in 1993 by David Card who’s the winner of the 2021 Nobel Laureate for Economics. In a study on the effects of the rise of minimum wage on employment (“Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania”, 1993) he compared the employment trend in fast food restaurants between two bordering states in the US where the minimum wage was increased on one side but not the other. 

What he found was that increasing the minimum wage had no impact on employment at all, whereas the pattern of price changes as part of the rise in input (labour) costs yielded statistically insignificant findings (of cost-pass through), i.e., there’s no evidence that menu prices rose faster among the stores that were affected by the rise in minimum wage (p. 788). 

David Card’s seminal study was conducted post-Volcker recession where interest rate hikes of up to 20% were deployed to tame inflation – but at the expense of unemployment which reached 9% at one point – so that the inflationary momentum thereafter increased on a steadier rate to 5% by 1990. 

Graph 1: Relationship between inflation and wage growth (Source: World Bank and Department of Statistics Malaysia/DOSM)

When we look at the wage growth in Malaysia, it does track a consistent path with inflation, more or less. 

According to statistics, as inflation rose, so did the wage growth rate on the most part. 

However, given the low base rate of the salary, a wage increment of 6% to 8% would only mean an additional RM150 per year on average in absolute terms. When inflation is taken into consideration, the real value of wages is further undercut.

Building upon the current minimum wage increase, the government should come up with a roadmap that seeks to revise the minimum wage in line with Section 25 of the National Wages Consultative Council Act (2011) to achieve close approximation with the “living wage” which too needs to be revised accordingly.

The integration of the “living wage” concept into Malaysia’s wage structure should be done through the close coordination between government and private sector. 

A way to do this is by also implementing a “progressive wage” model (see EMIR Research article, “Combine statutory minimum wage with progressive wage model too”, March 23, 2022). As the name implies, a progressive wage model allows for the linking of wage growth with productivity as measured by upskilling (or reskilling and cross-skilling, where applicable). 

So, the minimum wage should be reconceptualised as the base (not benchmark) with either the “add-on” to make up the “living wage” or a progressive wage model – or both (“living” wage and “progressive wage” model).  

The incorporation of the “living wage” into Malaysia’s wage structure is something that should be considered – as part of the wider anti-poverty agenda of the government and also in our quest to be a high-income nation. 

Going forward, the “living wage” will not only promote/enhance financial security but also critically help to rebuild the very low retirement savings of some 48% or 6.1. million low-income EPF members. 

At the same time, those qualified would also now be in a position to contribute to our nation’s coffers in the form of paying personal income tax. A “living wage” would also partly enable the re-introduction of the GST, if there’s a consensus, to fit into the appropriate time and condition. 

Jason Loh Seong Wei and Rosihan Addin are part of the research team of EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.

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