The Progressive Wage Scheme and the Madani Economy Framework

The PWS seeks to balance fairly the competing interests of employers and workers under the oversight of the State.

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Published by BusinessToday, image by BusinessToday.

With the Progressive Wage Scheme (PWS) set to be implemented from the second half of 2024 onwards via an initial trial run, the reformist-unity government of Malaysia Madani as embodied in the Madani Economy Framework (MEF) aims to ensure that workers’ compensation or share (especially from the small and medium-sized enterprises/SMEs and large local corporations/LLCs) of the economy is set to rise from 32.4% to the targeted 45% in the years ahead through structural reforms of market wages.

EMIR Research is grateful to the Prime Minister Dato’ Seri Anwar Ibrahim and the Minister of Economy YB Rafizi Ramli of which the PWS is especially under his care for implementing this policy which was first suggested in “Combine statutory minimum wage with progressive wage model too” (March 23, 2022). 

Indeed, the MEF’s PWS is not only an integral part of the wider reforms agenda considered here in the form of wage reforms/reformasi gaji which will play a role in tackling the issue of income and wealth redistribution, but as importantly reforming the tripartite model involving the State, employees and workers. The PWS could well epitomise the move beyond consultation and participation towards a “permanent settlement/accord” driven/undergirded by continuing co-determination (penetapan bersama) – a “synthesis” from the traditionally “dialectical” (i.e., opposing) relationships (and interests) between the capitalist and worker under the auspices of the State which continues to hold sway the dynamic balance in play.

The PWS seeks to balance fairly the competing interests of employers and workers under the oversight of the State on the basis of economic justice as a pillar of national governance, namely that “[t]he benefits of growth must be distributed equitably, and rakyat’s wages must be commensurate with their work output” (see the Prime Minister’s speech at the launch of the MEF on July 27, 2023).

Unlike the Minimum Wage Order (MWO)/Perintah Gaji Minimum (PGM) alongside the Productivity-Linked Wage System (PLWS), the PWS provides incentives to employers and not merely voluntary (unlike the MWO but like the PLWS).

In complementing the MWO/PGM which currently stands at RM1500, the reformist unity government is also signalling its intention to move away from the neoliberal period which has characterised our country’s economic trajectory understood in terms of domestic wages set below the country of origin of the multinational companies (MNCs) both in terms of “purchasing power parity” (PPP), i.e., rates of currency conversion which equalises the purchasing power of both countries as well as the currency exchange (which highlights the relative strength/weakness of the currency pairs concerned), especially during the take-off periods of between the 1970s to 1990s. In short, from the perspective of foreign direct investment (FDI), the wage levels in the host country are seen as relatively or comparatively low than those in the home country. 

However, MNCs’ wages have also served as the “ceiling” for the manufacturing industry as one of the engines of economic growth and top three foreign exchange (forex) earners of the country. This has caused wages in the domestic small and medium-sized enterprises (SME) industry to consistently lagged behind that of the MNCs – considered as “statistically significant” (see, e.g., “Wage Differentials between Foreign Multinationals and Local Plants and Worker Quality in Malaysian Manufacturing”, Asian Development Review, 2014, vol. 31, no. 2, pp. 55–76).

That said, the intention of the PWS, of course, isn’t to equalise SME wages with that in the MNCs but precisely to ensure proper/reasonable increments in the first place (i.e., where wages are stagnant or growth is too low) and which are commensurate with productivity gains (correlation) measured according to successful participation in training and upskilling, for example (see the “White Paper: The Progressive Wage Policy”, Command Paper 69, 2023, e.g., p. 29).

Whilst wages may have kept pace with inflation, they’ve not necessarily aligned with the depreciating impact of the ringgit which means the net result is zero/neutral(ised) in terms of loss of purchasing power.

According to the Department of Statistics Malaysia (DOSM)’s Statistics and Wages (2022) report, wage increases were recorded across sectors – with mining and quarrying together with services (e.g., in the food and beverage sub-sector) constituting the largest recipients with manufacturing following behind.  All in all, in 2022, the number of recipients who received wage increases reached a total of 9.95 million (which represents a rise of 2.4%).

The results are, however, grim vis-à-vis inflation/cost of living pressures and loss of purchasing power/depreciation of the ringgit when the increases are translated in money terms.

For skilled workers, the average monthly wages increased by 3.7% which translates into a meagre rise of RM177 (from RM4,848 in 2021 to RM5,025).

Semi-skilled workers’ average monthly wages reached RM2,241 compared to RM2,064 in 2021 which also translates into a paltry increment of RM177.

Low-skilled workers experienced an increase of RM66 – raising their average monthly wages to RM1,815 from RM1,749 (in 2021).

The situation becomes more acute when looking at the national median and mean monthly wages. The former stood at RM2,424 in 2022 – even though represented by an increase of 7.7%. On the other hand, the mean monthly wage in 2022 increased by 5.8% to RM3,212.

This illustrates in stark terms the disparity between low and medium-income earners on the one hand with high-income earners on the other. It’s so because approximately 46%, i.e., nearly half of workers belong to the low- and semi-skilled categories which means that the results for the mean and median would be skewed (by the weightage) accordingly, as per Dr Mohd Yusof Saari, an associate professor at the School of Business and Economics at Universiti Putra Malaysia and labour market economist (see, “Wage disparity: ‘Workers are being short-changed’”, New Straits Times, September 29, 2023).

Set against the backdrop of our country’s dependence on food imports and inputs – capital goods and intermediate items – (which weighs heavily on our balance of payments /BOP), any disinflationary impact (i.e., from a high base) would be still minimal or negligible as the decline is merely small changes in prices (i.e., either down or up) or prices remaining where they were. 

Meanwhile, according to DOSM’s Household Income and Expenditure Survey (as released in the second half of the year), our Gini coefficient decreased to 0.404 in 2022 – indicating a 0.3% reduction in income inequality compared to 2019. The mean household income was at RM8,479 per month (2.38% of compound annual growth rate/CAGR) with the median household income at RM6,338 per month (2.57% CAGR). 

Whereas for the Poverty Line Income (PLI), it’s RM2,589 in 2022, while the absolute poverty incidence has reduced to 6.2% (only – inherited from a high base during the Covid-19 lockdown periods), affecting an estimated 487,576 households (“Households income in Malaysia on the rise, says DOSM”, New Straits Times, July 28, 2023).

This shows that there’s much space and work for the reformist-unity Madani government to do – in pushing for a more equitable distribution of income and wealth which entails increasing the purchasing power of the rakyat/masses.

The PWS comes at a time when we’re on track towards achieving a high-income nation in 2025. The current threshold is a gross national income (GNI) per capita of more than USD13,205 which is RM 61,819 in current prices for the financial year (FY) of July 1, 2022 to June 30, 2023. For FY 2024 (July 1, 2023 to June 30, 2024), the high-income threshold will be revised to more than USD13,845. This is broadly in line with the Mid-Term Review of the 12th Malaysia Plan (12MP MTR) 2021-2025 which projected that the GNI per capita is to increase by 4.6% per annum to reach USD14,250 in 2025 (which should exceed the high-income threshold in that FY).

The continuing surge in our GNI coupled with the mean and median incomes of households (divided by two breadwinners) reinforces the critical mission of the reformist-unity Madani government in “aligning” the floor with the ceiling with respect to workers’ and non-professional/specialist wages, i.e., reducing the gap between the two as part of the income and wealth redistribution effort, but in a manner which does justice (pun intended) to productivity (gains) coupled with the capitalists’ (balancing between the objective and subjective) cost valuations (e.g., ratio between profits and revenues to labour costs) especially in the context of SMEs (as conditioned by production techniques, e.g. labour versus capital intensive, market expectations, taxation structures, e.g., capital allowances, etc.).  

The need for a PWS demonstrates that the labour market can’t be left to an abstract notion of the forces of supply and demand (as per the neoliberal and mainstream/neoclassical thinking). Low and stagnant wages have only resulted in wage compression (as recognised in the White Paper, e.g., p. 49) and heavy reliance on foreign migrant labour.

Khazanah Research Institute (KRI)’s recent study on Malaysia’s wage dynamics indicate that the labour market, “when left to itself without any government intervention, performed poorly” in ensuring wage growth for low- and middle-income workers.  

To conclude, the government’s PWS as a form of fiscal policy (direct and indirect) bearing upon the labour market should be complemented and supplemented by monetary policy under the provenance of Bank Negara in relation to the product market.

Better still, Bank Negara should be prepared to cut the OPR in order alleviate the financial challenges of businesses and households given that interest rate payments are included in the cost of business and affect the cost of living.

Admittedly, it can’t be expected for Bank Negara to do so given that they adopt a slightly different understanding and approach towards the role and deployment of the OPR.

Notwithstanding, cutting the OPR would be supportive and conducive to price stability given the cost-push pressures via the exchange rate pass through (ERPT) channels in the import sector – which would help in supporting income levels of employers (directly via production, including the wage costs) and workers (indirectly via consumption).

Bank Negara should, thus, cut the OPR based on production (and, by inclusion, wage) costsrather than based on the standard demand-pull rationale (since there’s no wage growth spiral in the Malaysian labour market or even anywhere else in the world for that matter).

OPR rate cut(s) would then be in response to the weakened ringgit (which is the opposite of, again, the standard rationale of increasing rates to strengthen the currency) and thereby help to promote and reinforce price stability domestically.

The approach, therefore, would still be broadly consistent with Bank Negara’s general thinking on the role and deployment of the OPR, i.e., for price stability over the medium-term. It’s also in consonance with Bank Negara’s own acknowledgement that ringgit dynamics are not correlated to the OPR movements. 

In the final analysis, it’s still a pro-active measure by Bank Negara in relation to the dynamics of the ringgit (in floating currency terms) which helps to cushion against external shocks. OPR cuts would signal Bank Negara’s determination to do precisely that, i.e., provide indirect but critical support, nonetheless, to our ringgit by relieving imports of the cost pressures.

In short, based on Bank Negara’s own approach, cutting the OPR in relation to the supply-side (production costs) would balance and “re-align” with the prior dynamics in the demand-side to ensure that price stability remains constant over the medium-term (given the weakened ringgit and BOP deficit in food imports).

That is, in the final analysis, what the PWS does for the labour market should be “coordinated”/”synchronised” with what monetary policy can do for the product market,  given their respective co-relations. Jason Loh Seong Wei is Head of Social, Law & Human Rights at EMIR Research, an independent think tank focussed on strategic policy recommendations based on rigorous research.

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