Minimum Wage Revised Part IV: Poor SMEs

I'm going to dive deeper into this topic, because there are a number of inter-related issues that need to be highlighted. The data here comes from the 2016 Economic Census, cross referenced with the subsidiary report on SMEs from the same survey.

Before jumping into how an RM1,500 minimum wage might impact SMEs, let me digress into a discussion of the nature of the capital share of GDP.

The 2020 split on the share of GDP was 37.2% labour and 60.1% capital (the residual is taxes and subsidies). This of course has given rise to accusations of greedy capitalists, which is (a little) unfair. Yes, the capital share in Malaysia is high by developed country standards, but its not out of line with other emerging markets. More importantly, the capital share is not the same thing as the share of income going to the business owner/shareholders.

Minimum Wage Revised Part III: What's the appropriate level?

Despite the government determining the minimum wage to be hiked to RM1,500 by May 1, 2022, there's still debate on whether the timing/quantum of the increase is appropriate. This is partly acknowledged by the government itself, with the qualification that it will not apply to micro enterprises with less than 5 employees.

So what's really appropriate? What's the safe level of minimum wage that will uplift low incomes while preserving employment?

Minimum Wage Revised Part II: Some Evidence on Wages

Part I dealt with some of the criticisms of the minimum wage. Part II here will look at some of the data around the impact on wages and prices. For a look at the impact on employment, see this old post.

How do wages react to an increase in the minimum wage? To try to answer this question, I'll use some estimates from the EPF on wages at various parts of the distribution. To my knowledge, I've only shown this particular data in public just once before, and that was many years ago. Since then there has been multiple revisions of Malaysia's minimum wage, with varying results at least in terms of boosting wages, as you shall see.

BNM Watch: The Countdown Has Started

Yesterday’s MPC statement is about as clear a statement of intent as you can get from a central bank (excerpt; emphasis added):

Monetary Policy Statement

...At the current level of the OPR, the stance of monetary policy remains accommodative. Given the strength of the global and domestic macroeconomic conditions, the Monetary Policy Committee may consider reviewing the current degree of monetary accommodation. This is to ensure the sustainability of the growth prospects of the Malaysian economy....

Wages, Productivity and Growth

I’ve been meaning to write about this, but life and work kept getting in the way. Makes for a good story, except its almost totally wrong (excerpt):

High wages flash recession warnings in Singapore

...Indeed, while the city state's economy is expected to grow between 1-2 percent for the year, analysts say the wage-cost pressures are flashing warnings of a recession.

At roughly 43 percent of gross domestic product - though below the 55 percent world average - wage costs in Singapore are now at levels which historically had preceded recessions in 1985, 1997 and 2001.

The trouble is that the higher wages are raising business costs at a time when export-oriented Singapore has been hard hit by a cooling China, subdued domestic consumption, a downturn in commodities and global uncertainty due to Britain's vote to leave the European Union....

State of the Households II

I was at the launch ceremony at Khazanah Research yesterday, and while the report doesn’t present anything new, it compiles all the various statistics domestically available into one document to present a holistic picture of Malaysian households.

You can download the report here.

Oh, and I love the new interactive socio-economic map of Malaysia!

Thanks go to @Inequality_MYS for the invite.

Thinking About Labour Markets: Partial Equilibrium Fallacies

I think by this time we all know that empirically, a minimum wage doesn’t seem to have the negative effect on employment that conventional economic analysis says it does. The reason for that is the Econ 101 standby of analysing policy changes based on ceteris paribus – a partial equilibrium approach. Holding everything constant and changing just one variable is a very useful way of thinking about economic issues, but it risks missing out on real world implications when you forget that economic systems are, in fact, actually systems.

Raising The Foreign Worker Levy

The measure is on hold at the moment, but I want to put forward my thought process on the subject.

The main debating points are obvious - Malaysia relies too much on foreign workers, and they are generally paid wages below that of locals. The levies on foreign workers goes some way towards redressing that imbalance. On the other hand, raising the levy raises business costs and could force some industries to retrench without necessarily increasing demand for local labour, not to mention the impact on consumer inflation.

What most commentators might have missed is the existing discrepancy between employing a foreign worker relative to a Malaysian one, which boils down to one thing - EPF contributions.

The Impact of Foreign Labour

It’s no secret that Malaysia plays host to a lot of foreign labour; a lot of cheap foreign labour. Among the criticisms of this happenstance is that it takes away jobs from locals, reduces the wages locals can command, and stunts productivity growth.

Underlying these concerns is a false view of the economy, that labour competition between foreigners and locals are a zero-sum game. The first concern isn’t true – given our ridiculously low unemployment rate, there’s not a lot of evidence that foreigners have taken jobs away from locals. Culling foreign labour from Malaysia would only reduce output, and remove industries that would only exist (or exist as cheaply) from the availability of that foreign labour.

Wages and The CE/GDP Ratio

I’ve come across the same dilemma myself, but a box article in BNM’s 2014 Annual Report outlines the latest data (excerpt; emphasis added):

Trends in Malaysia’s Gross Domestic Product by Income

…In terms of share, capital income forms the largest component of GDPI (Chart 3). However, with the growth of labour income outpacing the growth of capital income, the share of labour income to GDP has risen steadily from 29.5% in 2005 to 33.6% in 2013. By definition, however, the labour income component in GDPI excludes income earned by self-employed individuals…With such adjustments, the share of labour income for Malaysia is higher, on average, by 8.0 ppt. throughout the period (Chart 4)….

Why Aren’t Prices Dropping With The Price Of Oil?

Seems reasonable that they should, doesn’t it (excerpt):

Food stall operators maintain cost of their fare despite drop in price of fuel

PETALING JAYA: Rises in fuel cost usually lead to higher cost of food in eateries but there has been no corresponding drop in the prices of food in restaurants, coffee shops and stalls in spite of the much lower prices of fuel today.

Operators are blaming this on suppliers charging the same rates while they in turn point their fingers at transporters.

The Pan–Malaysia Lorry Owners’ Association (PMLOA) has urged its members to follow the current trend in diesel prices to adjust transportation charges.

However, its president Jong Foh Jit said the margin of adjustment could not be indicated because of restrictions set by the Malaysian Competition Commission (MYCC).

Wages and Productivity

DS Wahid on the share of wages in GDP (excerpt):

Govt planning to push wages-GDP ratio to 40%

KUALA LUMPUR: The Government is planning to increase the ratio of wages to Gross Domestic Product (GDP) from 33.6% last year to 40% in the long term.

Minister in the Prime Minister’s De­p­artment Datuk Seri Abdul Wahid Omar said this would be done gradually.

“This is because any wage increase must be supported by increase in productivity,” he said after attending a media appreciation ceremony with the Statistics Department yesterday…

Fact Check: Wages And Inflation

I seem to be taking a lot of pot-shots at Rafizi lately; perhaps its because he makes it so easy (excerpt):

Kadar naik gaji Malaysia 2.6%, Indonesia 10%, dakwa Rafizi

Kadar kenaikan gaji pekerja di negara ini hanya sekitar 2.6% sahaja jika dibandingkan dengan Indonesia yang menerima kenaikan empat kali ganda lebih baik iaitu 10% dalam tempoh lima tahun, dakwa Pengarah Strategi PKR, Rafizi Ramli.

Dalam wawancara eksklusifnya dengan Selangorkini, Rafizi berkata, lebih memburukkan keadaan ialah peningkatan kos sara hidup yang berlaku tidak selaras dengan kadar kenaikan gaji yang perlahan.

June 2013 Employment

Released along with the report on the July CPI was the employment report for June, and it’s certainly at odds with the prevailing market sentiment (‘000):

Labour Bargaining And Wages

If you had a choice between two jobs with equal compensation, but one has higher bonuses and allowances but the other has higher base pay, which should you choose?

Take the one with higher basic salary (excerpt):

The intercept is negotiable, the slope is fixed

A new hire only gets one chance to negotiate: a brief window between the time that an offer is made and the time when that offer is accepted. Those initial terms and conditions determine the employee's salary for years to come - possibly the entire the duration of his or her time at the institution.

Comparing Wages

There’s this great article on the Beeb yesterday:

Where are you on the global pay scale?

If there were no rich and poor, and everyone had an equal share of the world's total pay packet, how much would they earn?

The total value of world income is closing in on $70 trillion (£43.9tn) per year, and there are seven billion people in the world, so the average income is heading towards $10,000 (£6,273) per person per year. Easy.

But not everyone has a job and some of those seven billion are children. So another question you could ask is: "What is the world's average wage?"

That is more tricky to answer, but a group of economists at the United Nations' International Labour Organization (ILO) has had a go, though they have never gone public with this information. Until now.

What follows is a discussion that highlights the problems inherent to international comparisons of data, and how sparse some of the data actually is.

But the best and most fun part of this article is an online wage comparison tool which also includes data on Malaysian wages – hit this link to try it out!

December 2011 Manufacturing: Something Really Strange…

Along with yesterday’s IPI report, DOS also released the December stats for the Manufacturing sector. And there’s something really strange about the numbers, specifically total wages (RM millions):

Productivity Growing; Wages, Not So Much

From yesterday’s news (excerpt):

M'sia on track for 4.7% labour productivity growth

PETALING JAYA: Malaysia is on track to achieve the target of 4.7 per cent growth in labour productivity this year, said International Trade and Industry Deputy Minister Datuk Mukhriz Mahathir.

He said Malaysia's productivity level or output per employee last year at US$13,577 was 3.3 times higher than China's and 4.7 times higher than Indonesia's.

"However, comparisons with the productivity levels of more advanced countries in the region such as Korea at US$33,628 and Singapore at US$54,556 confirm that there is still room for improvement," he told reporters today after officiating the Productivity & Innovation

Conference and Exposition 2011 here today. Mukhriz said Malaysia needs to benchmark its productivity level against countries like Korea and Singapore which are doing better, adding this is where the focus on productivity and innovation comes to play…

Is Inflation Really The Problem?

Great article in The Star yesterday which echoes my own thoughts on the Malaysian experience of inflation (excerpt):

Inflation: Myths and perceptions
By PRISCILLA LIM

The general view on the street is that Malaysia suffers from rising inflation. Do the statistics back the claim?

RECENT headlines in the Malaysian media have highlighted the issue of the unholy alliance of rising inflation, stagnant wages and subsidies rationalisation.

It is an “unholy” alliance simply because subsidies rationalisation and imported inflation result in rapidly rising price levels. Coupled with the problem of slow rising wages, it implies that our buying power as consumers is decreasing.

Certain quarters would have us believe that Malaysia is a ship headed for an iceberg and a Titanic-style tragedy could happen any time now. To add salt to the wound, they argue that those at the helm, like the captain on the Titanic, are sleeping and that like the passengers on the Titanic, we will not survive this tragedy. But is this gospel truth or an urban myth?…

The only thing that’s missing from this article is the heterogeneity in the inflation experience between higher and lower income households, but that’s nit-picking. The main point is valid – it’s not really higher inflation per se that’s really affecting Malaysians, but rather slow wage growth that has not kept pace with either inflation or productivity.

Go read it, it’s worth your time.

Global Low Wage Growth: Some Evidence

I don’t think I’ll take this as proof positive that labour compensation has lagged productivity globally but Dani Rodrik sends us to an interesting paper from employmentpolicy.org (excerpts from the introduction):

In the three decades after World War II, a central feature of the American economy was a mass upward mobility in which each generation lived better than the last, and workers experienced earnings gains through much of their careers…The central drivers of mass upward mobility were real wages for most workers that grew in line with overall labor productivity…

…The alignment of wage growth and productivity growth resulted from two main factors: labor markets for most groups of workers in which demand matched supply, and the post-World War II Social Compact that emerged from the Great Depression helped to propogate [sic]wage norms throughout the economy, norms that were enforced in part through collective bargaining and professional personnel/human resource management practices.

By the 1980s, both of these factors had reversed. Labor demand increasingly shifted toward more educated workers – particularly well-educated women. At the same time, the post-war Social Compact was challenged by the inflationary 1970s and collapsed in the 1980s. Nothing has emerged to replace it.

Now, in the absence of a labor market boom like that of 1996-2000, increased labor productivity no longer translates into rising real wages for many groups of workers…