EVER since the Human Resources Minister was quoted as saying that Malaysia is mulling the idea of raising the minimum wage from the current level of RM1,200 to “around RM1,500 and below” and to be implemented by the year-end, stakeholders have been out with guns blazing either in support or in opposition of the 25% jump in minimum wages.

       According to the International Labour Organisation (ILO), minimum wages are the minimum amount of salary that an employer is required to pay employees for the work performed during a given period and cannot be reduced by a collective agreement or an individual contract.

       In other words, employers are bound by law to pay what is a minimum wage in a country.

       In Malaysia, the relevant law governing minimum wages is under the National Wages Consultative Council Act, 2011.

       The National Wages Consultative Council (NWCC) is established under the Act, which is required to conduct relevant studies on minimum wages and make recommendations to the government via the subsidiary legislation, which is the Minimum Wages Order, 2018, and the Minimum Wages Order (Amendment), 2018.

       On top of fixing the minimum wages, the NWCC is also required to review the minimum wage order at least once every two years under the Act.

       Hence, as Malaysia last reviewed and implemented the current minimum wage in February 2020, the comment made by the Human Resource Minister is timely as the NWCC is expected to review, make recommendations and implement minimum wages every two years. The argument is only on the quantum. Is RM1,500 a fair amount? Should it be higher, or lower?

       Minimum wage mechanism

       Just like how we fix the RON95 price based on a certain formula, minimum wages in the country too are governed by a formula and the formula is in the graphic below.

       As some of the above data are based on 2019 data, some are 2020 data and for some, we do have the latest annual figures.

       Figure 1 summarises the current calculated minimum wage. From Figure 1, we obtained three different results and they are RM1,876 based on 2019 data; RM1,543 based on 2020 data; and if we were to base the calculations using the latest data, the minimum wage should be RM1,725 per month.

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       Another easier method in arriving at the minimum wage is to take the guidance from the ILO, whereby minimum wages are set at 67% of the median wage in emerging economies.

       Based on the RM2,062 median wage in 2020, the minimum wage should be set at RM1,382 per month.

       However, the year 2020 was exceptional and not a reflection of a normalised year due to the pandemic. Hence, the year 2019 is more appropriate to be used as a yardstick, and based on the 2019 median wage of RM2.442 and taking into consideration ILO’s guidance, our minimum wage should be RM1,636 per month.

       Hence, when the minister commented that the minimum wage the government is contemplating is at RM1,500 and below, the figure is still lower from not only the calculated figure of RM1,725 based on the latest data but also based on ILO’s guidance of RM1,636 per month.

       Hence, even if the minimum wages are fixed at RM1,500, they still fall behind the calculated figures. Minimum wages ought to be raised by at least another 9% to be in line with ILO’s recommendation, and to be in line with the formula for minimum wages, the proposed RM1,500 per month needs to be raised by another 15%.

       Will businesses go bust?

       The standard argument put forward by many business associations as well as by the Malaysian Employers Federation (MEF) is that many businesses, especially micro SMEs would have to close shop if minimum wages of RM1,500 is implemented as these businesses are still struggling from the effects of the past two years living with the pandemic.

       While these arguments may have merits, nothing beats analysing real data and of course a hypothetical scenario analysis as to the impact of a 25% hike in minimum wages to businesses and whether they would go under due to the supposedly massive increase in wages.

       Data from the Statistics Department are amazing when it comes to analysing the various economic sectors.

       In Malaysia’s case, the key economic sectors are the services and manufacturing industries, which made up 81.3% of the nation’s GDP last year.

       Lucky enough, the Statistics Department does compile some very interesting statistics and it is collated from the quarterly revenue from the services sector fourth-quarter 2021 and the monthly manufacturing statistics, which also reveal the salaries and wages paid in the two major sectors, as seen in Figure 2.

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       The table clearly shows that wages as a percentage of revenue are almost insignificant as they are just above 5%. However, this does not include other employee costs, which among others include training, medical coverage, statutory contributions, allowances and other benefits. It is therefore not too far-fetched to assume that overall total employee cost is in the region of between 7% and 8% of total revenue.

       For analysis purposes, there are two key critical questions as to wages and salaries. One is, what is the percentage of salary and wages as a percentage of total cost? Second, what is the number of employees of a particular firm currently under the minimum wage structure?

       To understand the dynamics of this, Figure 3 summarises the impact of the RM1,500 minimum wage based on certain assumptions as to salary and wages as a percentage of cost and number of workers that are presently under the RM1,200 minimum wage structure. The net change also takes into consideration a higher EPF contribution to be made by employers due to the RM300 increase per employee.

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       The way to read Figure 3 is assuming a company has a 30% wage bill as a percentage of its total cost structure and 20% of its staff are in minimum wages, the impact of the increase in minimum wages by RM300 each for these employees plus the additional EPF contribution will cost the company an increase of 3.4% in the total wage bill (not in the table) and 1% in total cost.

       Hence, it has two choices – one is to raise prices for its goods or service to maintain its profit margin; and two is to absorb the additional cost, which will eat into the company’s profitability. Assuming that a company’s total cost as a percentage of revenue is approximately 80%, then the company will need to raise prices by just 0.8% to maintain its profitability.

       The knock-on effect of higher minimum wages

       There is no doubt that there is a knock-on effect when minimum wages are raised from the current level of RM1,200 to RM1,500 per month. Employers will be pressed to not only adjust wages for employees currently at the minimum wage level but for employees who are earning more than RM1,200 but less than RM1,500 per month now.

       Hence, in addition to a RM300 increase, there will be another group of employees who will see their wages bumped up by between RM1 to as much as RM299 or higher. On top of it, due to the reduced wage gaps between a minimum wage of RM1,500 and those earning above RM1,500 per month, there will be an added market adjustment factor that will see employees presently earning between RM1,500 and perhaps up to RM3,000 experiencing another upwards adjustment of between RM100 and RM300 per employee.

       These adjustments are difficult to quantify as to the impact to employers but taking the above example, it is safe to assume it may add another 7.5% in wage bill based on an assumption that employers would make an average adjustment of RM250 per employee (including the employer’s EPF contribution) based on the average wage of RM2,200 per employee for employees earning between RM1,500 and RM3,000 per month, and assuming that this will impact 75% of the remaining employees.

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       Hence, as a whole, 80% of total employees (20% from the minimum wage category and 60% of total workers currently earning between RM1,500 and RM3,000) will enjoy wage increases.

       However, as a percentage of the total cost, the increase will still be acceptable as this will only increase total cost by another 2.25% (as wage cost is 30% of total cost), and assuming total cost is approximately 80% of revenue, a company would need to raise prices by approximately another 1.8% to maintain the same level of profitability.

       All in the total impact on the company is a higher wage bill of 10.9%, which translates to a 3.3% increase in total cost.

       Clearly, given the above example, raising the minimum wage has very little impact on a company’s profitability and companies can very well afford and absorb the increase, even without raising the prices of their goods and services.

       A potential 5% increase in the total wage bill

       The above example was rather extreme as it was based on the assumption that a company has 30% of its cost as employee cost and 20% of its employees are under the minimum wage category. In essence, employee cost is just about 7%-8% of total revenue and probably not more than 10% of the total cost.

       Furthermore, the total number of workers under minimum wages currently is less than 10% of the country’s 16.34 million workforce. Hence, if the above example shows that the wage bill will increase by approximately 10.9%, one can safely assume that given the actual labour market dynamics, wage increases will be likely in the region of between 5% and 5.5%.

       A higher wage structure will not only result in an increase in disposable income for the B40 group but help to boost the economy as well, as typically, the increase in wages will result in higher consumer spending.

       With total Compensation to Employee (CE) in the region of approximately RM526.7bil based on the 2020 full year statistics, a 5% increase in the overall wage bill for employees will help the government to achieve the CE to GDP ratio from the 37.2% that was recorded in 2020 to 39%, ceteris paribus, and closer to the target of 40% that the government intends to achieve by 2025 under the 12th Malaysia Plan.

       In addition, the higher disposable income of approximately RM26.3bil, which is equivalent to about 1.7% of last year’s nominal GDP, can accelerate the pace of economic growth as well, mainly due to higher consumer demand as disposable income will rise as a result of better wages and improved affordability.

       The government too benefits from this move not only in the form of a more satisfied working population but as a strong kicker to economic growth, which can also help the government to strategies the current taxation system as well as subsidies.

       With higher disposable income, the masses will be more receptive to price changes, especially on necessities. Of course, price adjustment on control items must be done over a period of time so as not to see a drastic rise in aggregate prices, which may fuel inflation data instead.

       In closing, the government has no reason to deny an adjustment to our current wage structure as it has a positive impact on the nation as a whole. Hence, when it comes to the issue of minimum wages, the government should just do it!