A minimum wage is the minimum amount of compensation an employee must receive for performing labour. In economic term, minimum wages is the price floor of the pay of the labour that set by the government. The minimum wages rate normally was fixed by legal authority as such, it is illegal to pay an employee less than the minimum wage. Our economic transformation goal is to make Malaysia a high-income nation by 2020, with a per capita income of US$15,000 a year, however there are still around 30% of the people in Malaysia are still living below the poverty line.
The general purpose for the implementation of the minimum wages is to ensure that the wages of a labour is able to meet the basic standard of live which is be at or above the poverty line so that they can survive with their salary. In Malaysia, The Prime Minister YAB Datuk Seri Najib Abdul Razak announced the rates of national minimum wages in Peninsular will be RM 900 while Sabah, Sarawak and Labuan will be RM800. This implementation of minimum wages in Malaysia was the decision under the National Minimum Wages Consultative Act 2011. The national minimum wage is the first ever in Malaysia. This will benefit about 3.
2 million low-income workers in Malaysia, by ensuring they receive a basic salary per month. But at the same time it will also causes some impacts in the economy. Inflation Inflation is the sustained rise in the general level of prices that affect individual, business firm and government. There is a close relationship between setting the new minimum wage and the inflation rate in the country. Based on the Employment Act 1955, all the small and medium enterprises (SMEs) had been urged to start adjusting the salary of the workers to meet the minimum wages of RM 900 starting from 30 April 2012.
When the wages of the labour increase, the business firm will face a higher cost of production as the wages of the labour is also one of the element of the business expenditure. In order to maintain the cost of production, the firm will shift the burden to the household by increasing the price of the goods and services. Then, the general price level will hike up and this causes the cost push inflation as the sustained increase in prices that occur is due to the higher cost of production. During inflation, the household have to pay a higher price for the final goods and services.
This will reduce the purchasing power of the household that also causes the drop of the real income and the living standard as with the fixed amount of money, the household can only buy less goods compared to the previous time. In long term, the implementation of minimum wages will cause high inflation rate that weakening the currency of the country thus decline the economic growth. Based on the statistic, the Consumer Price Index (CPI) for the period January to April 2013, which is the time of the announcement of new minimum wages policy increased by 1. 5 per cent to 106. 1 compared with that of 104.
5 in the same period last year. The Market achieve the equilibrium when aggregate supply (AS) is equal to aggregate demand (AD). However, when the minimum wages was implemented, the cost of production increase, then the firm will reduce the production of the goods. As a result, the aggregate supply decreases, the AS curve shift inward and leftward from AS from AS1. The economy is now become disequilibrium as the aggregate supply is lesser than the aggregate demand, AS<AD. The lower level of aggregate supply will cause a shortage in the market therefore it push up the price from P to P1.
The pressure on price will then cause a inflation to occur. GDP Besides inflation, minimum wages also give a large impact to the Gross Domestic Product (GDP) growth in Malaysia. The impact implementation of minimum wage on GDP is ambiguous therefore we must study it on two sides, which is the demand side that referred to aggregate demand and the supply side that referred to the aggregate supply. In term of aggregate demand, Gross Domestic Product (GDP) is define as the total amount of spending over a year by the residents within the country.
In Malaysia, according to the report of the Human Resources Ministry, around 34% of labours in Malaysia earn less than RM700 per month which are not even able to bear the burden of basic daily expenses nowadays. Also, their wages had only increase by 2. 6% in the past 10 years. The implementation of minimum wage will boost the salary of the workers especially the low income earner who remain employed. Based on the statistic, the setting of minimum wage will benefit a reported over 3 million private-sector employees. When the wages of the labour increase, the disposable income of the workers increase.
The increment of income will driven up the purchasing power of the household therefore they will spend more. It will cause a hike up of the gross domestic product in the country and boost up the economy growth as the higher income help the country to get further from the poverty line. In term of aggregate supply, Gross Domestic Product (GDP) is define as the total amount of final goods and services produced over a year by the residents within the country. In Malaysia, the amount of small and medium-scale enterprises (SME) is plentiful.
Based on the nature of this type of industries, many workers will be hired to produce goods. The implementation of minimum wages policy means that the companies have to pay more to hire workers. Needless to say, it leads to a higher cost of production. The firms would not able to absorb the increment in the cost of production. Hence, the situation will discourage the production and investment of the industries. Also, some of the business firms may not able to absorb the increment of cost therefore they will transfer the burden to the consumer by increasing the price if goods and services.
In the point of view of the business firms, the minimum wage policy will lowered the gross domestic product in the country. Employment The employment is the situation which people aged 16 and above who are employed at present in a job. In contrast, unemployment is the situation where a person of working age who is actively searching for work either full time or part time but is still unable to find a job. Unemployment rate is often used to measure the growth of the economy in a country.
With the implementation of the minimum wages, Small-medium industries (SMIs) warned that 80% of active businesses could fold under a blanket wage floor, cutting four million jobs from the labour market and cause a drastic increase in the unemployment rate in Malaysia. This is because the operational companies employ 59% of all workers as they are the more to labour-intensive. Hence it will be a large impact in the cost of production when there is a hike in wage bills. When the cost of production increase as the wages of the labour
increase, the firm and industries will find an alternative method in order to reduce the reliance on labour and maintain their cost of production. Instead of using labour intensive, the firm will shift to capital intensive, which is the machine or tools are more than the labour work. That’s mean the firm will cut down the number of labour and advance the technology by increasing the high tech machine to replace the labour work. This will cause the unemployment to increase. Based on the prediction of the economists in Malaysia, a 10% increase in the minimum wage reduces gross hiring by about 1.
36% . Based on the graph, When the minimum wage is higher than the equilibrium wage, the market is going to be distorted. The wages increase from W0 to W1, at this point, the employer will decrease the demand of labour from L0 to L2 and the supply of labour increase from L0 to L2 as more people is willing to work due to the higher wages. This will cause a surplus of labour as the supply is greater than demand and then result unemployment. The unemployment will result many socially undesirable consequences such as the increase in crime rate, increase in suicide rate and many more.
Also, the increase of unemployment rate will cause the black market become active. When the employers choose to reduce the number of labour as they refuse to pay the labour at the minimum wage rate, the workers that desperately want a job will go to the black market and agree to take the less salary. Exchange Rate Exchange rate is the price which the currency of the country can be exchange for another country’s currency. In simplify, exchange rate also mean that how much amount of money in a country that you can buy with one dollar of the other country.
Aside from inflation and unemployment rate, exchange rate is also a factor that determines the economic growth in a country. The exchange rate of a country is normally determined by the demand and supply of goods and services. For example, the high demand in the Malaysia’s goods will tend to cause an appreciation or the increase in value of Malaysia Ringgit (MYR). Therefore, the implementation of the minimum wages policy will then affect the exchange rate of Malaysia Ringgit in long term.
The minimum wages policy will directly hike up the price of goods and services and then raise the inflation rate in Malaysia. If the Malaysia’s inflation rate is relatively higher than other foreign country, this will reduce the international competitiveness in Malaysia because the demand of domestic good is lower as the price is high. Therefore, during inflation the export of Malaysian goods decreases and increases in the demand for import goods in both investment and consumption goods. This will reduce the demand of Malaysia Ringgit and hence cause devaluation in the value of Malaysia Ringgit. This will finally result a fall in the exchange rate.
Conclusion All in all, the minimum wages policy is expected to give a positive impact to the economy in Malaysia. However, there are always two sides of effects when the policy was implemented. In the running of minimum wages policy, it is unavoidable to the risks of having negative impacts to the economy such as inflation and unemployment. In this situation, the government play the critical role in stabilizing the economy. When there is a high inflation rate, the government should implement the policies such as fiscal and monetary policy.
To curb the demand pull inflation, government uses contractionary fiscal policy that control the government expenditure and revenue to reduce the national income and aggregate demand by increasing the government spending and reducing the taxes. Also, government uses contractionary monetary policy to bring the economy out of inflation by reducing the money supplied so that the aggregate demand will decrease. In term of unemployment, the solution for the government is to rise the total spending to make up the lack of spending elsewhere in the economy.
Instead of the negative impact, it is undeniable that minimum wages policy brings many positive changes to the country. For instance, although the minimum wages policy hike up the cost of production, it also improve the productivity of the industries because the companies will try to fully employ their workers to maximize the profit and the labour also will work hard to avoid being retrenched as companies become more wary of their costs of hiring workers when the policy is in place.
In fact, since the minimum wages had been set, the productivity rate increase around 40%. Needless to say, the minimum wages policy help the low income earner to get the income which can meet their basic living standard and bring them away from the national poverty line as the minimum wages of RM 900 is 25% above the poverty line of Malaysia which is RM 720. After all, I strongly believe that minimum wages policy can boost up the economy of Malaysia if the business firm take the initiative to collaborate with the government. Reference TEOH, S.
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