Introduction The first pronouncement of the first minimum wage announced by our Hon Prime Minister on 1st May 2012 was a long awaited announcement which marked the culmination of almost a year of speculation, argument, protests and criticism from both the proponents and opponents of the minimum wage policy. This imposition of minimum wage policy is a very important step in the area of human capital development in our country and as such it is proposed that a critical review and evaluation of its predicted effects on the business organizations in Malaysia is proposed here.
As this development is fresh off the press, no statistics are available and any evaluation will be based on comparative studies and our own observations. This review will be divided into several sections:- i) The first section will consist of a brief description of the history and theory of the minimum wage policy, as well as its advantages and disadvantages. (Jason) ii) The second section will be an examination of the National Wages Consultative Council Act 2012 (which empowers the National Wages Consultative Council to decide, impose and enforce the minimum wage) with a critical review of the policy. (LP)
iii) In the third section, a comparative study on the effects of the minimum wage policy in developed […. ] and developing coutries[…. ] will be made. [Joey). iv) The fourth section consists of the results of interviews with [ ] businesses in the plantation, hotel and manufacturing sectors to judge their reaction to the policy. (Mun Kit) v) In the fifth section, the management decisions that business organizations can or will make in the light of the new minimum wage policy is considered. Section 1: Minimum Wage Policy The global wage growth has decreased significantly due to the global economic slowdown and financial crisis.
According to International Labour Organization, minimum wage defined as “the lowest basic wage guaranteed by law as an attempt to put a floor under the wages of a particular subgroup of the working population” (International Labour Organization, 1996 - 2012). It is believe that through the implementation of minimum wages can improve the economic and social conditions of low-wages families and ensuring low-wages households get fair shares of every percentage of economic growth. However, setting minimum wages that higher than efficient market determinant will contribute to the increase of unemployment rate in the long run.
Minimum wage can be classified into four types: national minimum wage which is applicable to everyone in the country, minimum wage policy that applicable to specific regions that have similar characteristics in terms of economic development and labour market situation, setting policy according to economic sector and setting according to professional category (Ricardo Infante, Andres Marinakis, & Jacobo Velasco, 2003). The Malaysia Parliament has passed the National Wages Consultative Council (NWCC) bill on July 2011 and the first minimum wage scheme was announced on 1st May 2012.
There are three existing mechanisms in place: Wages Councils Act 1947, Collective bargaining and Market forces. These mechanisms are insufficient to fulfill the standard of living of low-wages families, rarely update and only cover small number of workers. On September 2011, the Wages Council Act 1947 was no longer effective. Proponents of minimum wage policy suggest that through the implementation of national minimum wage policy will improve the productivity and generally improve the competitiveness of SMEs.
However, the opponents of the minimum wage policy concerned that with the implementation of national wage policy, SMEs in Malaysia will be affected with the increase labor cost and subsequently affecting the unemployment rate. Some also think the introduction of national minimum wage policy may be just another political move from Barisan Nasional to win more voters’ support from the lower income group (Business Monitor International Ltd, 2012). The government needs to understand that it will be difficult to withdraw such policy once implemented. There are several pros and cons in implementing minimum wages policy.
According to OECD reports, minimum wages policy provides incentives to unskilled and unemployed workers to find employment. This will encourage unskilled and unemployed workers to get a job and feed themselves. It also offers job security to low-skilled workers during the global economic slowdown period. As contrast to that, minimum wages policy can lead to discouragement of organizations to open new job opportunity and eventually increase the unemployment rate. The increase of minimum wage adding burden to organizations and small organizations may not able to afford the changes.
Alternatively, employers will try to increase productivity from existing workers, passing the pressure and burden to existing workers. Section 2: National Wages Consultative Council Act& Criticisms of the Policy The National Wages Consultative Council Act (“the NWCC Act”) The National Wages Consultative Council Bill (the “NWCC Bill”) has been tabled in the Dewan Rakyat and is enacted as the National Wages Consultative Council Act (“the NWCC Act”) . The NWCC Act proposes to set up a National Wages Consultative Council
(“NWCC”)(section 3)made up of a Chairman, Deputy Chairman, Secretary, 5 public officers, 5 members representing employees, 5 members representing employers and 5 other members(Section 5). The NWCC‘s function is to advise and make representations to the government concerning minimum wages, to consult the public to review, deliberate and disseminate on all matter relating to minimum wages(section 4). It empowers the NWCC to make a Minimum Wage Order (Part III) which has to be complied with powers for the NWC to investigate and enforce(Part IV). The purpose of this NWCC Act is to replace the current Wages Council Act 1947 (Act 195).
The Act 195 only gives the Minister power to impose minimum wages where there is no adequate machinery for the regulation of salaries or conditions of employment. This can occur where employers and employees fight over remuneration and the government is forced to step in to prevent disputes. The powersof enforcement under the Act 195 was also weak and the NWCC Act aims to beef it up. Minister to be Empowered It would appear that the government has decided to take a more pro-active position in the wage fixing process and has set up the NWCC for this purpose.
One can argue that the best people to decide on wages should be the parties involved and the government’s participation or “interference” should be an act of last resort. The fact that 5 members representing employees and 5 members representing employers are in the NWCC recognizes the need of the input of theseparties but the fact that there are 23 members in the NWCC and voting is by majority makes the votes and voice of both the employer (5 votes) and employee (5 votes) out of a maximum of 23 redundant. A major criticism of the NWCC Act is that it gives the Minister almost absolute power to implement the scheme.
DatukDr S. Subramaniam, the Minister of Human Resources, in his presentation of Human Capital Development SRI under the Economic Transformation described the implementation of the Minimum Wage as important to “ensure worker’s rights to a fair wages system are protected whilst minimizing the cost of doing labour“(Star Newspaper 14th February 2011) Criticisms of the Minimum Wage Policy by Businesses i) Uncertainty for Businesses It will be very difficult for businesses to forecast what their costs of production will be because the decision as to how much to pay has effectively been taken out of their hands.
Businesses will face uncertainty and future planning will be difficult. Multinational corporations look out for countries whichoffer them comparative advantage in terms of labour costs will be outweighed by the fact that such costs will not be determined by the laws of supply and demand but by the Minister in charge. As it stands, the various businesses in different sections and located in different parts of the country cannot even agree on how much a minimum wage should be and to ask that this decision be imposed on them by law has raised their ire. (ii) Can a “Fair” Minimum Wage be Determined?
In order for the NWCCC to be effective and determine a wage it will have to consider many factors and this is not an easy matter. A very clear example of how difficult it can be is the recent debate of what the minimum wage is to be. The Federation of Malaysian Manufacturers (FMM) had proposed that a median of RM700 be considered. The SMI Association of Malaysia claim that eighty per cent (80%) of small and medium-scale enterprises (SME) could be forced to shut down if the Government's proposed minimum wage policy of between RM800 to RM1,000 is implemented across the board.
The SMI Assocation of Malaysia’s Vice-President, Michael Kang, said at a joint conference participated by 16 manufacturing, retail and service sector associations, that “Most of the SMEs are labour-intensive; they don't have modern machines. An increase in salaries will have a tremendous effect on the manufacturing cost” and continued that “It could totally kill SMEs because for most of them, their net profit margin is only around 3% to 5%” (Star Newspaper 7 March 2012).
Malaysian Trade Unions Congress (MTUC), the umbrella body that represents 800,000 workers from 390 labour unions, called for a minimum wage of RM900. Richard Ko of the Malaysian Furniture Entrepreneur Association (MFEA) claimed that some 2,000 unskilled workers in the furniture industry are currently paid a minimum of RM600 as starting pay. If the government were to propose a minimum wage of RM800 for those in Sabah and Sarawak, and RM900 in the Malay Peninsula, the industry will go into a decline. The point to be observed is that the issue of wages is not only a political issue, butit is also a social issue as well as an business issue that will effect the economics of a country.
Setting a wage is such a complex and difficult procedure that it may be best left to the forces of supply and demand. iii) Poverty and Productivity The Malaysia Economic Monitor April 2012 by the World Bank has also warned of the effects of using the minimum wage policy to solve social inequality. 1) Social issues and tackling of poverty can be addressed in other ways. In fact,Malaysia Economic Monitor April 2012 by the World Bank remarked that a minimum wage policy “is not the most appropriate instrument to address poverty and inequality.
Indeed, many poor people are not employed or are employed in the informal sector where minimum wages are not binding. Also, poor people often have limited skills and low productivity and thus tend to be among the first to be laid off when wages increase in line with the legislation. ”(Malaysia Economic Monitor April 2012). 2) It is also not necessarily true that the hardcore poor will be helped. Many of them are informal labourers with no work contractnor unions to protect them. These people are usually based in rural areas where there are not many potential employers.
Such people may lose their jobs because of higher wages and may be the very people who will suffer as a result of the minimum wage policy. Dr Khalid Abdul Hamid, a senior research fellow of the Malaysian Institute of Economic Research (MIER),as reported in Edge Financial Daily interview on 18th April 2012, has expressed that the “Minimum wage policy is an instrument to provide an incentive for innovation technology and economic diversification. It is an inappropriate tool to tackle problems like poverty and labour productivity”.
3) A minimum wage policy does not ensure higher productivity. A common argument is that the unskilled workers basically comprise the uneducated portion of the population currently. They will become lazier knowing that their wage is already fixed. Moreover, they are not incentivized to improve their position in life. In fact Malaysia suffers from a problem of low skills and low-skill occupations still account for 44 percent of all jobs. (Malaysia Economic Monitor April 2012). A minimum wage policy will not address this problem.
4) Although a minimum wage policy can cause low-productivity, firms that cannot afford the higher cost of labor will go out of business, and, this may result in an increase in the average productivity in the economy. However increased productivity can be better encouraged by other measures such as improvement of skills or educational programmes. iv) Foreign Workers DatukDr S. Subramaniam, the Minister of Human Resources, in a parliamentary debate has said that the minimum wage policy will extend to foreign workers as well. In 2008, the number of legally recruited foreign workers reached around 2.
06 million,which comprisesabout 17. 5 percent of the labour force and declined to 1. 8 million, according to the Ministry of Home Affairs. The latest numbers by MIER states that there are 3. 1 million foreign workers, making up 25% of the national workforce employed in the plantation, construction manufacturing and agricultural sectors and out of which two-thirds are illegal. These workers are mostly unskilled and will be able to benefit from the minimum wage policy. Many employers may be happy to turn to such illegal or undocumented workers if the minimum wage policy is enforced to save costs.
The effect of a minimum wage policy will therefore be in the negative in both aspects, namely that the legal workers will be able to be paid more, whilstthe illegal will also find jobs, both at the expense of the unskilled workers. Recommendation of the Minimum Wage announced by the Prime Minister on 1st May 2012. (got to keep this till 1st may ) Section 3 – An Insight into the Imposition of Minimum Wage Policies Across Developed and Developing Countries To accurately access the effects of a minimum wage policy in Malaysia, we will need to comparatively analyze other studies that have been conducted on developed and developing countries.
Malaysia is categorized as a successful developing country that is on its way to progress towards a developed nation, in line with the Vision 2020. However, there is a distinct differentiation in the development progress in urban and rural Malaysia, with numerous rural areas that has not benefited yet from the progress of development that urban areas have. It will thus only be fair to inspect the impacts that minimum wage legislation and policies haves brought about from the purview of both spectrums. The objective of implementing minimum wage legislations and policies differ for a developed and developing country. ;
In developed countries, a minimum wage policy is instituted to protect a the minority group of workers from the low-paying sectors who are generally not safeguarded by unions,. wWhereas in developing countries, minimum wage policies are instituted to elevate the level of income distribution, and ensure that all workers can acquire an acceptable minimum standard of living and are uplifted from poverty (Watanabe, S. 1976). Most research and studies on the impact of minimum wage legislation and increases in minimum wage haves been based on developed countries and there has been limited studies done on developing countries.
It is important to note that labour market conditions bear no resemblance across developed and developing countries, mostly because there are a higher number of informal and uncovered sectors in developing countries (Alatas, V. & Cameron, L. A. , 2008). Uncovered sectors are employment sectors that are not included in the minimum wage policies and labour law, while informal sectors are employment sectors that are not incorporated and governed by any acts or regulatory bodies of a country, and is therefore excluded from the measurements of Gross Domestic Product (Hussmanns, R.
). Informal sectors typically comprise of individual and family based entities, domestic servants and non-estate agricultural labourers (Alatas, V. & Cameron, L. A. , 2008). In developing countries where there is a surplus of labour resources, typically the biggest cause of the hindrance in economic growth and job or employment opportunities is due to a lack of integrative and important resources such as infrastructure, capital, talents and skills, as well as entrepreneurship aptitudes, rather than the insufficiency of people’s purchasing power (Watanabe, S. 1976).
It can be observed that minimum wage rates in developed countries are generally established at lower rates in relation to average wage rates, whereas in developing countries, ambitious governance intents typically result in minimum wage rates established at somewhat high rates in relation to average wage rates. This did not bode well because the rate of inflation skyrocketed from between 1965 to 1973 and resulted in the substantial decrease in the increase of minimum wage. The only exception was Libya, where the increases in minimum wage rose fairly quickly and compliance was reported to be fairly successful.
The cause for Libya’s exception can be attributed to its high and profitable economic dependency on its oil resources, an idealistic government and its small local labour resource (Watanabe, S. 1976), which does not apply to many other developing countries The implementation of minimum wage policies in developing countries have not been much of a very successful, in cases where the extent of the policy has been seen as being too ambitious, in relation to the limited amount of financial and administrative capacity in these countries.
The excess availability of labour resources in the labour market means that workers are much more willing to accept lower wages as compared to a higher minimum wage. In countries such as Pakistan that enforce minimum wage based on the size (number of workers) of companies, firms may also resort to restraining the growth of their businesses and hire contractual employees of shorter time periods. This may lead to the inefficacy of company operations in operating out of optimum levels whilst hiring unskilled workers or workers who have insufficient training (Watanabe, S. 1976).
Where some developing countries report that there is insignificant impact of the increase in minimum wage impositions, this was due to the unsuccessful compliance of firms after the implementation of minimum wage policies. To cite a non-compliance case, some employers even resorted to coercing their workers to validate that they receive higher wages than what their actual wages are (Watanabe, S. 1976). A short observation of the impact on busineses and the decisions made by the imposition of the Minimum Wage policy in the hospitality industry in the United Kingdon and in the manufacturing industry is set out below.
A Peek into the Business Decisions after Ramifications of a Minimum Wage Legislation in a Developed Country –Hospitality industry in the United Kingdom(Developed Country). To investigate the ramifications of minimum wage legislation in a developed country, we reviewed the impacts that a National Minimum Wage Legislation had on the hospitality industry, (a labour intensive sector), in the United Kingdom. In Ssimilar instances to Malaysia, the United Kingdom’s hospitality industry is monopolized by a smaller number of large companies and countless numbers of small companies.
Economic theories of the labour market have always reiterated that the imposition of minimum wage policies results in employers having to take actions to ensure their profit margins stay relatively unaffected. One of these actions is to reduce the cost of training for workers to make up for the increase in workers’ wages, and the other is to decrease the hiring of younger workers who are more willing to accept lower pay in return for the work experience, but have limited productivity output in relative to the higher wages imposed by minimum wage policies. i) Two- tier minimum wage levels.
In the case of the implementation of a National Minimum Wage in the United Kingdom, there were two brackets of minimum wage, in the recognition that employers required incentives to uphold prior levels of providing training for workers and hiring younger workers to leverage on their labour market participation. The first bracket of minimum wage applied to workers generally on a national scale, reported by Norris, Williams, and Adam-Smith at the time of publication, to be at ? 4. 50 per hour. The second bracket, called a subminimum rate, applied to younger workers age 18 to 21 at ?
3. 80 per hour. The subminimum rate was also extended to cover new workers age 22 and over for a duration of the first 26 weeks of employment, with the condition that workers would need to receive formal, accredited training for the given duration. i) Increased employment for lower tier (subminimum) employees The implementation of the National Minimum Wage in UK took into consideration not to dramatically create inconveniences to employers, provide employers with the ease of managing higher costs, and to avoid any unfavorable economic outcomes.
It was then considered a success, especially for firms that were in low paying industries and which hired a significant number of younger workers, such as the hospitality industry in the United Kingdom. Through a series of interviews of firms in the hospitality industry in the United Kingdom, firms report that the subminimum rate was not popularly used, because most firms found it too troublesome to provide the required 26 days of formal, accredited training, some preferred to pay workers based on their merits and not discriminate age, while many found that the lower pay bracket was not attractive enough for the purpose of hiring and retention of workers.
ii) Impact on training of workers Unfavorable outcomes of the imposition of the National Minimum Wage was not so much seen in this industry, as most of the larger firms preferred to distinguish themselves from competitors by focusing on quality of service, which meant that the quantity and quality of training provided for workers were not compromised.
For the smaller companies however, they reported that the required training that applied to subminimum rates were more cumbersome to practice because many of the workers don’t require any formal training to do their jobs well, but could contribute to more job satisfaction amongst workers, although their salary scales are lower (Norris, G. , Williams, S. & Adam-Smith, D. , 2003). A Peek into the Ramifications Business Decisions after of a Minimum Wage Legislation in a Developing Country-Manufacturing industry in Indonesia(Developing Country).
On the other end of the spectrum, we reviewed a study that is based on the manufacturing industry in Indonesia. The various Indonesian provinces reflected a distinct difference in the average standard of living, where Jakarta is an urban area and West Java is predominantly a rural area. This poses similarities to Malaysia, where there is a distinct difference in the urban areas such as Kuala Lumpur, Klang Valley and in the predominantly rural areas of the East Coast of Peninsular Malaysia and in East Malaysia (Sabah and Sarawak).
The minimum wage policy varied across different provinces in Indonesia, and there were differing rates of minimum wage increases across provinces such as Jakarta and in West Java (Bogor, Tangerang and Bekasi, collectively called Botabek), where manufacturing firms are mostly located in. Data from six years was also used to analyze the long-term impacts of minimum wage policies. This provided an easy comparison to identify the impacts of minimum wage impositions in Indonesia.
Indonesia experienced very sharp increases in terms of minimum wage between 1990 and 1996, because of international pressures to curb the exploitation of cheap labour by multinational firms. Particularly in the early 1990s, the increase of minimum wage was doubled in actual practice. The implementation of minimum wage was found to be in compliance across the provinces and in medium and large sized firms. Smaller sized firms were likely to be informal sectors, for which the minimum wage policy does not include, so the level of compliance were likely to be lower. i) Hiring decisions.
Because larger firms paid higher wages to their workers as compared to the smaller firms, and foreign firms were also known to pay higher wages as compared to the local firms, minimum wage policy had a more significant impact on the smaller and local firms, because of the inflexibility of their business structure to accommodate higher costs. In certain provinces such as Botabek that experienced a higher increase of minimum wage as compared to Jakarta, it was found that smaller local firms reported a higher decrease of workers. The imposition of minimum wage policy did not affect the larger sized firms much however.
Despite some arguments that foreign firms are distinctly sensitive acute to increases in minimum wage and this could impact the amount of foreign direct investment into a country, the study found that the foreign and multinational firms in Indonesia did not relocate their businesses following the imposition of the minimum wage as the cost of relocating a business is much costlier. But the duration of the study (6 years) may prove to be too short a time to measure the decision-making exercise for a relocation of a foreign business (Alatas, V. & Cameron, L. A. , 2008).
Section 4– Results of interview with [ ] business organizations (Mun Kit) Section 5 -How will this effect the management of business and management decisions to be made Section 5 -How will this effect the management of business and management decisions to be made Understanding the business operating environment is extremely critical for us to have a better picture of the impact of minimum wage towards businesses. We have in the earlier parts of the report, concluded that a minimum wage policy, in order for it to be implemented has to be in favour of the worker.
It is unlikely that the government will impose a minimum salary that is lower than the economic value of the worker as it has been said that the policy is meant to help the poor. This will especially mean that the minimum wage policy will have an impact on lower skilled or unskilled positions, rather than skilled positions. At the current moment and with the MWCC Act being passed on [ ] and announced by our Prime Minister on 1st May 2012 (pending). We will focus first on the assumption that the minimum wage proposed is higher than the current salary. The likely forces facing a manager will be as follows:- 1.
Uncertainty in forecasting As mentioned earlier, it is anticipated that there will a lot of lobbying and appeals that will be made to the Minister in regards to the implementation of the minimum wage policy once it is announced. This will lead to revisions and discussions, and there will be possibility of a delay in the implementation.
The General Elections is also scheduled to be held this year, and while the Government will want to make the man on the street happy to ensure that they can win the votes from the lower income group which is believed to be the group which will most benefit from this policy, the Government will also want to be in the good books of business and major players in the various sectors which are labour-intensive. As such, there could be a slight uncertainty in terms of forecasting of expenses for businesses which will make it slightly difficult for the Managers to then plan ahead.
2. Increase in Costs Any increased costs may be passed on to the consumer. Our limited interviews and questionnaire have indicated that the costs will definitely be passed on to the consumers save for the goods which prices are fixed. There may be a threat of inflation.
However, there might be other ways for businesses to counter cost increase and this will be discussed in more detail below. 3. Labour All things being equal it is not necessarily true that an employer will prefer a local over a foreigner. It has always been said that foreign labourers work harder, expect less, and are less distracted as their families are not with them. It is very possible that the number of foreign workers may not fall and managers may continue to employ them. There may be a larger outflow of moneys as their salaries are repatriated.
Smaller industries in rural and agricultural areas like Sabah, Sarawak or even the Thai border may turn to illegal workers. This situation may be heightened because according to the Sarawak Timber Association, 90% of the workforce in the timber industry is made up of foreign labour (The Star, 2012). 4. Closure of business According to The Malaysian Employers Federation (MEF), the implementation of a minimum wage policy may because businesses may close down (Boo, 2011). They believe that when profit margins become too low, business owners may not longer find it feasible to operate.
When that happens, employees will be retrenched and this will contribute to a higher unemployment rate for Malaysia. MNCs may also re-examine the competitive advantage gained in coming to Malaysia. 5. Benefits It cannot be ignored that some benefits and allowances usually given unilaterally will be withdrawn. The NWCC Act is not clear as to what constitutes “minimum wage” but it has been defined as ‘basic wage” in the NWCC Act. Much has been said about the effects minimum wage will have on employees and the economy in general.
While on the one hand it is said to be good method of increasing the quality of life for Malaysians in general, not much has been said about the impact it will have on businesses. It is without a doubt that businesses, especially smaller or family-owned businesses, or those which are labour intensive, will feel some impact, possibly negative, with the implementation of this policy. In fact, the US Employment Policies Institute reported that there is consistent evidence which shows that there is a significant decline in employment in retail and small business establishments as a result of minimum wage (Sabia, 2006).
We will look at some of the possible results once the minimum wage policy is implemented. Management Decisions Assuming that the minimum wage policy will affect the plantation, manufacturing and services sector as discussed in the section above, we set out what likely management decisions will face the different managers. These decisions and strategies are proposed based on the survey we conducted as well as sectors and places where we anticipate that the minimum salaries will impact costs and profit margins. When minimum wage is higher than current salary 1. Cost-cutting measures.
There is likelihood that cost cutting measures will be adopted by Managers if the proposed minimum wage is higher than the current wage level offered by business. This may be considered to be the easiest way when dealing with the minimum wage policy. One of the first steps in cost cutting may be by reducing the number of staff in the business. The difference between current wages and the proposed wage may actually eat into profits and thus, to ensure the sustainability of a business, they may opt to reduce the number of workers to be able to absorb the difference in the wage amounts.
In fact, it was reported in Australia’s Fair Work Australia’s Research Report 7/2010 that some smaller business owners worked longer hours to make up for the reduction of staff (Evesson, Oxenbridge, Schutz, Susanna, Moensted, & Buchanan, 2010). For bigger businesses, the reduction of employees affected by the policy may be countered by the hiring of contract foreign labour that are paid daily, rather than monthly to reduce the necessity to hire local employees. This is because under the proposed minimum wage policy, both local and foreign employees will be paid equally (Boo, 2011).
Another method of cost-cutting may include the reduction of benefits and allowances of current employees. While this may demoralise employees, with proper handling of the situation, Managers can explain and justify their actions to employees. They may also be able to provide certain other incentives to make up for the benefits, such as achievements of KPIs or targets. In this instance, motivation of employees is paramount, and the Manager must handle this situation extremely.