Is the progressive wage dead on arrival?

 

In his closing speech to the Dewan Rakyat on the 12th Malaysia Plan (12MP), economy minister Rafizi Ramli hinted at some of the details being considered for the implementation of the progressive wage model (PWM).

Payments will be made to companies based on proof that they have a PWM and will be allocated on a first-come-first served basis. We already learned that the PWM would be productivity-linked, voluntary and incentive-based.

This “dance of the seven veils” raises the question of who is designing this policy and whether pushback, especially from employers, is killing the policy at birth.

The link to productivity is confusing. If productivity could improve easily, employers would push for higher productivity and reward employees accordingly.

A PWM is normally applied to jobs where productivity does not improve or cannot be easily measured. It breaks the link with productivity and ties wages instead to other indicators such as qualifications and training.

There is no guarantee that extra training, for security guards and cleaners for example, will improve their productivity. A reverse effect might be that the costs of the PWM force employers to use technology or better business models to raise productivity but this appears rather too complicated.

Having a voluntary scheme appears pragmatic because even mandatory regulations like the minimum wage are not enforced. Employers push back or simply do not pay.

Politicians bow to demands to delay increasing the wages and rich people benefit at the expense of the poor.

A fully voluntary scheme avoids that conflict but of course no one will voluntarily adopt a scheme that increases their costs unless there are clear benefits.

In the case of the PWM, there are none. If there were, companies would already have it.

This makes the link to incentives the key to the success of the PWM and this is where the danger lies for the minister.

Incentive-based schemes are of three basic models. First, payments to employers to adopt the scheme in the form of subsidies, grants or cash.

Second, preferential vendor access for companies with a PWM to contracts and procurement from the government and other large buyers.

Third, semi-compulsory, “voluntary-not-voluntary” schemes which deny benefits such as contracts, access, grants or even tax breaks to companies that do not have a PWM.

The scheme described by the minister in Parliament is simply to pay companies to adopt the PWM and it will not work.

First, there are huge costs to changing to a PWM and the benefits are simply not clear.

Second, meaningful payments to adopt a PWM would cost billions and would be negligible for employers. The RM2 billion already mooted would be worth less than RM1,500 per year to each of the registered companies in Malaysia.

Third, the burden of proof on employers that they have a PWM and have raised employee wages is bureaucratic, onerous and essentially a lottery if the money runs out before they get their forms approved. Of course that approval process is open to corruption as everyone can see from the outset.

With these barriers the proposal looks like a non-starter and one wonders whether it has been designed and advised by people who actually do not want it to work. Of course it is the minister, not the anonymous advisers, who will carry the can.

The best incentive scheme should be to use the existing preferred vendor schemes from the government and its agencies as well as GLCs at federal and state level.

According to research by Terence Gomez and his team there were 80 large GLCs and 100 MoF companies alone.

The top 35 GLCs had 68,000 subsidiaries. There is an unknown number of GLCs and subsidiaries at state level but there will be tens of thousands at least.

Each has suppliers in the private sector and requiring everyone in this supply-chain to have a PWM would bring hundreds of thousands of companies into the PWM community. Those that do not supply to government or GLCs would be free to choose not to have a PWM.

This scheme would not cost any money and there would be fewer options for middlemen, rent-seekers or corruption. Perhaps this is why many people do not want it. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.