Can a progressive wage model work?

A progressive wage model (PWM) is simply a form of job-specific minimum wage where salaries rise regularly on a controlled pay-scale based on skills training, career development and strategies to increase productivity.

It is mostly used in types of jobs where salaries do not rise very much because productivity and the value-add of the work is difficult to improve. Typically these include cleaners, security guards, gardeners, maintenance staff and retail workers.

The idea is that the wage will increase if workers enhance their skills, which hopefully would improve productivity to compensate employers for paying higher wages.

To encourage or enforce PWMs, companies that adopt the scheme can be given a licence to operate their business. Those that do not have progressive wages do not get the licence. So the licence signals that you are a responsible company and this is good for business.

The licence can either be mandatory, so for example you cannot run a cleaning company without it, or it can be voluntary so if you have the licence you get preferential access to contracts.

The licence could also be linked to other incentives such as tax breaks or grants. Sometimes licensed companies qualify for co-funding from the government to pay for training and salary increments. So it becomes a hand-out scheme for employers who would otherwise pay poverty-level wages.

In principle a PWM could work in all sectors but for those where skills and qualifications are the norm or are required, the individual worker would have the credentials personally so there is no need for such a system.

If people with skills and qualifications are not happy with their wage they simply push for a better salary or change jobs.

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So a PWM is generally used in sectors where skills training and formal qualifications are not the norm or not necessary.

In Singapore, where the idea originated, it is restricted to very few types of jobs in unionised sectors and applies only to Singapore citizens. So it is rather limited in scope, affecting around 3% of the labour force.

In Malaysia it might have to cover millions of people, perhaps 10% to 20% or more of the formal labour force and so there are extra considerations here.

First, where this is applied in Singapore, for example the workers affected are unionised and the PWM is part of their tripartite system.

We do not have widespread unionisation or a tripartite consensus in Malaysia and it is highly likely that employers will push back here when they are already resisting enforcement of the very low minimum wage.

Second, this is essentially a wage subsidy system that involves payment from the government directly to employers for training and salary support.

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There is no guarantee that it would improve productivity or that it would go to workers at all. It could also be very expensive.

Third, it involves compliance costs and licensing which require enforcement which is notoriously difficult in Malaysia. It would lead to “preferred vendors” and might exclude many eligible companies. This is of course very complicated territory in the Malaysian context.

The benefits for employees are that a PWM raises wages and offers skills training which can help them have more secure jobs or even move between jobs more easily. The benefits for employers are the preferential access to contracts and subsidies.

The drawbacks are the costs, compliance issues and scope for corruption. Another big drawback in Malaysia is that it would cover millions of formal workers and would probably not cover informal workers or foreign workers.

It also interferes in the market mechanism by incentivising firms to rely on subsidies and handouts rather than improving their business models.

Many employers will see this as restricting their businesses. Some would simply change the contracts of their employees to contract for service agreements and so former employees would not be covered.

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They would reduce their hours which would raise productivity but still keep salaries low.

It would also push more people into the informal gig-economy. Many businesses would simply employ more foreigners who are likely to be outside the schemes.

Employees might have to be union members for it to work and although that is not essential a PWM would require changes in employment law whatever happens.

Judged against these criteria, the PWM is not a panacea and there are simpler ways of achieving the same thing.

A reverse income tax as a form of universal basic income or enforcing the minimum wage and increasing it in line with inflation are both easier and universal and it serves as an incentive for employers to manage their wage increments and business models better. - FMT

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