The challenge of raising incomes

 

The Madani Economy framework launched by Prime Minister Anwar Ibrahim sets a target for labour income to reach 45% of gross domestic product (GDP) by 2025.

The new Employee Wages Statistics from the Department of Statistics, part of economy minister Rafizi Ramli’s Pangkalan Data Utama (Padu) initiative, show just how bold and challenging this target is.

In March 2023 half of all formal employees earned less than RM2,600, including bonuses, commissions and allowances. Put into context, Bank Negara Malaysia estimated that the living wage for a single person was RM2,700 based on 2016 data.

Seven years later 50% of wages are still below this level and 40% of people in the formal sector earn wages below the official household poverty level.

This is barely enough to live on and not enough to save for retirement. Many will work for the whole of their life on poverty wages.

The situation for young employees is even worse, 50% of those below 20 years old receive only RM1,500 or less. Informal and foreign workers are not included.

In terms of gender, Malaysia has almost achieved gender pay equality with both men and women paid equally badly. Median wages for men were RM2,664 and for women, RM2,545.

Beyond the data, the biggest issue causing low incomes is the imbalance between employers and workers. The Compensation to Employees (CE) ratio is barely one-third in Malaysia compared to more than half in Singapore and other developed countries.

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For every ringgit of value, Malaysian employees only get around 35 sen. Singaporean employees get more than 50 cents per dollar. So Malaysian employers are keeping more of the value created and denying employees a bigger share.

They can do this because employees have very little power in the labour market to push for higher salaries.

Employers can also exploit foreign workers with low-pay, poor conditions of employment and very little legal protection.

Malaysia has reached the point where foreign worker exploitation borders on modern day slavery and this is damaging the economy and the image of Malaysia as a place to invest.

This imbalance is one of the main causes of low productivity and lower economic innovation and development. It is a failure of the labour market due to dominance of employers.

For example employers were successful in delaying minimum wages at the expense of low-paid workers. This is a symptom of power imbalance.

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There is also a cultural and mindset problem but this is difficult to change.

Actually market forces are overtaking the rigid attitudes of employers. For example fewer foreign workers are interested to come to Malaysia on the poor terms and conditions here. Pay is now better in Indonesia for example.

To raise incomes there must be a fairer distribution of economic growth targeting a CE closer to that of high income countries.

In his comments on the data Rafizi rightly focused on higher income as the main aim of long-term economic reform. Inflation is slowing but prices are still high, so affordability is the concern now and that means raising incomes because prices are unlikely to come down.

We cannot continue to keep prices down with subsidies or price controls and this is now widely accepted.

So we need to focus on ways to raise incomes with wider structural reforms of the labour market.

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This might include a Progressive Wage Model (PWM) for lower income groups, more flexibility in wages and employment for everyone and a new system of wage determination along with good taxes and benefits for multiple income sources to make sure people have enough to maintain a higher standard of living and save for retirement. - FMT

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