Institutions must be strengthened to ensure meaningful income growth: BNM

 

Malaysia must strengthen the institutions that shape how wages are set between employers and employees to raise incomes and strengthen purchasing power meaningfully.

Bank Negara Malaysia (BNM), in its Economic and Monetary Review 2025 released today, said that the minimum wage, which was introduced in 2013, has not proportionally raised wages for workers in the middle of the pay distribution.

“To support broader, more durable income growth, Malaysia will need to further develop its wage-setting institutions beyond the minimum wage,” it said.

The central bank said international experience shows that complementary mechanisms, such as wage guidelines, living wage standards, and coordinated wage-setting, can help link wage growth to national priorities like productivity, competitiveness, and price stability.

“For example, Japan’s Shunto system is an economy-wide process that helps anchor wage expectations and link wage increases to broader macroeconomic conditions,” it said.

BNM said adapting these principles to Malaysia’s context would help rebalance bargaining power and ensure that rising productivity consistently translates into higher incomes for workers.

Meanwhile, it said that in order to maintain low and stable inflation, the supply-side policies should be in place to raise productive capacity.

The central bank said that investment in infrastructure and funding for the research and development of high-growth-high-value sectors helps with expanding domestic production, thus keeping the prices of essential goods affordable.

Externally, it said, relevant government agencies should work closely with industry stakeholders to diversify sources of food products to mitigate future supply disruptions.

“Such efforts would enable domestic importers to respond more nimbly by securing purchase orders from alternative supplies, helping to keep food inflation low and stable,” it said.

At the same time, BNM said, policies must actively harness the “second demographic dividend”, defined as productivity-enhancing economic gains that arise when an ageing population accumulates more savings, wealth, and human capital.

“It must be enabled through reforms that raise national savings, strengthen social support systems and increase productivity through targeted capital investments,” it said.

According to BNM, a key priority is to continue broadening retirement savings coverage, particularly among informal workers such as micro-entrepreneurs and gig workers.

“Ongoing measures such as default Employees Provident Fund enrolment for platform-based workers, matching contributions for lower-income informal workers, and simplified contribution channels through e-wallets and payment platforms would directly strengthen their long-term financial buffers,” it said.

It said that these policies may temporarily come at the cost of lower short-term income and consumption, but they improve retirement adequacy and reduce vulnerability to income shocks in the long run.

The central bank said the pooled savings would then need to be strategically intermediated into sectors with strong productivity spillovers under the various national master plans.

“Such investments can raise Malaysia’s capital-to-labour ratio, which in turn supports labour productivity growth and sustained real wage growth even as the labour force contracts,” it added.

- Bernama