Why are Malaysian wages stagnant?

 

Reforming wage setting institutions and interfering in the wage bargain will not necessarily address stagnant wages in Malaysia, instead creativity and common sense might do the trick.

The latest Economic and Monetary Review 2025 from Bank Negara Malaysia (BNM) has some sobering if not entirely unexpected observations on wages.

Their research shows that prices have risen faster than wages since 2019, to the point where a typical lower-income household now has to work about four extra hours just to cover their monthly grocery bill.

BNM has also found that working harder is not translating into better pay for many people. Malaysian workers have become about 9% more productive since 2019 but their real wages have gone down.

While the minimum wage has helped those in low-wage jobs, rather than encouraging broad-based wage growth, increases in the minimum wage have not raised wages for workers in the middle of the pay distribution.

This “wage bunching” has narrowed pay differences between low- and semi-skilled workers while holding back wage growth and weakening incentives to raise skills.

BNM’s report highlights that Malaysia’s reliance on foreign workers in sectors like manufacturing, construction and agriculture also creates a wage ceiling.

On a similar note, about one in five Malaysian workers now works in the gig-economy where BNM says they earn less and have fewer chances to move up. This would suggest that the gig economy is also quietly holding wages down.

While this analysis is based on actual data, the interpretation is open to debate.

The fall in real wages and spending power, caused by prices rising faster than wages is most likely to be caused by weak negotiating power in the labour market. Employees know that prices are rising but they cannot push for higher wages because approaching employers for a pay rise will most likely be denied.

In the absence of trade unions workers cannot make a collective push for everyone to be paid better. Too much noise leads to sackings and workers are given a “take it or leave it” response in “hire and fire” employment contracts.

Foreign workers provide a convenient alternative to locals, even in semi-skilled work. This is because Malaysians and their employers insist on giving foreigners advantages in the labour market.

They are cheaper because their employers’ EPF contributions amount to only 2%, they don’t earn enough to pay taxes, and they are easy to sack if they make noise because they have no real chance to enforce their rights.

As long as Malaysians give foreign workers these advantages they will take the jobs and keep the salaries down for locals.

To stop this, foreign workers must be placed on a level playing field with full 24% EPF payments, other social payments and full medical cover as well as fully enforceable legal rights. They would quickly become unaffordable and Malaysians would take back their jobs.

All of this means that for every ringgit of value produced in the economy, employees get only 33.6% compared to 51.9% in the United States and 54.7% in Germany.

BNM is calling for stronger wage-setting institutions, but Malaysia already has a minimum wage, a National Wages Consultative Council (NWCC) and now a progressive wage policy. What is missing from the current institutional setup is common sense.

The minimum wage keeps wages for millions below the living wage of RM3,100 per month. The NWCC favours employers and keeps middle-income wages down. The progressive wage is over-complicated with training and reporting. It should be turned into a simple reverse income tax credit for around two million people.

The most important reform we need to implement to ensure a fairer share of the economic pie for Malaysian workers is to inject a dose of creativity and common sense to rebalance the power between employers and employees. - FMT

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