IF market forces have failed to lift wage levels adequately, the intuitive policy response is for government intervention — to compel higher wages across the board.
This would not stop at merely raising minimum wages, but could extend into broader progressive wage structures, mandating sector-wide wage floors and scheduled increments across skill and experience tiers.
The argument follows that higher wages would naturally drive greater savings, purchasing power, and, by extension, stronger consumption-led growth.
Simple enough but dangerously flawed.
Here’s why, drawing from a working paper I completed last year.
The average monthly salary for, say, an accounts executive position (with one to three years’ experience) increased from RM3,250 in 2010 to RM4,250 in 2022, or only 2.3 per cent a year.
Or that of a civil engineer with two to five years’ experience has risen at a similar clip, from RM4,000 to RM5,250.
That is barely keeping pace with inflation, which was 2.2 per cent a year, on average, during this period (again, let’s be honest: The actual inflation for the man in the street has been much higher than this official rate).
The thing is, this data provides only a snapshot of the job market at a particular point in time.
Thus, we are comparing two snapshots taken 12 years apart.
What it does not take into account is wage mobility over this timeframe.
What if we could follow the career path of an individual?
Does it change the story?
The real question is whether this accounting executive (or civil engineer) will stay in the same position the entire 12 years and is, therefore, in need of direct policy intervention to improve his financial situation.
Or is this merely his starting salary, from which he will advance, say, to accountant in four years and finance manager in another four years?
Currently, a finance manager (with six to eight years’ experience) can command a salary of RM10,000 to RM15,000 a month.
Viewed this way, the salary trajectory for our accounts executive could have risen from RM3,250 to as much as RM15,000 over the same period — implying an annual growth rate far higher than the headline 2.3 per cent.
Unfortunately, there is no official available data for wage mobility, beyond statistics (which I have used in the example here) collated by recruitment agencies.
And herein lies one of the biggest problems — my data does not capture “completeness”, be it of wages, incomes, cost of living and so forth.
Indeed, Malaysia has a large informal economy, where incomes are grossly under-reported.
Case in point: Closer to one in three of the entire workforce currently pays income taxes.
The argument is, when I take into account the incompleteness of data and encompass the bigger picture, the issue is different — and, therefore, the solution to raising overall wages in the country will also be very different.
I wonder whether some of this skewed and “chosen” data is intentional with agendas.
Let’s not put the cart before the horse.
Coming back to our accounting executive example, obviously, the number of higher-wage positions will be fewer, that is, opportunities for career advancement.
A company may have 10 accounts executives but only two accountants and one manager.
So, rather than being fixated on raising the annual wage growth, the more important policy objective would be to increase the number of higher-paying jobs.
How? By attracting more high-value investments.
Direct policy intervention in the private job market, I fear, would have the opposite effect — it will more likely deter than attract investments.
For instance, Brazil has a minimum wage policy that is adjusted annually.
According to a World Bank report, the minimum wage in Brazil increased by an average of 68 per cent between 2003 and 2014.
While this helped to reduce poverty and improve living standards for low-wage workers, the higher wages — that far exceeded productivity gains of only 21 per cent over this period — led to rising costs for businesses.
Competition in the country is low while the cost of doing business is high.
As a result, investments and innovation declined, as did economic complexity and total factor productivity (TFP).
Brazil became less competitive (of course, there are other contributory factors) and unemployment rose.
TFP data for Malaysia rose marginally between 2013 and 2019, after minimum wages were introduced and progressively raised.
But TFP rose far more significantly between 2001 and 2008, when there was no minimum wage policy.
In short, there is no clear correlation between higher wages and productivity gains.
Raising wages in the belief that productivity can be forced up through higher investments by the private sector may be a myth — unless there are very clear policy instruments on accelerating investments and R&D, as well as raising the education and training of the workforce.
A crucial factor for direct wage interventions to be successful is the talent, the workforce itself.
It is time for an honest assessment — do we have the necessary skills and knowledge (quality and level of education) to step up productivity and justify higher wages?
Otherwise, it would simply lead to a higher cost of doing business and, in the worst case, higher unemployment.
Even more critically, can firms afford to pay more?
As I have written before, workers in Malaysia are lowly paid, but not underpaid.
Wage increases have been slow, not because firms are taking a larger and larger share of incomes.
In fact, their returns on equity capital (ROE) have been in a consistent downtrend in the past decade.
Rising cost of doing business (due to economic rent) = lower profits (ROE) = lower wages
At the same time, inefficiencies are imposed down the supply chains, resulting in higher prices — and cost of living — for the people.
So, if Malaysia is to continue rolling back on broad subsidies and regulations, please also remove the monopolies and oligopolies, and all sorts of licensing.
I’m not questioning the need to “force” or motivate companies to invest in R&D, to innovate, to adopt better production processes and advanced technologies (including automation and robotics) in their businesses — to move up the value chain and increase the domestic value-added.
Forcing wages higher (increasing costs) without a corresponding rise in productivity gains will lead to loss of competitiveness and an even faster profit decline for businesses — and eventually widespread layoffs.
Many might well end in failures and closures or businesses will simply relocate to other countries.
Investments will decline and unemployment will rise.
Businesses invest and innovate only when they are profitable, or when they are steered by market competition.
In another working paper (published in 2023), I described how South Korea successfully raised the country’s productivity and income levels — by opening up its domestic market to investments and competition, thereby forcing companies to innovate and move up the value chain.
Essentially, compete or die.
What about the impact of higher private sector wages on the public sector?
Surely civil servants will also demand higher wages.
What will this do to already-high public deficit and debt levels?
What if higher wages without corresponding gains in productivity trigger a wage-price spiral and runaway inflation, which not only nullify the wage increases but also collapse the ringgit, stock market and wealth?
The consequences are highly unpredictable and risky.
To be fair, I believe the job market is largely efficient.
Workers are mobile.
Firms must compete for talent and they will pay to attract and retain workers — if they can afford to.
Audit firms have already been forced to raise the starting salaries of new recruits from RM2,800 a month to over RM4,000 a month — driven purely by market forces, not government intervention.
On the other hand, the consequences of direct wage intervention policies — fixing the “right” numbers by itself will be an extremely difficult and complex task with incomplete data — could be disastrous for the nation.
Medecci Lineil leads a specialised quant team within Goldman Sachs’ investment banking division. He’s also a founding board member of consultancy firms in Kuala Lumpur and Singapore. Reach him at med.akilis@gmail.com
