CME: WAGES SHOULD BE DETERMINED BY THE MARKET, FOCUS ON EDUCATION AND LABOUR REFORMS
MONDAY 7 FEBRUARY 2022: The debate about minimum wage in Malaysia has emerged once again and it is now particularly important at the light of two important facts: 1) mean monthly wages and salaries fell by 9% in 2020, while the median monthly wages and salaries fell by 15.6% (due to different movement restrictions and stay-at-home orders); 2) inflationary pressures are threatening purchasing power (and CME launched the alarm as early as 26 March 2021).
While the purchasing power of workers in Malaysia is under threat, a simple increase in minimum wages is not the proper answer.
The Ministry of Human Resources reported that 8.8% of workers in Malaysia are actually earning monthly salaries below the minimum wage of RM 1,200 per month. The right questions to be posed here are: who are these workers? Why is their income so low?
In all likelihood, a good portion of these wage-earners is made of low-skilled and immigrant workers, that cannot command a higher salary because of their skills and productivity. Policymaking should deal not only with good intentions but also, and above all, with unintended consequences: too high wages could expel unskilled workers from the labour market rather than bettering their conditions. A well-designed policy should consider the replacement point between workers and machines, in order to avoid harming workers rather than helping them.
As a central planning agency such as the government operates outside the market and is in the impossibility of grasping all the relevant knowledge produced by the market, the best way to preserve both profitability (which means survival) of enterprises and jobs is to leave the determination of salaries to market forces.
Instead, a better way to improve the labour conditions of unskilled workers is to increase the degree of freedom of movement between different employers. Such a freedom of movement would create competitions among employers in order to get the best workers, so that wages would increase as result of this competition rather than by law. The introduction of this competitive mechanism should be accompanied by a more holistic regulation and enforcement about the living conditions of unskilled workers.
The government should furthermore be concerned with other and more general problems affecting the labour market:
- Fresh graduate conditions.
- Rising underemployment.
The low wages for fresh graduates and the phenomenon or rising underemployment are strictly interrelated and due (at least partially) to mass tertiary education. The rising access to tertiary education, in fact, is generating two additional phenomena:
- Decreasing quality of education itself.
- Decreasing value of the education certificates.
In a community where everybody possesses a degree, the marginal value of that degree declines and the degree does not constitute anymore a signal for the employer about the value of a potential employee. That value, then, needs to be discovered during a period of training, which will be paid less than the average salary precisely because the degree does not contain any longer relevant information about the worker’s value.
At this regard, an education reform should be conceived, aiming at lowering the number of tertiary education graduates. Secondary education should be already a qualifying one, preparing for administrative and technical jobs, while tertiary education should be left only for qualifications requiring an extremely high level of skills. In this way, false expectations would be avoided and most of the professionals could join the labour force at an early age.
Finally, inflationary pressures should be closely monitored and controlled. Inflation is a monetary phenomenon; failing to recognize this would bring about misleading analyses and wrong policies. Too much money chasing too few goods is the result of the excess of quantity of money created to handle the damages created by lockdowns. A gradual plan of government spending cuts should be implemented in order to contain inflation and to try to minimize the impact of the restrictive policies which are now unavoidable.
About CME: The Center for Market Education (CME) is a boutique think-tank based in Kuala Lumpur, Malaysia. As an academic and educational institution, CME aims to promote a more pluralistic and multidisciplinary approach to economics and to spread the knowledge of a sounder economics, grounded in the understanding of market forces. In order to do so, CME is not only involved in academic initiatives, but it organizes seminars, webinars and tailor-made economics classes for students, journalists, businesspeople and professionals who wish to better understand the relevance of economics for their daily lives and activities. Economics matters and needs to be presented in a fashion in which the link with reality is clearly visible. In this sense, we look not only at theoretical economics but also at policy making, with an emphasis on the unintended consequences generated by political actions.