THE government is expected to pilot its progressive wage policy (PWP) program in June. Aimed at increasing employees’ wages in parallel with their productivity, this incentive-driven voluntary opt-in program has received mixed reactions. Workers have welcomed the move while employers have remained skeptical.
Most experts agree that wages must rise to improve the quality of life, especially among the B40s, and reduce socioeconomic inequalities.
Studies by Khazanah Research Institute and the Center for Future Labor Market Studies indicate that higher wages can yield positive economic outcomes. For example, they can enhance productivity, mitigate brain drain, bolster Malaysia’s pursuit of high-income status and promote upskilling efforts.
However, raising wages may not be enough. While the introduction of a minimum wage has raised income levels, the share of Malaysia’s compensation of employees (CoE) to gross domestic product (GDP) for 2022 was 32.4%. This falls below the 45% benchmark observed in developed nations or the national target of 40% set for 2025.
This points to the persistent presence of entrenched structural economic issues. Bank Negara’s Economic and Monetary Review 2020 report highlighted the prevalence of a low-cost production model, inadequate generation of high-skilled employment opportunities and significant skills mismatches as contributing factors to Malaysia’s stagnant wages. The 2022 report further attributed this trend to the relatively limited wage bargaining power of workers.
There have been long-standing efforts to address these structural problems. The 2010 National Transformation Plan has endeavoured to raise income levels through a combination of strategic growth plans and major investments. Subsequent administrations have continued these efforts with policies and plans focusing on growth via the enhancement of science, technology adoption, human capital development and innovation.
Under the Madani economic framework, new policies and plans such as the National Energy Transformation Roadmap, New Industrial Master Plan 2030 and the 12th Malaysia Plan mid-term review have been introduced to restructure the domestic economy and push Malaysia higher up the income ladder.
Skills mismatch is another long-standing problem. Initiatives such as MyFutureJobs and Career Development Programme, along with various career carnivals organized by the Human Resources Ministry, strive to align the skills of jobseekers with industry demands. However, these efforts must be accompanied by robust collaboration among universities, industries and the government to effectively anticipate and address Malaysia’s future human resource demands.
Pre-requisite reforms undertaken for the ratification of the Comprehensive and Progressive Trans-Pacific Partnership agreement include amendments to labor laws that will further uplift the welfare of workers and improve freedom of association. This is anticipated to improve the negotiating leverage of workers, especially within the national tripartite mechanism.
The introduction of the PWP must be viewed within this broader context. The white paper outlining the proposal was presented in parliament in November 2023, proposing a model wherein salary increases would correspond with the rise in workers’ productivity. While beneficial for workers, there remain concerns that this will eventually hurt them by impacting the firm’s profitability and sustainability.
According to the Finance Ministry, the proportion of gross operating surplus (GOS) to GDP (67% in 2022) remains higher than the share of CoE, indicating that a significant portion of profits is still directed towards capital owners or firms.
When compared with the more advanced economies such as Korea (CoE 47.6%, GOS 42.2%), Australia (45.6%, 45.7%) and the US (53.0%, 40.6%), it is apparent that there is room to accommodate the increases .
To ensure the long-term sustainability of the programme, there must be a pull and push factor. The pull factor will come if the PWP leads to increased productivity, stronger employee loyalty and enhanced firm competitiveness and profitability. The push factor will come from the impact of the PWP on the labor market.
Although initially limited to 1,000 firms and confined to workers earning less than RM5,000 monthly (representing 66% of Malaysia’s total workers), theoretically it should still encourage some inter-firm competition that will push wages up and the effects eventually spilling over to others wage groups.
There is no better time to initiate these changes than now. The unemployment rate remained steady at 3.4% as of October 2023. Delaying action may result in changing circumstances and conditions, making any necessary measures more challenging to implement and accept.
The writer is the deputy head of center at the National Institute of Public Administration.
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