In the article (http://www.nst.com.my/top-news/minimum-wage-cheer-for-workers-1.79469) ‘Minimum wage cheer for workers’, Abas, Augustin and Bendahara (2012) writes on the implementation of the new minimum wage policy that was declared by Malaysian Prime Minister, Datuk Seri Najib Razak on April 30, 2012. In accordance with the new policy, the minimum wage for private sectors will be fixed at RM900 (RM4.33 an hour) for the peninsula and RM800 (RM3.85 an hour) for Sabah, Sarawak and Labuan. The respected Prime Minister believes that the minimum wage policy will guarantee an income that is able to help the lowest paid out of poverty and to cope with the rising cost of living, as well as to encourage local individuals to obtain a job.
The minimum wage acts as a price floor that is applied to labor markets. A price floor is the lowest legal price set by the government for a commodity to be sold at. Price floor is used to prevent prices from being too low, in this case, the minimum wages that are paid to labor workers. If the minimum wage is set below the equilibrium wage rate, it has no effect and the market will operate as if no minimum wage exists. However, setting the minimum wage above the market equilibrium wage rate will have influential effects. Malaysia had no national minimum wage in the previous years and laborers would receive less than RM900 a month. For example, plantation workers would only receive a wage of RM350 per month or RM700 that includes incentives and bonuses. In the article, Malaysia’s Prime Minister announced a minimum wage of RM 900 for peninsula Malaysia and RM800 for Sabah, Sarawak and Labuan, which is set above the equilibrium wage rate of RM700.
However, minimum wages will lead to unemployment. A minimum wage set above the equilibrium wage rate will cause a surplus of labor. This is because quantity of labor supplied by workers exceeds the quantity of labor demanded by employers. Labor surplus occurs as many workers in the market are willing to work but employers hire lesser workers because of the increased minimum wage.
The supporting article “Minimum wage policy may hinder employment” by Bernama, (http://www.nst.com.my/latest/min-wage-policy-may-hinder-employment-1.91559), released June 6, 2012, reports a survey conducted by JobStreet.com that was participated by 1,520 human resource personnel revealed that approximately 50% of the surveyed agreed when asked if companies would hire less, lay-off or retrench its workers. Economic Research Head of CIMB Investment Bank Bhd, Lee Heng Guie says studies carried out by the National Wages Consultative Council and the Human Resources Ministry showed that the minimum wage was expected to reduce the demand for labors by 0.4% to 6.1% between 2012 and 2015 if the wages were set at RM900 and above. Hence, because the legal wage rate cannot eliminate the surplus, the minimum wage creates unemployment.
Besides that, minimum wages also creates inefficiency. A minimum wage leads to an inefficient outcome. In an efficient labor market, increase in productivity should increase wage rates, however, in Malaysia, studies show that an increase in productivity rate by 6.7% only increase the wage rate by 2.6%. A minimum wage causes the quantity of labor employed to be less than the efficient quantity. Since the marginal social benefit exceeds marginal social cost, the labor market is inefficient and a deadweight loss arises. Deadweight loss is the measure of inefficiency. It is equal to the decrease in total surplus (consumer and producer surplus) that results from an inefficient level of production. A potential loss also arises due to job search and bargaining between labor workers and employers. For example, workers are looking for employers who are willing to pay RM7 an hour but employers are looking for labor to work for RM5 an hour. The potential loss decreases both workers’ surplus and employers’ surplus.
The argument in this is whether the minimum wage policy will benefit people or not. From my point of view, the minimum wage is able to increase the lower income earners’ standard of living as they receive higher income. For the middle and high income earners, the minimum wage policy does not benefit them as they are already earning income much higher than the minimum wage. While the minimum wage policy may seem to be the “right” thing to do, it could also be otherwise. Since employers are required to pay workers a minimum wage of RM900, the cost of production will rise and managers would have no option but to adjust the number of workers of the firm. In effect, unemployment may rise. However, I feel that the minimum wage set at RM900 is sufficient and is not too drastic of a change for business firms.
In the article, Prime Minister Datuk Seri Najib Razak had announced that employers will be given six months to implement the new policy. He added, “employers for micro enterprises will be given 12 months to do so as we understand they will need more time to make the necessary adjustments and ensure their businesses are not affected”. This reflects the decision time frames of managing business production. Firms tend to make many decisions to achieve its main objective; maximize profit. Some decisions made are irreversible or very costly to carry out. For example, a firm decides to expand its plant. Building a new plant requires millions of dollars in investment and years to build. Other decisions may also be easily performed and seem less critical but still influence profit, an example is labor. The number of labor of a firm can be changed easily depending on managerial decisions.
Decisions take place in two time frames; short run and long run. A short run is a time frame in which at least one factor of production is fixed. A firms’ capital such as land, plant and machinery is fixed in a short run as it cannot be easily changed. Variable factors of production are also known as ‘non-fixed factors of production’ as it can be easily changed or improved in a short period. These variable factors include raw materials, entrepreneurship and labor.
Since the new minimum wage policy implemented by the government would affect the number of labor of a firm now that employers are required to pay a higher amount of wage, employers have to make decisions on the number of labor hired to ensure the firm remains efficient and still maximizes profit. As the firms make changes in the number of labor while land remains fixed, this shows that the firms are making decisions in the short run time frame. The government has given a period of 6 to 12 months for firms to make the necessary change in labor wages.
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