Business

Saturday March 10, 2012

The right to fair pay

By Cecilia Kok
cecilia_kok@thestar.com.my


Minimum wage is a controversial policy, but the call for it is to reflect a basic sum that could help low-income earners meet their basic needs.

IT is not surprising that the Government's plan to institute a national minimum wage system in Malaysia would be met with resistance in the employers' camp.

Minimum wage inevitably spells an increase in cost, as when that mechanism comes into effect, companies will no longer be able to pay their staff usually the unskilled ones who occupy the lower ranks in the hierarchy anything lower than the “decent” amount that has been set as a statutory floor limit.

For many companies, especially the labour-intensive ones that have been hiring people at “peanut” rates, this will then mean they have to raise the salaries of their workers, many of whom are currently still earning below the country's poverty threshold (see charts).

And for as many companies as will be affected by the minimum wage legislation, they will likely find it to be a constraint to their ability to maximise profit, which is after all, every company's main objective in business.

Test of resilience

Recent reports suggest that the country's minimum wage could be set at anything between RM800 and RM1,000 across the board. But the actual details of the scheme have yet to be made known. They are only expected to be unveiled later this month.

Even so, 16 associations representing companies from the manufacturing, retail and services sectors, have already come out with all guns blazing against what they perceive could be a “too sudden, too high” minimum wage for the country.

They are not against the idea of having a minimum wage policy in the country, mind you. They only argue for the implementation of a national minimum wage policy to be done in phases over time, with a smallish amount of increase at each stage, to enable them to cope with the changes.

They claim that any salary increase, resulting from a mandatory minimum wage policy that does not commensurate with productivity improvement will only lead to higher production costs. And if these cost increases were not passed on to their customers or consumers (read: inflation), they would lose their competitiveness. This could then eventually lead to a danger of rising unemployment for the economy, as companies resort to reducing their staff numbers to minimise cost, and the worst-case scenario would see some companies closing down because they could no longer cope with the so-called high-cost environment.

Some quarters, however, are not buying into that excuse. They believe companies can easily absorb the staff-cost increases brought about by a minimum wage policy, as any changes, after all, will not be as drastic as feared.

According to Human Resources Minister Datuk Dr S. Subramaniam, studies by his department show that Malaysian wages in general constitute an average of only 15% of the total annual expenditure of a company. Throw in the fact that the minimum wage will only affect the salaries of workers in the lower hierarchy of an organisation, or an average of less than 20% of its total number of employees, the resultant increase in cost will likely be marginal.

Take the case of labour-intensive plantation industries.

The Malaysian Agricultural Producers Association, which represents about 140 plantation companies, agreed to pay all plantation employees a guaranteed sum of RM850 each month with effect from September last year. The guaranteed sum comprises a minimum wage of RM650 per month and an additional remuneration of RM200 per month.

Calculations by analysts suggest that the impact on the earnings of plantation companies, on the back of the mandatory wage hike, would be minimal not more than 4%.

For instance, Maybank Investment Bank Bhd's calculations found the impact to range from 0.8% to 3.7% in terms of the decline in the companies' net profits. TA Research's estimates put that at around 1% to 3%, while Affin Investment Bank Bhd expected the impact to be no more than a 2% to 3% decline in net profit.

“Industries have been subjected to greater jolts before,” Subramaniam said in an interview with StarBizWeek last year.

“When raw material and fuel prices went up, the costs of doing business went up even much higher. But companies could still adjust and absorb those cost increases,” he explained, adding that he believed that the resultant marginal increase in labour costs, therefore, would be something that most companies could absorb.

Time to transform

Many companies in Malaysia have for long been dependent on cheap labour to maintain a high profit margin for their businesses. And the abundance of cheap labour in the country has for long been a major attraction for foreign investments to set up low value-add, labour-intensive industries in the country.

Clearly, though, the days of having cheap labour in Malaysia are coming to an end, and for good reasons, as the nation prepares itself to graduate from the middle-income trap to become a high-income and developed nation by 2020.

According to RAM Holdings Bhd group chief economist Dr Yeah Kim Leng, while Malaysia is currently experiencing full employment, the country is also facing an “undesirable excess demand for low-skilled, low-paying jobs that have retarded the economy's upgrading and shift to high-end, high-value and high-paying industries”.

In line with the greater aim of the nation, companies have to transform by moving up the value chain, and mechanise their operations to improve productivity and enhance their competitiveness.

Investments in new technology and innovation are necessary in an increasingly competitive and challenging global business environment, so say economists.

Low-end, labour-intensive businesses operating at the margin can be driven out of business if they do not keep pace and transform according to the changing macro-economic environment.

“In such instances, companies will have no one, but themselves, to blame,” an industry observer says.

He couldn't be more right, as history tells us that companies that fail to change according to times and circumstances will indeed die a slow death.

“As wages start to increase, low-end, labour-intensive businesses may complain that Malaysia is no longer a competitive place in which to operate, they may even relocate to some other countries ... in that case, I think they are making the right decision,” the industry observer argues.

“The country is moving up the value chain; what we need in the country are companies that operate in capital intensive, high-end industries; not low-end stuff anymore,” he adds.

Hard-disk drive component manufacturer JCY International Bhd provides a good example of how transformation is gradually taking place in its company.

It reckons that rising labour costs, among other things, are a constant battle for its operations in Malaysia. To counter that, the company has invested money in automation initiatives to improve its operational efficiencies and to reduce its reliance on manual labour. At the same time, the company is also shifting its labour-intensive operations to lower labour-cost countries. The downside of the exercise, unfortunately, includes headcount reductions.

Call that a birth of something greater. Pundits reckon that there will be some painful adjustments along the way, as Malaysia transforms its economy, but these are necessary processes that the country has to go through.

“Ideally, companies (especially manufacturers) should do away with cheap foreign labour in order to safeguard their bottom lines in the long term,” Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias says.

“An over reliance on cheap foreign labours, while keeping their costs low and maintaining their favourable profit margins in the short term, will eventually lead to inefficiencies and higher costs in the long term.

“Further mechanisation of production processes and resorting to high value-added activities such as research and development, on the other hand, would increase business efficiencies over time,” he explains.

Rebalancing the economy

For a country on the way to become a “high-income” economy - defined as one with a minimum per capita income of US$15,000, or RM45,000 based on a an exchange rate of RM3 per US dollar - it is staggering to see the majority of its workforce still languishing in this so-called low-income trap.

According to the National Employment Return Study conducted by the Human Resources Ministry, one third of Malaysia's workforce is still living on basic wages that are below the poverty line income. It's found that about 30%, or 1.92 million workers, were earning below RM700 in 2010. This compares with the prevailing poverty line income of RM763 per month for Peninsular Malaysia, RM1,048 per month for Sabah and RM912 per month for Sarawak.

We all know people who live on low wages often have to make tough choices just to make ends meet - from feeding the family to clothing them and ensuring a proper shelter, life is a constant struggle to this segment of people in our society. The rising cost of living, which experts say is a global phenomenon, makes it worse. This cruel reality has caused the low-income group even more vulnerable and hard-pressed to just pay for their basic necessities. Spiralling debt can be a result of them living on a tight budget, and that could exacerbate their already challenging circumstances.

“There is an urgent need to campaign for the implementation of the minimum wage, which should reflect the basic living wage to provide for the elements of housing, food, clothing, education, health, recreation and other normal human requirements,” the Malaysian Trades Union Congress states in its manifesto.

In arguing that there is some degree of wage suppression, especially towards those in the low-skilled category, and inefficiencies in the labour market, the Malaysian Institute of Economic Research points to the slow growth of wages in relation to labour productivity growth.

According to a World Bank's study, wages growth in Malaysia has only recorded an average increase of 2.6% per year from 1994 to 2007. Real labour productivity, on the other hand, grew at an annual 6.7% during the same period.

Most economists reckon that minimum wage is not a cure-all policy, but this, if implemented correctly, could be a step in the right direction to iron out the imbalances found in the system.

“The country's high-income transformation agenda requires a high wage policy to drive industries up the value chain and a minimum wage to take care of disenfranchised,” Yeah argues.

“Labour should not be seen as merely an input to production, but also as a development goal. Workers' welfare, therefore, is paramount in national policy decision-making, hence the desirability of a minimum wage policy, although it is not a panacea to the country's low wage woes and growing income inequality,” he adds.

In China, policymakers are gradually increasing the country's minimum wages as one of the many initiatives to boost domestic demand on a more sustainable basis. Beijing's objective is to rebalance the country's economy towards one that is more dependent on domestic demand, rather than on exports.

Malaysia can bank on the same principle, as a minimum wage policy can help to boost the disposable income of many workers in the country.

“The extra money in consumers' pockets will eventually find its way into consumption, which will generally be positive for the economy,” Zahidi explains.

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