Economic Policy on Human Resource Management: Argument for/against Minimum Wage Policy

1. By: Mohamed Azmi Taufik

2.  First enacted in New Zealand in 1894 (US in 1938) there is now legislation or binding collective
bargaining regarding minimum wage in more than 90%
of all countries worldwide.
 Most of Asian countries has legislated minimum wage
law including Singapore, Thailand, Indonesia,
Philippines, Vietnam, Japan, Korea and Hong Kong.
 Malaysia has also announced the minimum wage
policy on 1 May 2012 but will be only effective in 6
months after the gazetted date.
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3.  Definition and meaning of minimum wage
 Labour Supply & Demand Curve
 Impact of minimum wage on poverty & economic growth
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4.  Labour Supply & Demand
 Minimum wage policy and its Impact
 Minimum wage in Malaysia
 The debate on minimum wage - Pros & Cons
 Issues & Discussion
 Conclusion
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5. The minimum amount of compensation an employee
must receive for performing labor. Minimum wages
are typically established by contract or legislation
by the government.
As such, it is illegal to pay an employee less than
the minimum wage.
Are you for or against a minimum wage policy?
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6. W
S
Equilibrium
w
D
L
L
In a perfectly competitive labour market, where the wage rate is determined
in the industry, which means that the actual equilibrium wage will be set in
the market, and the supply of labour to the individual firm is perfectly elastic
at the market rate. The equilibrium wage rate is the rate that equates
demand and supply.
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It is assumed that in equilibrium everyone who wants a job has a job. In this
sense, the equilibrium value of employment is also called full employment.

7. Market wage may change following a change in an
underlying condition of,
1. Demand or,
2. Supply.
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8. Demand can change, and the demand curve will shift, under a
number of circumstances, including changes in:
1. The productivity of labour.
2. The price of the product.
3. Demand for the product
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9. Labour supply can change under a number of circumstances, including
changes in,
1.
2.
3.
4.
5.
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The length of the working week.
Participation rates.
Demographic factors.
Qualifications and skills required.
The length of training.

10. W
S
W
S1
S1
S
E1
w
E
E2
w
E2
E
E1
D
L L1 L2
10
D1
L
D1
L2 L1 L
D
L

11. W
Unemployment
 The floor is a binding constraint
on the wage, causes a surplus
(i.e. unemployment).
S
Price
Floor
Mw
 If the equilibrium wage (Eqw) is
below the floor and therefore
illegal.
Eqw
 Minimum wage laws do not affect
highly skilled workers.
D
L1
11
EqL
L2
L
 Often, they affect unskilled and
teenage workers.

12. A binding minimum wage creates,
 A surplus of unskilled workers (more unemployment).
 Reduces market efficiency
 Non-price rationing - employers may discriminate certain types of
job applicants.
 More labour supply from teenagers (foreigners) - people in need
may end up losing jobs.
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In contrast, the competitive equilibrium market
without price floor is more efficient.

13. The intended objectives of establishing minimum wages are,
1. To prevent exploitation of workers by employers,
2. To promote a fair wage structure,
3. To provide a minimum acceptable standard of living
for low-paid workers and,
4. To alleviate poverty, especially among working
families.
(ILO, 1992).
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14. 1. A US study by Card and Krueger (1995) reached the conclusion that an
increase in the minimum wage has no negative effect on employment.
2. More recent studies in Europe unanimously stress that minimum wages do
not lead to higher unemployment but often even to more employment.
3. Minimum wages increase the productivity of employees and reduce
employee turnover, which in turn positively influences the long-term
growth and employment prospects of the National economy (Swiss Trade
Union Confederation, 2002).
4. Minimum wages have prevented or even reduced a potential extension of
wage differentiation.
5. Minimum wage can be seen as an effective instrument for, if not removing,
at least reducing income discrimination among these groups (Funk/Lesch,
2006).
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15. There are two basic mechanisms for
setting the minimum wage.
1. A statutory minimum wage is set by
government, possibly involving
consultations with trade unions and
employers.
2. Minimum wages are determined through
collective (tripartite or bipartite)
negotiations. Collective agreements can
set national or sectorial (industry,
occupational) minimum wages.
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16. What is the rationale for a minimum wage in Malaysia?
 The empirical evidence has clearly pointed to the fact that wage levels in
Malaysia has been suppressed and has lagged behind by all measures.
 The World Bank has reported that wages in Malaysia has increased by only
2.6% pa. which is below inflation rate of 3.5%. Also the productivity rate
is 6.7% which clearly shows the suppression of wages.
 National Employment Returns (NER) showed that 34% of Malaysians
earned less than RM700- below poverty line. In Sabah and Sarawak,
where the cost of living is much higher, the figures are 63% and 48%
respectively.
 A further 37% nationwide earned below RM700 per month and it is
alarming that 72% of workers earned less than RM1,500 per month.
Malaysia Poverty Line Income (PLI) 2009 is RM720
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17. What is the rationale for a minimum wage in Malaysia?
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18. 1. To ensure basic needs of workers and their families
are met,
2. To provide sufficient social protection to workers,
3. To encourage industry to move up the value chain
by investing in higher technology and increase
labour productivity,
4. To reduce nation’s dependence on unskilled foreign
labour.
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19. Essentially the debate on minimum wage hinges on,
 Workers want a minimum wage as a means to increase wage
levels to provide sufficient purchasing power to enable a
worker to have a basic standard of living
 Employers reject it as an increase cost of doing business and
hurt competitiveness.
 The government aim to develop the country into a high-income
nation and fully developed by 2020.
 The impact on employment, training & productivity, inflation
and the country’s competitiveness.
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20. For
Against
Unions (MTUC), NUBE
ASLI Centre for Public Studies
FMM, MEF, IDEAS
1. Workers wages has been suppressed too
long although labour productivity grew by
6.7% annually
1. Wages should be governed by market forces
2. Inefficiencies and ineffectiveness of the
existing wage determination mechanisms
3. No increase in productivity level
3. Minimum wage protects particularly those
employees who work in low-wage sectors
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2. Possibly lead to higher unemployment
4. Some 200,000 micro business owners will
close shop since could not afford to
increase workers salary

21. PROs
CONs
1. Fulfillment of basic human rights
1. Uneven wage distribution
2. Happy workers are productive
workers
2. Increase of unemployment
3. Denial of rights at workplace
3. Better bargaining power for workers
4. Outsourcing
4. Promote pay equity
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22. Possible Impact on FDI
1. Factors other than wage costs are more important for FDI inflow
>
>
>
>
Employment protection
> Labor taxes
Productivity
> Skills
Protection of property rights > Low corruption
Ease of market entry and exit
2. May impacts on new FDI and on many foreign-owned firms in
Malaysia but likely to be limited.
3. Low productivity FDI firms represent one-third of all FDI, but their
total fixed investment accounts for only 9.9% of all fixed investment
in Malaysia.
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23.  Possible disadvantages of a minimum wage
Although the government are now committed to legislate the minimum wage,
there are still plenty of economists who believe that setting a pay floor
represents a distortion to the way the labour market works because it reduces
the flexibility of the labour market
i.
ii.
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Competitiveness and Jobs
Firstly a minimum wage may cost jobs because a rise in labour costs makes it
more expensive to employ people and higher labour costs might damage the
international competitiveness. Rising unemployment worsens the living
standards of those affected it has a negative impact on poverty.
Effect on relative poverty
Is the minimum wage the most effective policy to reduce relative poverty?
There is evidence that it tends to boost the incomes of middle-income
households where more than one household member is already in work
whereas the greatest risk of relative poverty is among the unemployed,
elderly and single parent families where the parent is not employed.

24.  Can a minimum wage actually increase employment?
Yes? – depending on the circumstances in the labour market when a pay floor is
introduced and also on what happens to the productivity of labour when a high
(statutory) rate of pay is introduced. There are two main explanations for the
possibility of higher employment
i.
ii.
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The Keynesian argument that higher wage rates will increase the real
disposable incomes of lower-paid workers many of whom have a high
marginal propensity to consume. Thus they will increase their own
spending and this will feed through the circular flow of income and
spending
The efficiency wage argument that raising pay levels for low-paid
employees may have a positive effect on their productivity and efficiency.
In addition to the psychological benefits of being paid more, businesses may
take steps to improve production processes, workplace training etc if they
know that they must pay at least the statutory pay floor.

25.  The importance of elasticity of demand and supply of labour
The impact of a minimum wage on employment levels depends in
part on the elasticity of demand and elasticity of supply of labour
in different industries. If labour demand is relatively inelastic then
the contraction in employment is likely to be less severe than if
employers’ demand for labour is elastic with respect to changes in
the wage level.
excess supply
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the possible effects of a minimum wage when both labour
demand and labour supply are elastic in response to a
change in the market wage rate. The excess supply
created is much higher

26. Has minimum wage worked? (Based on UK NMW report)
1. Employment: For most of the years since the NMW was launched,
unemployment has been falling. The jobless total is now increasing at a rapid
rate but the main cause has been the domestic and global economic recession.
2. Inflation: In many sectors firms find it hard to pass on higher wage costs to
final consumers – limiting the inflationary effect of the minimum wage
3. Wage costs: The minimum wage affects only a small proportion of workers and
the effects on the wage bills of most businesses is not a significant factor in
their employment decisions. In the short term, the demand for labour tends to
be inelastic with respect to changes in wages
4. Discrimination: The minimum wage has had an impact on the earnings of parttime female workers.
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5. Productivity: It is hard to identify any strong positive effect on labour
productivity - but efficiency gains have been made in most low-paying
industries, a trend which started before the minimum wage was introduced.

27.  Is a minimum wage worth it? Who will hurt most?
Case -> if the minimum wage were removed, there might be lower
unemployment, but workers might not make enough money to support
themselves and their families.
Case -> With the minimum wage in place, the employed are able to make more
money, but many more workers are forced into unemployment and forced to
take welfare, while making no contribution towards national productivity.
Case -> Firms will always want skilled workers who can make large
contributions to productivity. When the minimum wage is installed, however, it
is the least productive workers who are cut from payrolls first. The skilled
workers will keep their jobs, perhaps even with higher pay; but the unskilled
workers will be unemployed.
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28. Three conditions have to be met in order for the minimum wage to have a
positive effect on the standards of living of workers and their families,
i.
Most workers are entitled to receive at least the minimum wage in
exchange for their work. No workers or very few workers lose their jobs
because of the minimum wage. Or in a case where job losses are entailed,
workers can find another job, i.e. the economy is growing and some
sectors are creating jobs.
ii.
Employers comply with the minimum wage. Compliance with the
regulations implies both that employers are organized and have been
consulted during the minimum wage fixing process and that there is a wellfunctioning mechanism to enforce the regulation, such as a labour
inspectorate.
iii. There is no increase in prices following the rise in the minimum wage.
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29. Minimum wage legislation should be used as an instrument to remove
imperfections in the labour market and not meant to be used as an
instrument for achieving development plan objectives because by itself
it is a lame instrument and is an inappropriate instrument to address
poverty.
For Malaysia – Minimum Wage will act as means,
• to intervene the market – main justification for minimum wage
• to address inefficiencies (imperfection) in the labour market
• to reduce nation’s dependence on unskilled/ cheap foreign labour.
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