Minimum wage policy - the research

Prof. David Metcalf, LSE

The Malaysian government did not decide on this matter out of the blue, although the announcedment came strategically before the election. Just a little research indicates that most of the considerations of the Malaysian government are not easy to dismiss. Najib and his ministries based their decision on well-known international experts, such as  David Metcalf, who was a leading economist for the introduction of a minimum wage policy in the United Kingdom some years back. His publications and findings are standard literature in economics and for governments with any feelings for minimum wages. Currently, he teaches at the London School of Economics. However, I also read that Malaysia's decision makers relied on certain reports and research of the World Bank and afterall, I suppose they read the same studies as I did. Most relevant reports point at experience with minimum wage implementations in Latin America, which was basically successful, but because of the high wage quite a painful process. Moreover, the policy was also meant to initiate reforms and direct production to higher value products and services. (WorldBank 2006 and World Bank 2008). Probably, they had access to more recent findings, but the following comment of a CIMB analyst is similar, if not identical, to economic estimates of the World Bank.

These analysts are quite supportive, as they do not believe in any major detrimental effects on the employment market or foreign investments:  “Under perfect competition market, the RM900-a-month minimum wage is expected to increase the country's unemployment rate by an average 0.4 percentage points from 2012 to 2014. The impact on investment is very mild with an estimated 0.05% decline in total investment rate from 2012 to 2014 when the minimum wage is set at RM900/month.”(The Star 5 May 2012: More people welcome minimum wage policy than not). In this context, I saw comments from the prime minister, which stressed the fact that a higher wage floor would increase negative effects on investment and labour market. Certainly, this statement is not surprising, also in the light of the World Bank studies on Latin America. Here the higher wages caused a rather painful transition, which the Malaysian government obviously cannot execute in an election year.
Coming back to the figures from CIMB above, there is nothing much to be worried about, Malaysia seems to head into a bright future. Not to forget the strong belief that the additional money in the pockets of low income groups would increase domestic consumption. At this time, I cannot provide any statistics, but there might be another marginal, while positive effect for the retailers and consumer products industry in Malaysia. I stick to wait and see, as I do not expect a lot from the overall implementation of this policy.

At this point, I would like to invite any comments or research knowledge on negative effects of minimum wage policies. I am rather neutral in regard to this matter, so I would be curious about negative case studies or reports.

Soon, i will finish my discussion of the minimum wage topic in Malaysia, but I found already a new and quite exciting issue, which is in the news for about 2 weeks and caught my attention already several times. The ingredients are murder, money and China. Not to forget a Frenchman. They are evil, aren't they?

Stay tuned