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The step forward: Is the Progressive Wage system the solution to the ever-increasing living costs in Malaysia?

Prepared by Kennard Lam

29 May 2024


Credit photo : Shorstudio


Introduction: the Economic Impact of Rising Living Costs in Malaysia

Despite Malaysia's annual inflation rate remaining relatively normal, the cost of living continues to escalate across various sectors, including everyday necessities, food, housing, and rental prices. Despite the government's efforts to increase the minimum wage, which now stands at RM1,500, it has struggled to keep pace with rising expenses. Data from 2024 indicates that the estimated monthly costs for a single person amounts to RM2,252.4 without rent, while a family of four faces estimated monthly costs of RM7,949.6 excluding rent (6). This disparity underscores the financial challenges faced by individuals and households, even those earning above the minimum wage, in navigating Malaysia's economy.


Some shortcomings of the minimum wage

Many countries make minimum wage a legislative priority in order to reduce poverty or inequality by raising the wages of low-income workers in an attempt to encourage growth and productivity (1). But is it really the best solution to the problem of high living costs? This issue affects not only those earning minimum wage, but many who are earning above that as well. In fact for the past decade, middle wage earners have experienced the slowest growth in their wages, even lower than the lowest 30% group of wage earners. This shows that the effects of the minimum wage are mostly limited to the lowest wage earners as the beneficiaries (2).


The crucial role of the M40 in Malaysia

Citing data from Khazanah Research Institute and the Department of Statistics Malaysia, the Economic Outlook 2024 report stated that the "squeezed middle", comprising people whose wages were between the 45th to the 80th percentile, experienced the slowest monthly wage growth. The middle-income class is crucial for the economy; known as the M40, they are one of the backbones of  Malaysia’s economy and are one of the major driving factors of its growth. They have the spending power to buy goods and services which helps maintain a steady demand, and  most of them have higher education, making up a big part of the talent pool required to attract valuable foreign investments. The M40 also pays taxes, contributing about 13% (RM5.38 billion), to personal income tax collected in 2022. And as we look at the population, we see that this middle bracket of earners makes up the majority of this current government’s voter base in the last general election, GE15. This means that they have a huge influence on the outcome of the political state of the country as well  (7).


What is the Progressive Wage System? 

Malaysia recently introduced the Progressive Wage System, which is in line with the Rancangan Malaysia ke-12 (RMK-12). The progressive wage system is a transition from a minimum wage model to a gradual and phased wage increase to make it comparable to the country's economic growth, and it aims to enhance wages for low-income and middle-income workers through structured salary increments tied to skill development and productivity improvements. The suggested policy incorporates three primary components: criteria for participation, yearly salary increments, and incentive structures tied to rates and worker categories. These elements complement existing policies like the Minimum Wage Policy and the Productivity Linked-Wage System (PLWS) (10). According to statements by Economy Minister Rafizi Ramli, the government plans to set aside RM2 billion for incentives for companies who adopt this progressive wage structure. Human Resources Minister V Sivakumar says that the Progressive Wage System, which is seen as the most relevant to be practiced in Malaysia, needs to go hand in hand with the minimum wage and increase employee productivity thus giving profit to employers as well. (3) The plan is not just to raise salaries, because the government does not want salaries to be increased at the expense of companies laying off some of their other workers(4). 


The progressive wage system will target individuals earning monthly salaries between RM1,500 and RM4,999, providing them with training opportunities to access higher wages. Employers will also receive cash incentives to cover the additional salary costs. The initiative aims to involve approximately four million Malaysian citizen workers in formal sectors. Small and medium businesses particularly, are encouraged to participate in the program.


Expected Benefits and Economic Impact of the Progressive Wage System

When implemented, the policy is projected to have several positive impacts, including a RM790 million increase in contributions to the Employees Provident Fund (EPF), a rise in income tax revenue by RM1.8 billion, the creation of 37,529 new income taxpayers within the first year, and a reduction in unemployment (10). According to Economy Minister Rafizi Ramli, the salary increase resulting from the policy will enhance workers' purchasing power, leading to increased consumer spending and private investment. It is projected that around 1.05 million workers would benefit from the Progressive Wage Policy, which is expected to contribute an extra RM3.3 billion to the gross domestic product (GDP). Although the policy may initially raise the inflation rate due to heightened consumer demand, the long-term positive effects on economic growth are expected to offset this inflationary pressure. According to a study by The Centre for Future Labour Market Studies, when wages go up in Malaysia, it's not just good news for the employers as it also helps the country's overall economy grow, makes workers more productive, and even makes income distribution more equal. When the employees are paid more, it’s a win-win situation for everyone, from the individual workers to the entire nation. 


Conclusion

For this Progressive Wage System to work, the government, companies and workers have to all work together to boost commitment to the wage policy. Consulting reliable organizations for salary advice makes the policy more effective, monitoring productivity and wages while preventing conflicts of interest between the parties. Businesses that adopt the Progressive Wage Model would attract the best talents, potential clients and investors, and boost the business' reputation (4). 


Overall, Malaysia's Progressive Wage Policy signifies a pivotal step towards wage justice and serves as a cornerstone for driving comprehensive transformation within the employment sector, prioritizing worker well-being while bolstering economic competitiveness and resilience.



References :

  1. National Human Rights Commission (NHRC) of Malaysia. (n.d.). Minimum wage in Malaysia. Retrieved from https://nhrc.com.my/resource-centre/minimum-wage-in-malaysia/

  2. The Star. (2023, October 14). Addressing the longstanding issue of low-income workers. The Star. https://www.thestar.com.my/business/business-news/2023/10/14/addressing-the-longstanding-issue-of-low-income-workers

  3. Harian Metro. (2023, August 1). Gaji minimum kekal di bawah dasar sistem gaji progresif. Harian Metro. https://www.hmetro.com.my/mutakhir/2023/08/1003631/gaji-minimum-kekal-di-bawah-dasar-sistem-gaji-progresif

  4. Hafizi Zamri. (2023). Dasar Gaji Progresif utamakan kelestarian sektor pekerjaan. ResearchGate. https://www.researchgate.net/publication/377303189_Dasar_Gaji_Progresif_utamakan_kelestarian_sektor_pekerjaan

  5. Berita Harian. (2023, May 1). Kerajaan teliti dasar sistem gaji progresif - Rafizi. Berita Harian. https://www.bharian.com.my/berita/nasional/2023/05/1099018/kerajaan-teliti-dasar-sistem-gaji-progresif-rafizi

  6. Numbeo. (n.d.). Cost of living in Malaysia. Retrieved April 5, 2024, from https://www.numbeo.com/cost-of-living/country_result.jsp?country=Malaysia

  7. Tong, K. O. (2023, February 24). Will this government return the favour to the M40? The Edge Malaysia. https://theedgemalaysia.com/node/656745

  8. Williams Geoffrey. (2023, October 8). Budget 2024: Help for the middle class. Free Malaysia Today. https://www.freemalaysiatoday.com/category/opinion/2023/10/08/budget-2024-help-for-the-middle-class/

  9. Tham Lynelle. (2023, June 12). Narrow tax base piles burden on the rich. Free Malaysia Today. https://www.freemalaysiatoday.com/category/highlight/2023/06/12/narrow-tax-base-piles-burden-on-the-rich/

  10. The Star. (2023, December 14). Towards a progressive wage policy. The Star. https://www.thestar.com.my/news/nation/2023/12/14/towards-a-progressive-wage-policy#:~:text=The%20Progressive%20Wage%20Policy%20has,to%20adopt%20this%20pay%20model

  11. Gimino, G., Yusof, T. A., & Ibrahim, J. (2024, March 16). Guidelines on wage policy in May. The Star. https://www.thestar.com.my/news/nation/2024/03/16/guidelines-on-wage-policy-in-may

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