Let market forces determine pay to save jobs, says economist

Workers at a construction site. An economist says while the minimum wage policy is well-intentioned, it often produces unintended outcomes.

PETALING JAYA: An economist says market forces must be allowed to determine salary levels to save jobs in the current economic climate.

Responding to calls for the minimum wage to be revised, Carmelo Ferlito of the Institute for Democracy and Economic Affairs (IDEAS) said that while the minimum wage policy was well-intentioned, it often produced unintended outcomes.

Ferlito told FMT that whereas a full employment situation would usually mean that employers must pay more to attract workers, a high unemployment context required workers to adapt to the market.

He said occupations that were close to the minimum wage tended to be low-skill jobs, adding that these could easily be replaced by automation.

Carmelo Ferlito

“Take the example of paying for parking in a shopping mall. If the wage of an employee who collects payment is competitive compared to automation, you would keep the worker,” he said.

“But if automation becomes more convenient due to an increase in the minimum wage, then instead of having a worker earning more, you will have a newly unemployed person replaced by machines.”

Ferlito said these factors were all the more relevant with unemployment rising and businesses still suffering from the effects of the Covid-19 movement control order.

While recognising that the labour market would be shaken up, Ferlito said policymakers should focus more on improving the social safety net to cope with future emergencies.

“If we really wish to save jobs, we should allow market forces to determine wages instead of keeping wages artificially high,” he said.

Last week, the Department of Statistics revised Malaysia’s poverty line income (PLI) to RM2,208, more than double the previous benchmark of RM980.

Chief statistician Mohd Uzir Mahidin said the revision was in accordance with current needs that emphasise optimal food intake and quality non-food basic requirements.

This prompted calls by some for the minimum wage to be increased, with the Malaysian Trades Union Congress (MTUC) saying the current level of RM1,100 to RM1,200 was no longer realistic, especially for city dwellers.

J Solomon

MTUC secretary-general J Solomon said a revision was timely and would help Malaysia become a high-income nation.

He told FMT the congress had always maintained that workers were entitled to receive a “living wage” of RM2,700, especially considering the higher costs of urban living.

Noting that the current minimum wage was far lower than the PLI, Solomon said Putrajaya should gradually increase it within the next six months.

He also called on the government to raise the minimum wage for rural workers to the same level in the next two to three years, and for the poverty line to be revisited periodically.

However, the Malaysian Employers Federation (MEF) said it was not practical for the minimum wage to be increased at this time, fearing that employers burdened by the additional costs may just close shop.

Shamsuddin Bardan

MEF executive director Shamsuddin Bardan said an increase in the minimum wage would lead to retrenchment, pushing people to pursue freelance and contractual jobs.

“During the pandemic, workers should be thankful that they are still in employment and not retrenched,” he said, cautioning that those in employment may still be subject to pay cuts and other cost-cutting measures.

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