The Minimum Wage introduced in Malaysia

On the article that is posted by Malaysian Institute of Economic Research, (http://www.mier.org.my/newsarticles/archives/pdf/quah21_05_2012.pdf), the minimum wage introduced in Malaysia causes small businesses loss their profit because of the raising in operation cost. Therefore, they opposed the policy of minimum wage. Meanwhile, they employed less workers and result in surplus of labors. Minimum wage also applies in Thailand which has the same problem that is less quantity demands for labors by businesses.

Minimum wage is a policy that implement by government to increase the salary of labor in the market .This helps up the poor able to afford something necessity and avoid the problem of financial crisis. At the same time, this decreases the numbers of labor who are living below the poverty line in the society. The government of Malaysia intervenes into the labor market because they think the labor are getting too low the wages they worth to obtain. This is because some of the firms in Malaysia are offering the lower wages to their employees such as the salary below RM 700 for a month. Firms only concern about their profit gained and revenue. Firms calculate their total profit by using the total revenue deducts the total cost which includes fixed cost and variable cost. Rent expense, tax expense, insurances are a fixed cost, while labors’ salaries are the variable cost in the firms. Fixed cost is a cost that cannot be change or avoid whether or not the firm operates the business. In other word, this is the cost that remains the same output in the firm and not affect by production. On the other hand, variable cost will change with the production of the firm. Supplies, utilities bills, raw material, employees are relatively flexible to the firm to run the business. For instance, producers may use the cheaper raw materials or substitute to other resources that relatively cheaper to produce the products with the same output. Therefore, the firm also tends to reduce the employees’ wages to obtain the maximum profit due to low cost. Hence, this action of the firm triggers the intention of government to intervene in the market which is applying the minimum wage.

In the aspect of labor market, .minimum wage affects the labor demand and supply. In this case, household is the supply for labor, while businesses are the demand for labor. Labors are willing to supply their service to the firms when the wage rates increase. Before the minimum wage introduced in Malaysia, the average wage rates in the labor market is about RM 700 per month which is lower than the poverty line of RM763 per month.  In this case, let assume that the labor market equilibrium is RM 700. When the wage rate is more than RM 700 per month, there are a lot of labors are looking for jobs. In other words, the quantity supplied for labor is increasing.

From the figure 1, it shows that when the minimum wage is imposed at RM 800 for a month, there are 100 of labor willing to provide and offer their services to the firms. This is because the minimum wage exceeds the marginal cost .Marginal cost in labor market is also supply for labors. Therefore, labors are gaining the producer surplus which lies on purple triangle area. If there are 50 of labor supplied to a firm, they gain RM 50 of producer surplus from the wage rate of RM750. That is why the quantity of labor supplied increased.

On the other hand, businesses want to hire the factors of production in lower cost to obtain maximum profit. Quantities of labor demanded by businesses rely on a certain wage rate with particular type of labor. The higher the wage rates, the lower the firms’ quantity demand for labor. In other word, the firms intend to pay low wage rates to their workers. Once the government implements the minimum wage in the labor market, businesses tend not to employ extra labor to work for them because it will increase the expense of firms. Just like I mention before, salary or wage expenses are the variable cost to the firms which will change with production. Hence, the minimum wage is not motivating the businesses to hire much more employees. Therefore, when the minimum wage is put into the labor market, the quantity of labor supplied will increase, while quantity of labor demanded by firms will decrease.

The government imposes the minimum wage will causes the inefficiency in the labor market. Minimum wage is set because the government think the labors are getting too low the wages; thereby put the wage rate up by using the price floor. When price floor is introduced, the firms cannot pay the wage rate that lower than price floor to their employees. From the figure 2 demonstrates that the minimum wage increases the quantities of labor supplied from 100 to 120 of labors. However, firms’ quantity demand for labor decreases from 100 to 80 labors. The wage rate of RM700 for a month is market equilibrium wage rate as well as equilibrium quantity of labor is 100 labors. When the quantity of labor supplied more than the quantity of labor demanded will cause surplus of labor in the market. In other words, surplus of labor means the unemployment. There are 80 thousands of labor are employed and 120 thousands of labors are available. Therefore, there are 40 thousands of labors facing the problem of unemployment. This is showing the inefficiency of minimum wage.

From figure 3 indicates that the minimum wage rate create an inefficient labor market. Figure 3 also demonstrates the firms’ surplus and labors’ surplus which are filling with the colour of pink and orange triangle area. From the area of blue square shows the potential loss in the market. In this area, labors are seeking for jobs and also known as jobs searching. The opportunity cost of the minimum wage is the potential loss from job search as well as it brings the loss to the society. At the same time, the firms intend to employ less of labors in the minimum wages, the quantity of labor employed will decreases from 100 to 80 thousands of labors. This result in the deadweight loss to occurs which is showing the area of black rectangle in the figure 3. Deadweight loss is created when the quantity of labor employed is less than the efficient quantity of labor employed. Therefore, this is the reason the inefficiency of the minimum wage is occurred in the labor market.

I think that the implementation of minimum wages in Malaysia is the wrong policy to help the labors who earned low wage in their jobs. This is because when the minimum wage imposed in labor market, businesses would not like to hire more employees due to increased total costs. Meanwhile, some of the firms may lay off their employees to make revenue. Eventually, there are a lot of labor are available to work. In other words, labors are also facing the problem of unemployment even worse than before the introduction of minimum wage. Therefore, I do not agree with the government to implement the minimum wage in Malaysia.