Economics Mudslinging

[2544] Responding to Ahmad Fuad Rahmat on minimum wage

Ahmad Fuad Rahmat wrote a short essay in support of minimum wage.[1] While there may be a number of reasons to support minimum wage, I believe he misunderstands some issues and mischaracterizes others while he attacks the anti-minimum wage camp.

He first and foremost takes issue with Wan Saiful Wan Jan’s statement that ”when employers refuse to hire at the minimum wage, desperate workers will look to the black market and agree to take less than that,” as reported in The Malaysian Insider.[2]

The statement on the black market is not mere theorizing. Any student who has attended universities in major cities where minimum wage law is in place will know somebody who has worked illegally below the minimum wage. It is especially a prevalent issue with international students, despite having a study/work visa. I personally know a number of students in Sydney whom worked below minimum wage. That alone is illegal. The illegality by definition adds up more workers in the black market as far as the minimum wage law is concerned.

The concern with the black market is not merely a definitional issue. That illegality will reduce protection these workers may get as compared to if they are legally employed. If you are a foreign worker, then it will be a double-whammy, and therefore, very oppressive. As you can see, the socialist policy is not compassionate it is cracked up to be. Utopia and the real world are two very different things.

That is not to suggest immediately that desperate workers will go into the black market in the sense of trading contrabands (or mafia-linked trades). No, it is not.

To repeat, minimum wage adds to the black market only because workers, possibly working as completely innocent occupation as store assistants at legal business setups, work below the minimum wage.

Ahmad Fuad Rahmat takes exception to that and counters that ”increasing the minimum wage to a level that secures the basic needs of a household will make it less likely for people to want to search for subsistence elsewhere.” Read his article and you will get the idea that he misunderstands the context of the black market as the one that trades contraband (or mafia-linked trade) instead of the one where one is employed below the minimum wage. I know the definition used by Wan Saiful Wan Jan because in an email discussion, I mentioned the issue about minimum wage and the black market to him.

As you can see, I am compelled to respond because the idea came from me. Else, I would not have bothered to reply.

And of course, increasing the minimum wage to a very high level will lead to higher unemployment rate. That means no wage at all for the unfortunate. There is always trade-off. There is nothing controversial about that. Put minimum wage at RM2,000 for instance, then you will see massive unemployment rate in the legal sector, and more workers in the black market.

Once you understand the economics that raising the minimum wage will add more workers to the black market, you will understand why raising the minimum wage even further will add more workers to the black market. When Ahmad Fuad Rahmat suggests that raising the minimum wage will discourage worker from participating in the black market, you know he does not understand the issue at hand. Again, he misunderstands the context of the term black market. And since he does not understand it and then goes on to prescribe a misleading policy, his argument should be ignored.

Immediately after the issue of black market, he referred to a so-called classist supposition that ”minimum wages decrease productivity is just false.” It is indeed false.

There is something that is called the efficient wage where a worker is paid slightly above the wage that his productivity warrants. With enough supervision (i.e. the probability of getting caught shirking and losing his job), the worker will appreciate his job and not shirk in fear of losing his relatively well-paid job. Henry Ford was famous for practicing efficient wage policy. Note that Ford was no government.

I do not know who actually makes the point about decreasing productivity as claimed by Ahmad Fuad Rahmat. But I think those with liberal economic understanding do not make that argument at all. The closest sensible argument from the liberal side that comes close to the argument the author puts up and then attack (strawman argument perhaps?) is that productivity will lag behind the minimum wage due to stickiness in the market as the market takes times to react changes. Note the concern: it is not the decrease of productivity but rather, lag of productivity to wages.

In any case, minimum wage and efficient wages are two different things set in two different contexts. Efficient wage is set within firm settings while minimum wage is set at the national or macro settings. Efficient wage can be tweaked at the firm level according to level of productivity of individual workers by managers with full knowledge of his firm. Minimum wage, especially Malaysian minimum wage, does no such thing because it suffers from aggregation problem; it cannot be as specific as efficient wage.

Ahmad Fuad Rahmat goes on to cite an author confirming the existence of efficient wage and use that as an argument for minimum wage. Just as he misunderstands the issue with minimum wage and black labor market, he jumbles up the concept of efficient and minimum wages together, and the uses the points in favor of efficient wage for minimum wage. Maybe the author that Ahmad Fuad Rahmat cites also confuses the two concepts together. If you correct the foundational understanding, the subsequent policy prescription must change accordingly. So, because of the misunderstanding of issues and concepts, his prescription should be rejected because it is derived from flawed understanding.

There is yet one more point in his essay and this is empirical in nature. Ahmad Fuad Rahmat states that ”it is also widely understood that many plantation workers in Malaysia are still being paid around RM400 per month.” I am unsure what he means by “widely understood” or “many” but if he means to say a large fraction of those in the plantation industry, I fear he is mistaken.

In the plantation industry, there is a shortage of workers. Indonesia is giving Malaysia a real fight in terms of wage competition in the plantation sector. An analyst friend of mine whom job is to monitor the plantation sector and recommend investment in plantation companies contends that workers in the industry are already earning above RM1,000 wage as plantation companies in Malaysia struggle to attract workers. In fact, do not take my words for it. Sime Darby, the largest plantation company in the world:

In an unprecedented move, Sime Darby Plantation Sdn Bhd (SDP) has increased the salaries of 37,000 of its estate and mill workers throughout the country, with each of them expected to earn an extra RM200 in basic salary effective July 1.


With the new salary scheme in place, a rubber tapper to a clerk, including auxiliary police personnel, employed in the estates and mills will enjoy a basic salary of between RM1,050 and RM1,100 per month. [Sime Darby Plantation increases salary for 37,000 workers. The Borneo Post. June 7 2011]

So, that are three counterpoints: two to clarify his misunderstanding and another a challenge on his data.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — Prime Minister Najib Razak’s announcement of a minimum wage requirement for the private sector has been met with outrage from pro-business Malaysians.

Their argument, in short, is that there should be no minimum wage at all. A minimum-wage policy will only increase business costs, which will only lead to inflation. Companies will also be reluctant to hire more workers as a result.

IDEAS director Wan Saiful Wan Jan even went so far as to say that the new minimum wage policy will eventually compel workers to turn to the black market in search for employment. He thus describes the policy as nothing short of an ”intervention” in the name of ”populism” — a clear breach of the natural process of growth that a truly free market would assure for everyone. [The case for increasing the minimum wage. Ahmad Fuad Rahmat. The Malaysian Insider. May 4 2012]

[2] — ”When employers refuse to hire at the minimum wage, desperate workers will look to the black market and agree to take less than that,” said Wan Saiful Wan Jan, chief executive of libertarian think-tank Institute for Democracy and Economic Affairs. [Minimum wage will cause unemployment, inflation, say employers, economist. Shannon Teoh. The Malaysian Insider. May 3 2012]

By Hafiz Noor Shams

For more about me, please read this.

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