The prime minister has said it so many times. His administration wants to turn Malaysia into a high-income country.  One of several initiatives that the administration believes can help in that direction is the introduction of minimum wage through the establishment of the National Wage Council. In promoting its supposedly market-friendly and market-driven policy, the federal government embarks on central planning without even flinching at the contradiction. For others, they will do more than flinch because as with any effort at central planning, there are side effects. One of them is the creation of an uncompetitive market.

In the free market, some firms have more market power than others do. That is inevitable due to various factors that are only too natural. Some are just larger than others are and they may have better access to resources and may be able make use of it more efficiently than others do, thus allowing them to sustain their prominence in the market.

That, however, does not prevent smaller firms from competing against their larger counterparts in the same industry successfully. There is enough flexibility in the free market to enable smaller firms to succeed. That flexibility creates free competition and that competition in the free market exacts punishment on mistakes made by anybody, even by larger firms. It gives others the opportunity to rise up.

This competitive force may no longer be true if the wage council dictates wages. The focus here is not the minimum wage itself but rather, the mechanism at which the council dictates the wage.

Consider the possible composition of the wage council. For it to be truly representative, it has to have all stakeholders in the labor market represented. This includes firms of all size and industries. There will be representatives from the labor unions and the government as well.

Consider now the interest of each side given an industry. The government wants to turn Malaysia into a high-income nation and believes the introduction of minimum wage can help. The labor unions want higher wage for its members and are strong advocates of minimum wage. The larger firms do not like competition and can afford higher wages. Finally, the smaller firms do not like competition as well but unlike the larger ones, they cannot afford to pay the kind of wages that the larger firms usually can.

One can see that at least one aspect of interest of the government, the labor unions and large firms coincides and then competes directly against the interest of small firms. Given this setup with the wage council, smaller firms are likely to lose out.

What begins as a problem of low wages or wage stagnation — what has been the rationale for the proposed formation of the wage council and the introduction of minimum wage in Malaysia — that is partly caused by unequal bargaining power between employers and employees is transformed into something else. It turns one problem into another.

While it attenuates the difference between employers and employees, the council amplifies the bargaining power differential between firms. The incentive mechanism of the free market is tweaked, or rather mangled, to give more leeway to larger firms to make mistake and less for smaller ones.

To put the implication more starkly, the wage council encourages the creation as well as the continuance of monopolies in the market. It creates an uncompetitive market, on top of the inflexibility created by the minimum wage policy.

What makes this all the more unpalatable to those who actually believe in market-driven policy is that many pre-existing monopolies in Malaysia are government-linked companies while the smaller companies are likely to be privately held. And when the monopolies are not government-owned, many of these monopolies came to being not because they were competitive, but because of past government policies of lemon socialism that privatized profits but socialized losses.

The concern for lemon socialism and privately-owned monopolies aside, the dynamic of the wage council is stacked against privately-held companies in favor of larger as well as government-linked companies. The role of the state in the market increases with the establishment of the wage council.

This is an example of Najib administration’s supposedly market-driven policy.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

First published in The Malaysian Insider on December 28 2010.

One Response to “[2294] Of favoring the fat over the fit”

  1. […] are other less publicly known effects. Discrimination against small firms is one. The adverse impact on low-skilled workers is two. There are […]

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