March 19th, 2012 by Hafiz Noor Shams
In any kind of policy debate, there are always two elementary opposing opinions at work. One side subscribes to the ability of the state to produce outcomes better than society can if society is left to itself. The other is not so sure of that and prefers to err on the side of caution, ever mindful human fallibility. One is confident. The other is humble. Beyond opportunistic politics, that has always been the background behind the minimum wage debate in Malaysia. This tug of war in fact has been on the forefront of any general modern economic debate.
The side preferring the organic solution fears that the initial government intervention in the workings of natural everyday life will lead to unintended consequences that in turn will lead to further government intervention. From one preferred outcome supposedly guaranteed by the intervention, a very different reality will emerge to contrast our overconfidence in our ability to control everything that even the gods appear to struggle at times. From there on, more and more unexpected expensive tweaks are a must not only to push towards the preferred outcome, but also to make sure the post-intervention scenario is not worse than the status quo.
The unintended consequence of minimum wage is always higher unemployment among the general public compared to an economy sans minimum wage, whether one does not know of it, or one decides to consciously swallow up the trade-off wholly.
Call this a tired argument from a free-market advocate, but it is true no matter how old the statement is.
The nuance is that unemployment effect depends on the level of minimum wage. At the proposed minimum wage level in Malaysia which The Star has reported to be between RM800 and RM1,000 however, that qualification is academic. If it was low enough to have negligible effect on unemployment (or the cost of doing business, which is the other side of the coin), there would have been no real complaints to be made.
Now that government intervention is imminent, the trade-off is taking the limelight while previously it was ignored. There are calls to grant businesses some flexibility to adhere to the fiat from both sides of the aisle in the national Parliament.
Of particular note is a suggestion from three prominent members of Pakatan Rakyat — Rafizi Ramli of PKR, Liew Chin Tong of DAP and Dzulkefly Ahmad of PAS. They suggest that the government subsidizes businesses so that transition will be smooth. The Malaysian Insider quoted DAP lawmaker Liew Chin Tong suggesting, “Funds from the federal budget should be allocated to a special facilitation fund to help entrepreneurs, SMEs and small firms retool, mechanize and adjust their operations to create new job. This is to address concerns of most SMEs that the minimum wage will make these businesses close down.”
Although the next step from here is unclear, the mood from both sides of the divide creates a suspicion that the government will intervene once again after the introduction of minimum wage on the pretext of a smooth transition.
In the context that the Najib administration has been copying policies advocated by Pakatan Rakyat quietly while publicly deriding the same set of policies as the height of irresponsibility, the suggestion from Pakatan Rakyat in particular is disconcerting. One has to remember the federal government only began to champion the minimum wage policy seriously after Pakatan Rakyat successfully placed the issue under the spotlight. Given the popularity of Pakatan Rakyat on this front, it is not too farfetched that the government will play the copycat yet again.
Already businesses, big and small, are heavily subsidized no thanks to various industrial plans put into effect by the federal government. Now Pakatan Rakyat wants a policy that will exacerbate the expensive incentive-twisting policy in time when what Malaysia requires is improvement in its efficiency. That efficiency, among others, requires businesses to stand on their own two feet without financial support from the government.
If this subsidy goes through, the next round of unintended consequence will be the creation of mostly incompetent businesses utterly dependent on government handouts. Look at some of the loss-making government-linked companies which are dependent on government largess and protection.
Now, imagine that economy-wide.