Categories
Economics

[2911] RM600 wage subsidies too small to prevent massive layoffs

I am happy with the inclusion of wage subsidies in the larger cushioning/protection policy announced by the government today. I use cushioning/protection because the supply-side context makes the definition of stimulus irrelevant. As announced, the government will implement RM600 per month wage subsidies for 3 months.

However, there is a big but. Is the RM600 per worker per month enough to prevent massive layoffs?

No. It is hard to say yes.

It is so small that it risks becoming irrelevant at preventing layoffs. It fails to protect minimum wage jobs fully, never mind those earning median wages.

In contrast, the government announced a big cash transfer program. From the perspective of protecting jobs and potential, prioritizing cash transfers over wage subsidies seems folly to me. Why?

Three factors I think:

  1. Wage subsidies are the first line of defense, while cash transfers are a safety net
  2. Wage subsidies depend on recent data, while cash transfers on last year’s data (recognition lag)
  3. Wage subsidies protect potential now and allows for faster recovery later

Wage subsidies are the first line of defense, cash transfers are a safety net

When wage subsidies and cash transfers work hand-in-hand, the former functions as a first line of defense with the latter a safety net. If the first line of defense fails, the safety net will kick in. Both need to be sufficiently big to be credible and effective.

To put it another way, the first line of defense (wage subsidies) is a proactive measure designed to protect jobs so that you do not have to rely on safety net. You want your first line of defense to work so that you do not have to suffer bigger and bigger demand for safety net.

Unfortunately from the policy design of the set of measures announced, it feels like we are skipping the first line of defense and going straight towards the safety net.

With only RM600 wage subsidies, I fear companies would have the incentives to fire even workers at the minimum wage. When the lowest earners not protected from job loss, I fear for the rest.

We have a specific statistics to measure the success or failure of this policy: the unemployment rate.

Wage subsidies depend on recent data, cash transfers on last year’s data (recognition lag)

And then there is a question of recognition lag.

When it comes to the labor market, wage subsidies rely on current data. If you have a job now, you will get the subsidy and this will encourage companies not to let you go because employing you is costless during this crisis of cash flow.

In contrast, cash transfers depend on last year’s data. Cash transfers have a one-year worth of recognition lag because it depends on yearly Internal Revenue Board data. If you lost your job this month but was paid wages above cash transfer qualifications, you would not qualify for the cash. This is purely a data and bureaucratic issue. This means cash transfers will be unable to help those in the need now, unlike wage subsidies.

So, it is quite clear wage subsidies address the now in terms of protecting potential.

Wage subsidies protect potential now and allow for faster recovery later

Wage subsidies are important because the labor market is a slow moving animal. The market can suffer immediate shocks, but recovery from the shock will be slow. And the labor market has a big influence on the economy. A post-shock slow-moving labor market will mean prolonged weak economic growth (if it could be called growth) for all of us. A prolonged weak economy means prolonged demand for safety net as jobs are hard to come by. And massive job losses can affect potential negatively in a big way.

Wage subsidies is supposed to preempt that shock and address it now in the short term immediately. It protects the potential now and removes big demand for safety net demand later. With potential protected now, there will be less ground to cover during recovery. That means there will be no need for many to suffer unemployment, and the time needed to find new jobs, go to interviews — all in all the long readjustment period. If wage subsidies are successful, it will allow for faster recovery without having to go thru the painful readjustment period.

But for it to be successful, it has to be meaningful for companies under pressure. Maximum RM600 wage subsidies do not even begin to work.

Meanwhile, cash transfers do not protect those potentials as much. It is designed to help if those potentials have collapsed. But our objective should be to prevent collapse in the first place, not wait for it.

Bigger wage subsidies needed

I have suggested for the government to provide 25%-50% subsidies for workers with wages up to RM4,600 with a joint statement that I wrote.[1] In retrospect (the statement was rushed out and I came on board at the very last minute), it should bigger: minimum subsidy of RM1,200, and beyond that, 25%-50% additional subsidy relative to income in excess of the minimum wage up to RM4,600.

This way, there is less incentive for companies to fire a lot of people. The subsidy size probably could grow bigger, but it may require more analysis to balance other needs.

Hafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reservedHafiz Noor Shams. Some rights reserved

[1] — Kabinet Rakyat calls on the government to provide larger direct cash transfers worth at least RM1,000 per month to all B40 households, and 25-50 per cent wage subsidies relative to total wages for SME employees earning up to RM 4,600 monthly (roughly 200 per cent of national median salaries) during the April-June 2020 period.

The large cash transfer programme will protect irregular job holders and those in the informal sectors unable to work due to the Movement Restriction Order (MRO), while the wage subsidy will lessen the temptation for SME companies to lay off its workers.

Urgent action must be taken to address the ongoing health and economic crisis. According to a Malaysian Institute of Economic Research (MIER) study, Malaysia’s real GDP may shrink by 2.9 per cent this year, with 2.4 million people losing their jobs. Massive job loss will exert prolonged adverse effects on the economy, as well as the social stability of the country, long after the health crisis is over.

The government has already announced some measures to cushion the impact of COVID-19 and the MCO. This includes cash transfer policies like the Employment Retention Program (ERP) providing RM 600/month up to six months for employees forced to take unpaid leave and a one-off additional RM 150 in Bantuan Sara Hidup (BSH). Meanwhile, Bank Negara Malaysia has introduced a massive monetary stimulus in the form of loan moratorium to address cash flow issues among companies, that hopefully will lessen the need for layoffs.

While these measures are welcomed, they are still inadequate.

The need for cash transfers is clear. Groups working directly with low-income communities have been overwhelmed by requests for cash assistance since the start of the movement control order (MCO).

Furthermore KRI, IDEAS, ISIS Malaysia dan REFSA as well as individuals including Nungsari Ahmad Radhi, Hamdan Abdul Majeed, and Muhammed Abdul Khalid have all argued that the cash transfer measures introduced so far (the ERP and the small increase in BSH) are insufficient. They all recommend additional cash transfers in some forms, by expanding coverage or increasing the amount of ERP or BSH, or both.

Other countries and jurisdictions have also responded to the crisis with substantial direct cash transfers. Hong Kong, Singapore, and Australia for example, have already done so. Concurrently, Denmark and the United Kingdom have introduced massive wage subsidies to protect jobs.

Our response to this crisis must include and prioritise those hit the hardest.

[Tharma Pillai, Yu Ren Chung, Hafiz Noor Shams. More direct cash transfers and wage subsidies needed to assist vulnerable and protect jobs. Malay Mail. March 26 2020]

Categories
Economics

[2738] The growth of the Malaysian labor force explained, maybe

I am pretty taken aback by the expansion of the Malaysian labor force in the past year or so. The rise has made me skeptical about the utility of the labor market numbers to ascertain the health of the economy. Whenever I look at it, I tell myself, wait until it normalizes. When? If you look at the first chart below, it seems like soon because for the “outside of the labor force” number, it is sort of reverting to its old mean.

The number of workers increased by more than 0.9 million people in 2013 alone and you can see in this in the first chart below. That is about 7% of the total labor force. It is huge. Concurrently, there was a drop of number for those outside of the labor force:

20140611 Msian labor force

I did not really know why it increased in a big way in a very short time frame. Previously, I had read three points explaining the drastic increase. None was satisfying enough to me, but it explained something nonetheless.

The first was the minimum wage. The argument goes that the implementation of the minimum wage caused a lot of people joining the labor market (technically, joining means looking for jobs, not necessarily getting them). The drop in the number of those outside of the labor force strengthened the minimum wage argument (see the red line in the first chart). It made sense, until you realized the unemployment rate itself did not remain elevated for too long. It spiked back in October-November 2013 at 3.5% but it then stabilized at around 3.0%-3.1%:

20140612ueMalaysia

It would make sense that the unemployment rate did not change much, if all of those attracted to minimum wage jobs would find placement immediately, but I am having problem believing that. Sounds way too outrageous. And data on this is a bit hard to find to prove anything conclusively. (p/s – looking at the data again, the spike in unemployment rate of 3.5% happened when the number for those outside of the labor force was at its lowest. So, the minimum wage may have some explanatory power. The V-shape can be explained by discouraged workers, who entered the job market only to find it was harder than expected to find a job, and left it altogether soon after. This makes the minimum wage narrative very promising but getting a hard number to test it out is hard.)

The second was the legalization of undocumented migrants. This was my favorite explanation, until recently. There was an amnesty program for these workers that began in October 2011 and ended in September 2013. Jason Ng at the Wall Street Journal reported about 0.5 million workers were legalized.[1] The figure sounds right except the program ran for 2 years. Why would the labor force size increased significantly only in 2013? Was it the case of last minute legalization? Was all of the 0.5 million registered only in 2013? There was a renewed effort by the government in July and August 2013 to get all those undocumented foreign workers to register with the authorities but I think it would take guts to say yes and be all confident about it. Also, the increase in labor force was 0.9 million, which is far, far higher than the number of amnesty given out. So, there is a hole there. And… it cannot explain the drop of those outside of the labor force. The legalization, I think, should not affect that number. They are already working and their legalization would only increase the labor size. For these workers, it is merely a transfer from the underground economy to the “above ground” economy, not from outside to inside of the labor force.

The third possible reason was a population boom and this is my least favorite because it is a bit convoluted. If you look at Malaysia’s demographics, there is a bulge for cohort aged 20-24 in 2010.

Malaysia demographic projection by Department of Stastistics

There were close to 3 million of them and the year 2013 was about the right time these people graduated out of schools. But here is the thing. There were about 1.1 million students in Malaysia’s higher ed institutions, doing diplomas, bachelors and higher level degrees. It cannot be there the 0.9 million graduated in just one year. There is also a V-shape that cannot be explained by graduating students because it suggests these graduates leaving the labor market after joining them, which I do not think it is the case.

So, the three possible explanations come short in their own ways.

I was researching on something else recently until I re-discovered that Malaysia raised its mandatory retirement age in July 2013, from 55 years old to 60. I remember reading about this a long time ago but it completely went through my head within the context of labor size. That is an embarrassing thing to admit because it was such a big thing that I forgot. So, the raising of the retirement age sounds like a promising possible factor behind the increase in labor force. First, there were about a million of them. That is a good number because again, remember, the increase of the labor force in 2013 was about 0.9 million. Now, it is likely that not all of them are in the labor force. This is a number that needs some researching.

There is a problem with the explanation, though I think it is not as bad that it completely rules out the retirement age point. The problem the retirement age factor faces is not as big as those faced by the amnesty and population boom factors. The problem is that the labor force size markedly increased around January 2013, six months earlier than the implementation of the new retirement age. This requires a bit of a research but a possible explanation is that those nearing the old retirement age in 2013 just before the implementation date were given the choice to continue working. A sort of grace period for them. Since the retirement age act was gazetted in December 2012, the market knew of the details pretty early in the game. This can easily explain the rise of the labor force. The new retirement age might even attract those outside of the labor force who had retired to rejoin, and this can explain the descending slope of the V-shape for those outside of the labor market. I am unsure how to explain the rising slope however.

So, here is my explanation for the drastic increase in the labor force.

The retirement age increase drastically reduced the outflow of labor from the market for one time. The inflow of remained about the same, or maybe slightly bigger than before because of the amnesty program, minimum wage introduction and the (minor) population boom.

Summary? The raising of the retirement age is the main cause of the drastic increase in the labor force.

The new problem now is to explaining why the labor force has contracted since it peaked in October 2013 and why the number for those outside of the labor force rose after September 2013.

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

[1] — About 1.3 million of an estimated two million undocumented foreign workers had registered with the amnesty program, which started in October 2011 and ended in September of last year, according to government data. However, only about 500,000 received legal documentation, while around 330,000 were repatriated. The program that ended on Monday was an extension of the one that ended last September. [Malaysia Gets Tough on Illegal Immigrants As Amnesty Program Expires. Jason Ng. The Wall Street Journal. January 21 2014]

Categories
Economics

[2548] One way which minimum wage increases unemployment rate

One impact of minimum wage is the general increase in labor supply in the market. Let us be clear and not talk too generally or loosely. Precision is key. I think if you cannot be clear, then it is very likely that you do not understand or have not thought of the issue well enough. And I think I understand it very well.

And I apologize if this appears to use a lot of jargons. I try to explain each jargon but I believe you will be able to overcome the jargons if you are really interested in the issue; if you really interested in the issue of minimum wage and not merely interested in the ideological battle, then you have to understand the mechanics. There is no short cut. Besides, the jargons are really self-descriptive.

And this is not a moral argument but rather it is the mechanics; just as explaining why the sky is blue does not make any moral argument, so is this.

So, here is the precise simplified mechanism: labor supply will increase if the newly instated minimum wage is higher than most of the prevailing wages. Higher wages attract workers into the labor market thus increasing the labor force/supply.

At the same time, minimum wage puts a limit on total jobs growth. Walter Williams has explained how that is so. Williams explains it in a specific context, but the logic can be generalized beyond the competitive context that Williams describes.

Now, combine the two effects related to labor supply and total jobs growth.

If you understand how unemployment rate is calculated, then you will realize how this will increase unemployment rate. For the uninitiated, the unemployment rate is calculated by taking the ratio of total unemployed individuals to the total labor force.

This is of course is not the general effect between minimum wage and unemployment rate, but part of that effect is explained by this particular interaction between variables.

This is how minimum wage, jobs and labor supply interact.

If total filled jobs grow faster than labor force, then unemployment rate will decrease.

If total filled jobs grow slower than the labor force, then unemployment rate will increase.

With minimum wage, there will likely be a shock to both total jobs and labor force growth. Since minimum wage puts a cap on total jobs growth and at the same time encourage more individual to join the labor force, there is a strong case to expect total jobs growth will be slower than labor force growth at the time when minimum wage is in force.

That will cause the unemployment rate to jump up. That elevated unemployment rate will remain at its new high level, discounting for other effects, until further development happens.

These other effects may increase or lower the unemployment rate on the balance. One factor that may blunt the effect of minimum wage on unemployment is inflation.

Categories
Economics Mudslinging

[2545] Re: Responding to Ahmad Fuad Rahmat on minimum wage

(This is a really long reply and relatively technical. For summary in plain English, click here.)

Let us begin with a real life conversation between friends of mine and a professor of economics.

The professor highlighted how women were discriminated in a certain country and how that discrimination affected the labor market in a bad way. A friend said gender discrimination in that country was unlawful. He tried to suggest that that statement about discrimination by the professor could not be true because there was a law against that.

Another friend was quick to reply, “Just because there is a law does not mean it does not happen. The law will just make it illegal.”

Was the last friend blaming the law, or was he simply saying the action would still happen despite the law? The stress is on the latter.

When I wrote minimum wage will lead to more workers in the black market sector (which concept Ahmad Fuad Rahmat misunderstood, accepted the correction and then went on to say it did not change a thing…), I am describing its effect. But Ahmad Fuad Rahmat in a written response to my comment that yours truly “thinks this is the fault of the state’s minimum wage law, rather than the companies that refuse to pay minimal wages.”[1]

I am describing what will happen and it requires address. Ahmad Fuad Rahmat says employers should be punished for breaking the law and workers should not be punished. He stops there and thinks it is as easy as that.

This brings us to the issue of protection, which is the reason black market is a concern. I raised the issue of worker protection, stating that workers will have less protection if they work in the underground sector. He mocks “one would shudder to think what a libertarian could mean by “the protection of workers”, especially when he is at the same time crusading so vehemently against minimum wages.” Notice, he does not address the issue at all. He simply mocks the idea and then says punish the employers and not punish the workers. The point here the effectiveness of the law affects legal and illegal workers differently. Ahmad Fuad Rahmat does not consider that.

But to elaborate on the point of worker protection, allow me to present an example. There have been a lot of cases where workers are denied their take-home wages even after working earnestly. A large fraction of wages are subtracted against some cost the employers claim to have borne on behalf of the workers: transportation, food, accommodation. In the end of the day, workers get nothing out of his work other than being modern day slaves. This is a pure manipulation and oppression. Never mind employers have been known to hold on to workers’ travel documents to prevent these workers from enjoying labor mobility that is important in encouraging wage competition in the market.

If you are outside of the legal framework, then you will be disenfranchised because the law will less likely provide you with the necessary protection a legal worker may get. This is a real issue. You cannot say it is immoral to do so and then pretend such statement will prevent it from happening. (Also, the injustice in the labor market happens even with relevant laws in place.)

Does Ahmad Fuad Rahmat address the point? No.

If I need to stress, the idea of worker protection is much, much larger than minimum wage. Any effect at making the two as clear equivalent is just an effort at getting a carte-blanche to argue for minimum wage. This you shall see, the effort at obtaining intellectual blank check happens at least two times in his response to me.

On to the next point, he rejects my accusation that he does not understand the difference between efficient and minimum wage and then goes on to cite the author he cites again after I explained why there is a difference. It is a nice work at appealing to authority but he is silent on the context of efficient and minimum wage that I set out; efficient wage is set at firm level and minimum wage at macro level. He makes no effort at rationalizing why the difference does not matter by saying it is beside the point because firms can reject efficient wage for the same reason firms reject minimum wage.

Not so. Efficient and minimum wage are not the same, while Ahmad Fuad Rahmat takes it as mostly the same. I will demonstrate in detail why.

Before that, let me highlight a minor point about how economics treats the issue of morality. Ahmad Fuad Rahmat boldly claims ”At any rate, it remains the case that many moral arguments in favor of efficient wages overlap with arguments in favor of minimum wages as well. Any basic Economics textbook will reveal this.”

This is an odd claim because modern and influential economics textbooks since probably the 1970s strongly stress on the difference between positive and normative statements and then explicitly avoid normative statement. In other words, mainstream economics avoid the question of morality and focuses on specific definition of welfare. In my six years of economic education, I cannot confirm Ahmad Fuad Rahmat’s claim about economics textbooks making such specific moral argument. In fact, the fact that the economics field avoids moral argument is one of the major reasons the field comes under criticism from outsiders. Have the debates in the past 4 years since the last great financial crisis escaped us? Yet here, he claims economics textbooks make morality claims. I am willing to bet Ahmad Fuad Rahmat will be surprised at discovering the implications of the fundamental theorems of welfare economics that every economics student at the undergraduate level learn. From experience, questions on morality only takes place in private discussions.

Beyond the point of morality and off to a more technical matters at hand, to defend his point, Ahmad Fuad Rahmat stresses on the similarities but dismisses the differences between efficient and minimum wage. The other instance of blank check.

I shall go through the logic carefully for the benefits of the audience, whoever they are. Here is why the difference matters.

Case number one: efficient wage is lower than minimum wage. Given turnover and shirking cost the firms may try to avoid, it may make sense for firms to pay efficient wage. The imposition of minimum wage (which suffers from aggregation problem especially at the national level because it generalizes everybody everywhere every time in the economy) here adds more cost on top of the efficient wage level, maybe even up to the point where it does not make sense to the level of productivity plus the premium of a respectable efficient wage. Firms will have a case to oppose minimum wage. Here firms can reject minimum wage and not reject efficient wage. If firm reject efficient wage, then firms will reject minimum wage. In short, firm can reject minimum wage without rejecting efficient wage.

Case number two: efficient wage is higher than minimum wage. This is the only case that makes minimum wage redundant. The firm will pay higher wage compared to the law anyway. Minimum wage does not matter at all. Here it does not make sense for firms to reject minimum wage if it accept efficient wage. If efficient wage is rejected, then minimum wage is automatically rejected.

Case number three: if minimum wage is the same as efficient wage. If firms actually reject minimum wage, then firms will reject efficient wage. Assuming it is rejected, then Ahmad Fuad Rahmat will be right.

Notice three different cases which very different implications. Notice that the point when Ahmad Fuad Rahmat will be right is when efficient and minimum wages are the same.

So, the difference matters.

And also, in an economic downtown, workers can lose their jobs. If the firms set minimum wage, workers can earn less and keep their jobs. With minimum wage, that flexibility of job security is eroded significantly. Has Ahmad Fuad Rahmat taken this into account? He writes ” In a competitive but unregulated labor market, especially in an economic downturn, workers can be made to work hard for very little pay.” So, no, he has not taken the possibility of disemployment into account.

The second last point I want to address is his claim that “classists” claim minimum wage reduces productivity. I wrote, the classist claim is untrue and in fact, I suspect it is a strawman argument. To back his claims of the classist minimum wage with respect to productive does indeed exist, he cites Richard Ko, the general council member of the Malaysian Furniture Entrepreneur Association that “by proposing this minimum wage, is the government saying we should not only pay lazy people, but protect them through the law?”

How does that suggest minimum wage reduces productivity? Please explain. Does being lazy mean reduced productivity?

Finally, on data. I invite readers to pay attention to this particular line that Ahmad Fuad Rahmat referred to:

Malaysian Employers Federation executive director Shamsuddin Bardan also said that in some cases, such as plantation workers in Sabah, a minimum wage of RM800 would double salaries. [Minimum wage will cause unemployment, inflation, say employers, economist. Shannon Teoh. The Malaysian Insider. May 3 2012]

…and his statement:

…it is also widely understood that many plantation workers in Malaysia are still being paid around RM400 per month. [The case for increasing the minimum wage. Ahmad Fuad Rahmat. The Malaysian Insider. May 4 2012]

In the first citation, the phrase is “in some cases.” In the second citation, “is also widely understood that many.”

It is a case of overreaching. Ahmad Fuad Rahmat refers to a secondary source, misinterprets it and then generalizes it in favor of minimum wage.

I would like to reiterate, anybody who actually keeps a track of the plantation industry knows about competition for labor between Malaysia and Indonesia. Refer also to my citation about Sime Darby.

Was it I whom missed it something? Doubt it.

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

Let me summarize my point for clarity purpose (back up).

First, minimum wage will cause more workers to participate in the underground economy. My counterpart does not reject it and turn to playing the blame game. He merely says firms should be punished for doing that, and not workers.

Second, I raised the issue of worker protection which directly related to concern about the black market sector. He does not address it, mocks me and pretends worker protection raised by a libertarian is a non-issue.

Third, I stress the difference between efficient and minimum wages. He dismisses it because both can be rejected by the same reason of cost. He only appeals to authority to defend his point and then moves on. He does not reason it through. I have shown, there are three different implications and clearly, a blanket it-does-not-matter is false.

Fourth, he claims ”it remains the case that many moral arguments in favor of efficient wages overlap with arguments in favor of minimum wages as well. Any basic Economics textbook will reveal this”. This is downright false. Any serious student of economics will know how mainstream economics deals with morality and normativity.

Fifth, he claims ”in an economic downturn, workers can be made to work hard for very little pay”. True but he forgets, with minimum wage in a downturn workers can lose their jobs altogether.

Sixth, he claims classists claim that minimum wage reduces productivity and then attacks that classist claim. That is likely a strawman argument. He cites something that has no relations to how minimum wage reduces productivity.

Finally, data. He somehow reads ”in some cases” as ”is also widely understood that many earn RM400” and he is clearly out of touch of the labor market condition in the plantation sector and specifically the competition for labor from Indonesian plantations.

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

[1] — Hafiz Noor Shams of IDEAS responded to my article calling for a more realistic minimum wage.

He begins by claiming that I misunderstood Wan Saiful’s use of the term “black market”. According to him, Wan Saiful was not referring to an underground economy but illegal work in general. How can we really know this? HNS says we’ll just have to take his word for it. [Responding to Hafiz Noor Shams on Minimum Wage. Ahmad Fuad Rahmat. May 5 2012]

Categories
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]