According to the New Straits Times on August 9, there’s a plan to introduce minimum wage “for three categories of workers“.
KUALA LUMPUR: Minimum wages are on the horizon for three categories of workers, a little over 25 years after the initial attempt failed largely due to flaws in the system.
A total of 250,000 private security guards, private clinic assistants and casual farm workers will soon be the first people in the country to enjoy a minimum wage.
If all goes well, they are expected to take home guaranteed monthly wages by the end of the year.
The article focuses on the benefits of minimum wage but it fails to be neutral by highlighting the other side of the coin. The article in fact only quotes bodies and individuals that are for minimum wage – labor unions and politician within a government that already have strong interventionist tendency. Therefore, allow me do a public service by raising the ugly side of minimum wage.
In a free market, prices and wages – for the sake of simplicity, let’s call prices and wages as simply prices – are the points where demand and supply coincide. That prices are at equilibrium. If we impose a price ceiling below the equilibrium prices, according to the law of supply and demand, supply will decrease while demand will increase. Artificial shortage will occur and this describes the current artificial sugar shortage in Malaysia. If the ceiling is above equilibrium prices, chances are, nothing will happen as the ceiling doesn’t affect the market. Remember, price ceiling simply means the “less or equal than” operator.
Price floor on the other hand is the “more or equal than” operator. So, if we impose price floor below the equilibrium points, nothing will happen because the restriction doesn’t affect the point itself. However, an introduction of price floor above free market prices will artificially decrease demand and increase supply. This last scenario is very relevant to minimum wage.
In other word, less employers will want to employ more workers while more employees will want to work. Hence, higher unemployment rate, ceteris paribus (tag).
There are already talks of high unemployment among Malaysian youth. Despite that, unemployment rate of Malaysia as of the first quarter of 2006 is 3.8 according to Malaysia Department of Statistics, which is quite respectable in my opinion. Germany and France are used to around 10% unemployment rate while the US and most European nations currently suffer above 5%. Regionally, Brunei has 4.8% (2004), Cambodia 2.5% (2000), Indonesia 11.8%, Laos 2.4%, Myanmar 5.0%, Singapore 3.4 (2005 by Singapore Department of Statistics) and Thailand suffers 1.8% unemployment rate according to 2005 The World Factbook by CIA.
As for me, I oppose minimum wage. I prefer the market to decide on it, as long as market failure doesn’t occur.
Regardless of what I think, the introduction of minimum wage will reignite public discourse in youth unemployment as unemployment as a whole will go up with imposition of minimum wage above equilibrium wage.
2 replies on “[858] Of minimum wage and unemployment rate debate in Malaysia”
Hi there,
The error is high only if the econometrics model isn’t properly constructed, regardless the program used to run the model. Construction of the model is much more important than the program itself and I know this through theory and practice. We need to isolate the noise (the other factors) and observe only the relationship between minimum wage and unemployment. The fact reality is dynamic is the reason why the concept of “all else being equal” is important.
The only well-known studies going again conventional economic wisdom was done by Krueger but that has been disputed by other economists. In fact, the negative correlation between minimim wage and unemployment only properly came in during the Clinton era where economic boom probably outshadowed any negative effect of minimum wage.
Concerning RM450 per month, if you raise it, it will cause others unable to gain employment. It raises cost for employers and employers will be reluctant to hire more workers. Minimum wage will only benefit the few while creating barriers for others that seek employment. We should be concerned with the benefit of the whole society, not for a fraction of it. That’s why I oppose minimum wage.
May I offer a link research on minimum wage-unemployment at the US Congress to prove my the positive correlation between minimum wage and unemployment.
While it is true that the theory of supply and demand holds, there are many factors that will affect the theory. If you plot it into a statistical software like Eviews, I believe you’ll find that the Error term is high.
The software might not be able to explain why, but one can observe that there is a problem with the theory of supply and demand. It requires all factors to be constant, but in reality it is not.
Another problem is, how low can low be? I mean, yes, because currently, the market is called employers’ market, they set the wage. But because people are being competitive, they would accept any type of wage as long as it’s money which in turn will end up being unfair. How could a security guard be paid only RM450 a month? Who the hell survives on RM450 anyway?
That’s why I support minimum wage. Price ceilings are not that bad anyway. ^^