Focus on Wage Policies: The Malaysia Country Case

Transcription

1 Focus on Wage Policies: The Malaysia Country Case Regional Labor Market Course for EAP David N. Margolis and Ximena Del Carpio December 12 th,

2 Three Broad Questions Guided the Analysis What is the rationale for a minimum wage in Malaysia, and what features of the labor market should be taken into account? How can the minimum wage policy be designed so that it increases the wages of low-income workers without having negative effects on formal employment, output, or productivity? What types of institutional arrangements need to be considered for the effective implementation of the minimum wage policy? 2

3 Overview of the Rationale for a Minimum Wage and Issues Related to Design and Implementation 3

4 Three Possible Objectives Reducing poverty and inequality Promoting the productivity of firms Protecting workers when employers have a stronger bargaining power 4

5 The MW Might Not Be The Most Effective Tool To Reduce Poverty By setting a floor at a reasonable level poverty and inequality may be reduced but if the reason wages are low is that productivity is low, many firms will likely operate informally or exit the market altogether The MW can also reduce the employment of unskilled or inexperienced (likely poorer) workers. Inequality may rise if negative employment effects for low-skilled workers are large and/or if the earnings of middle-income workers also go up. In addition, many of the poor are unlikely to benefit directly from the minimum wage. other anti-poverty instruments need to be developed. 5

6 An Anti-poverty Minimum Wage In Certain Provinces Can Harm Workers EXAMPLE: workers in Sabah have mid-low levels of productivity but they face very high costs of living. If government wants to use the minimum wage to address poverty, the level in Sabah would have to be over RM1300, and a disproportionately negative effect on employment, leading to job losses and more poverty, is very likely at such a high level. 6

7 The MW Is Also Not An Effective Instrument To Promote Productivity Some firms will adapt to the minimum wage by upgrading production technologies and increasing productivity in order to maintain profits. But these structural changes at the firm level are not always possible. Other policies need to be considered to promote productivity growth: Skills Business environment and infrastructure Subsidies to promote the diffusion of certain technologies PLWS 7

8 The Focus Of MW Should Be To Address Inefficiencies In Labor Markets There is evidence that Malaysian labor markets (like most countries around the world) are not fully competitive. This implies that employers can have more bargaining power than workers, allowing them to keep wages low. A minimum wage can allow workers to recover a fair share of the output they produce. If set at the right level, the minimum wage can even increase participation rates and employment levels. 8

9 Workers Seem To Be Recovering A Fair Share Of Their Productivity, By State 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Correlation = 0.95 (Highly significant) VA_L wageh Across all states, hourly wages tend to be highly correlated with productivity. In some states wages are lower than expected given their level of productivity. Average wages generally appear to grow in line with average productivity across states. 9

10 Value Added per worker (2010 RM) Workers Are Not Recovering A Fair Share Of Their Productivity, By Sub-sector 200, , , , , ,000 80,000 60,000 40,000 20, ,000 Correlation = 0.11 (not significant) VA_L wageh Hourly Wage (2010 RM) Across sub-sectors, there is no correlation between hourly wages and productivity. There are sub-sectors in which (non-collectively housed) workers earn less than would be expected given the declared productivity of formal firms in that sector 10

11 Direct effect of Productivity on Wages and Differences Between States Since labor markets are likely to be defined by their location (for most workers), whereas productivity depends on what technology is adopted by the firm (among other factors), it is necessary to disentangle the effects of geography from those of technology Regression results show that, even after controlling for technology, there are still important local labor market effects, consistent with the existence of market power for employers (monopsony) 11

12 The success of the MW depends on design and implementation arrangements Structure and coverage: Variation by region, sector, and/or age Exemptions by type/size of firms. Where to set its initial level and how to adjust: Which indicators to take into account, what should be the frequency, how to propose and approve. Institutional arrangements: How to implement minimum wage policy. How to enforce minimum wage policy. 12

13 Potential Impacts of the Minimum Wage 13

14 Firms and workers that can be affected 14

15 Share Of Establishments: By State W P Kuala Lumpur Selangor Pulau Pinang Johor Melaka Perak Negeri Sembilan Perlis Pahang Sarawak Sabah W P Labuan Kedah Terengganu Kelantan RM 700 RM 800 RM 900 RM 1000 RM 1100 RM 1200 Notes: 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Uses Value Added per Worker (lower bound on share of establishments that can afford to pay the minimum wage) Underreporting of labor can bias results (agriculture-intensive states appear more 15 productive

16 Share Of Establishments: By Sector (Least Affected) Ag & fishing & forestry Health & Social Work Construction Bus & prof services not IT IT services Logistics, rental & transp & trav Distributive trade RM 700 RM 800 RM 900 RM 1000 RM 1100 RM 1200 Sale & repair & rent motor veh Tourism excl travel ag & tours 0% 5% 10% 15% 20% 25% 30% Notes: Agriculture, Construction, Distributive Trade clearly subject to underreporting 16

17 Share Of Establishments: By Sector (Medium Affected) Utilities Culture & news & entertainment Mfg elec equip & electronics ICT mfg excl measuring RM 700 RM 800 RM 900 RM 1000 RM 1100 RM 1200 Education & training svcs Mfg chem & prods incl pharma 0% 10% 20% 30% 40% 50% 17

18 Share Of Establishments: By Sector (Most Affected) Mfg of furniture & mfg NEC Restaurants & bars & canteens Metal & machinery & equipment Rubber based industry Plastic & glass & non metal NEC Mfg food & bev inc palm oil Mfg of transport equipment Mfg of paper & publishing RM 700 RM 800 RM 900 RM 1000 RM 1100 RM 1200 Mfg wood & prods excl furn Leather & luggage & footwear Mfg textiles & apparel & fur 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 18

19 Share Of Workers: By State (Basic Compensation) W P Putrajaya W P Kuala Lumpur Selangor Pulau Pinang Johor Negeri Sembilan W P Labuan Terengganu Melaka Sarawak Perak Kedah Pahang Kelantan Sabah Perlis RM 600 RM 700 RM 800 RM 900 RM 1000 RM % 10% 20% 30% 40% 50% 60% 70% 80% 90% Notes: Mixes informal and formal workers (LFS does not distinguish) Excludes collective housing Assumes full time work for a month (converts via hourly rate) 19

20 Share Of Workers: By State (Total Compensation) W P Putrajaya W P Kuala Lumpur Selangor Pulau Pinang Johor Negeri Sembilan W P Labuan Melaka Terengganu Sarawak Perak Kedah Pahang Sabah Kelantan Perlis Notes: Not the definition in the law, but more relevant for decisions Comparable to Value Added per Worker figures RM 700 RM 800 RM 900 RM 1000 RM 1100 RM % 10% 20% 30% 40% 50% 60% 70% 80% 90% 20

21 Share Of Workers: By Sector (Least Affected) Base Compensation Total Compensation Mining & extractive industries Mining & extractive industries Utilities Utilities Other svcs & extra terr orgs Other svcs & extra terr orgs Petrochemicals RM 600 RM 700 IT services RM 700 IT services RM 800 RM 900 Finance & insur & real estate RM 800 RM 900 RM 1000 Finance & insur & real estate RM 1000 RM 1100 Petrochemicals RM 1100 RM % 20% 40% 0% 20% 40% Notes: Not representative at sector level 21

22 Share Of Workers: By Sector (Medium Affected) Base Compensation Total Compensation ICT mfg excl measuring ICT mfg excl measuring Tourism excl travel ag & tours Mfg elec valves & components Bus & prof services not IT Bus & prof services not IT Health & Social Work Metal & machinery & equipment Metal & machinery & equipment Mfg med & meas equip & clocks Construction Health & Social Work Mfg med & meas equip & clocks Tourism excl travel ag & tours Organizing & associative acts Mfg of paper & publishing Mfg of paper & publishing Mfg elec equip & electronics Logisticsrental & transp & trav RM 600 Culture & news & entertainment RM 700 Culture & news & entertainment RM 700 Logisticsrental & transp & trav RM 800 Mfg elec equip & electronics RM 800 Mfg of transport equipment RM 900 Mfg chem & prods incl pharma RM 900 Organizing & associative acts RM 1000 Mfg of transport equipment RM 1000 Mfg chem & prods incl pharma RM 1100 Education & training svcs RM % 10% 20% 30% 40% 50% 60% 70% Education & training svcs RM % 10% 20% 30% 40% 50% 60% 70% 22

23 Share Of Workers: By Sector (Most Affected) Base Compensation Total Compensation Mfg wood & prods excl furn Mfg wood & prods excl furn Ag & fishing & forestry Ag & fishing & forestry Restaurants & bars & canteens Restaurants & bars & canteens Mfg food & bev inc palm oil Mfg food & bev inc palm oil Mfg textiles & apparel & fur Mfg textiles & apparel & fur Rubber based industry Distributive trade Distributive trade Rubber based industry Plastic & glass & non metal NEC Sale & repair & rent motor veh Mfg of furniture & mfg NEC RM 600 RM 700 RM 800 RM 900 RM 1000 Plastic & glass & non metal NEC Sale & repair & rent motor veh Mfg of furniture & mfg NEC RM 700 RM 800 RM 900 RM 1000 RM 1100 Mfg elec valves & components RM 1100 Construction RM % 10% 20% 30% 40% 50% 60% 70% 80% 90% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 23

24 Share Of Workers: By Age Ages 60 to 64 Ages 60 to 64 Ages 55 to 59 RM 600 Ages 55 to 59 RM 700 Ages 50 to 54 RM 700 Ages 50 to 54 RM 800 Ages 45 to 49 RM 800 Ages 45 to 49 RM 900 Ages 40 to 44 RM 900 RM 1000 Ages 40 to 44 RM 1000 RM 1100 Ages 35 to 39 RM 1100 Ages 35 to 39 RM 1200 Ages 30 to 34 Ages 30 to 34 Ages 25 to 29 Ages 25 to 29 Ages 20 to 24 Ages 20 to 24 Ages 15 to 19 Ages 15 to 19 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 24

25 Macroeconomic impacts 25

26 Change in Informal Employment Change in Informal Employment Change in Informal Employment Perfect Competition: MW That Is Too High Can Substitute Formal By Informal Labor MW=700 RM Low Skills MW=900 RM Low Skills Young Adults Young Adults Change in Formal Employment (pp) Change in Formal Employment (pp) MW=1,200 RM Low Skills Note: Increases in formal employment reflect sectoral reallocations of capital Change in Formal Employment (pp) Young Adults 26

27 Change in Informal Employment Change in Informal Employment The Most Relevant Effects Involve Young And Low Skilled Workers MW = 1,200 RM Low Skills High Skills Young Adults Young Adults Change in Formal Employment (pp) Change in Formal Employment (pp) 27

28 Change in Informal Employment Change in Informal Employment Negative Impacts Would Be Less Prevalent In Monopsonistic LMs MW = 1,200 RM Perfect Competition Monopsony Young Young Adults Adults -0.2 Change in Formal Employment (pp) -0.4 Change in Formal Employment (pp) Malaysia is somewhere in between perfect competition and monopsony. 28

29 A Minimum Wage Is Expected To Reduce The Demand For Migrants Hypothetical wage level MONOPSONY MODEL COMPETITIVE MODEL RM % 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% RM % 0.0% 0.0% 0.0% -0.1% -0.1% -0.1% -0.1% RM % -0.4% -0.5% -0.4% -0.9% -0.7% -0.6% -0.4% RM % -1.8% -1.6% -1.3% -2.5% -2.2% -2.0% -1.7% RM % -1.8% -1.2% -1.7% -4.3% -4.0% -3.7% -3.4% RM % -3.9% -2.3% -3.0% -6.1% -5.6% -5.3% -4.9% 29

30 Potential Effect on FDI Factors other than wage costs are more important for FDI inflows Employment protection Labor taxes Productivity Skills Protection of property rights Ease of market entry and exit Low corruption. Impacts of MW on new FDI and on many foreign-owned firms in the country is likely to be limited, though not negligible. About 31.1 percent of FDI firms already operating in MYS will be directly affected at any level above RM700 These are the least productive (where VA p/w is less than RM700). Mfg of textiles, apparel, wood, plastics, rubber, and paper. Low productivity FDI firms represent one-third of all FDI, but their total fixed investment accounts for only 9.9 percent of all fixed investment in Malaysia 30

31 Deliberation and Choosing the level For example, line up some of the results we have now: RM 600 RM 700 RM 800 RM 900 RM 1000 RM 1100 RM 1200 Total Investment 0.00% -0.03% -0.03% -0.05% -0.08% -1.25% FDI Share of Total Assets 9.9% 10.2% 10.4% 10.6% 10.9% 11.2% 2012 Migration 0.0% -0.1% -0.6% -0.8% -1.0% -3.9% 2015 Migration 0.0% 0.0% -0.4% -1.3% -1.7% -3.0% Peninsular Base Compensation 21.0% 28.7% 35.7% 41.4% 47.9% 51.8% Total Compensation 24.3% 31.2% 37.4% 44.2% 48.4% 53.4% Value Added / Worker 16.4% 18.2% 19.9% 21.6% 23.4% 25.0% Sarawak Base Compensation 40.0% 49.1% 55.2% 61.1% 66.8% 70.2% Total Compensation 46.9% 53.0% 58.6% 64.8% 68.0% 71.1% Value Added / Worker 21.0% 23.9% 26.5% 29.2% 31.8% 34.1% Sabah and Labuan Base Compensation 57.4% 64.3% 69.3% 72.6% 75.1% 76.8% Total Compensation 45.0% 49.9% 60.4% 68.7% 72.3% 77.1% Value Added / Worker 18.1% 21.0% 24.1% 27.6% 31.2% 34.6% 31

32 Deliberation and Choosing the level If interested primarily in investment RM 1200 would be too high RM 1100 could risk losing almost 11% of FDI If interested in immigration Short and medium term labor shortages at RM 1200 Under RM 900 would see no medium term effect If concerned about formal employment Rates have to be lower in Sarawak, much lower in Sabah and Labuan If concerned about firm survival Rates have to be lower in Sarawak, much lower in Sabah and Labuan 32

33 Main Institutional Concerns 33

34 How to set the level? A MW that is too high relative to average earnings (>35-40%) can start having negative effects on labor markets: Reducing employment levels among low skilled workers. And/or pushing firms into the informal sector. The MW should not be set having in mind solely the formal sector where average earnings are higher: This would fragment labor markets and institutionalize informality. At the minimum, policymakers should pay attention to: The share of firms/employers with productivity levels below the minimum wage. The share of workers with earnings equal or below the minimum wage.

35 How to adjust? Key to the adjustment process is to offset excessive rigidity with an appropriate dose of discretion. The Law should indicate how frequently the MW should be reviewed (not necessarily adjusted): The agreement was that the adjustment should take place annually. Emergency meetings can be called by the chairman

36 MW Adjustment Process Independent technical research unit responsible for calculating the value of a reference MW for the new period (an anchor) based on a model that is publicly available. Using a set of objective criteria (see next slide), members of the technical commission modify the MW adjustment (upwards or downwards) and send to NMWC as a recommendation. NMWC accepts or asks the technical research unit to consider alternative scenarios. The process would continue until a minimum wage (adjustment) is approved within a given period (also set by Law).

37 Indicators for adjustment Cost of living / consumer prices Productivity Producer prices Competitiveness Income inequality Immigration The size of the informal economy Unemployment GDP growth

38 What should the mandate of the NMWC be? Set the minimum wage level. Set regional adjustment factors. Set percentage reduction in MW for the youth. Set maximum deductions for in-kind allocations. Political choice: Who has final decision with respect to the level of the MW? NMWC could be a purely advisory. NMWC proposes, Minister/Cabinet/Parliament accepts/revise-resubmit (once). NMWC has the final decision.

39 Transparency and accountability are key The NMWC should have public proceedings to take into account the views of civil society: The end date of the reviewing process should be established in the law. There should be a transparent process of consultation and deliberations. The Council must be accountable for its actions (Minister/Cabinet/Parliament).

40 What should the structure of the NMWC be? Traditional Tripartite Model Chairman Korean Model Chairman Technical Research Unit Technical Research Unit Government Representatives Representatives from Employers Representatives from Workers Representatives from Public Interest Groups Representatives from Employers Representatives from Workers Tripartite Model with Technical Advisors Chairman Technical Research Unit Government Representatives Representatives from Employers Representatives from Workers Technical Advisors

41 Governance The Chairman should be a technical person. There is a permanent Technical Research unit with members selected on the basis of a clear set of qualifications. All representative groups have equal number of members and individual voting power.

42 Principles to select members Technical advisors are chosen by a high profile headhunter organization: Selection criteria is technical merit based on open competition. Council members have veto power. Chairman is elected among the technical advisors. Appointment term is limited (3 years with one reappointment). Renovation of non-government members should be gradual, with one-third changed every year.

43 Enforcement Institutional Capacity Support for compliance, structures, resources Monitoring Powers of inspectors, rights of employers, outside actors? Information and Counseling Media, posters, workshops, handbooks Penalties Clarity, existing structures, proportional to violation, recidivism Roll-out of Implementation Grace period, temporary help for small firms 43

44 THANK YOU 44