Highlight Full impact from minimum wage

by **Cals** Wed 15 Jan 2014, 09:25

Highlight Full impact from minimum wage

Business & Markets 2014

Written by Charles Yong of theedgemalaysia.com

Wednesday, 15 January 2014 09:17

KUALA LUMPUR: The full implementation of the minimum wage policy on Jan 1 affects almost another 1.8 million workers, mostly migrant workers, said Malaysian Employers Federation (MEF) executive director Shamsuddin Bardan. The implementation last year, by contrast, affected 1.5 million workers (both local and foreign).

The national minimum wage (RM900 in peninsular Malaysia and RM800 in Sabah and Sarawak) came into effect on Jan 1, 2013 for employers with six or more employees and on July 1, 2013 for employers with five or fewer employees. The policy for foreign employees in small and medium enterprises (SME), however, was deferred until Dec 31, 2013.

“The impact of the policy’s full implementation this year will be larger than last year’s,” Shamsuddin told The Edge Financial Daily. SMEs are starting to pay the minimum wages to their workers this year.

“SMEs will be hit particularly hard, as larger companies have already implemented the minimum wages for their foreign workers. Moreover, foreign workers are mostly employed by SMEs.

“The labour cost of foreign workers in SMEs is estimated to increase 40% to 60%. Costs for some SMEs could go up by as much as 10%,” said Shamsuddin.

“While SMEs are trying to compensate by increasing their workers’ productivity, that is a long-term process. We expect only a 2% to 3% average increase in productivity per year.”

Shamsuddin expects many SMEs that hire foreign workers will face difficulty in coping with the higher cost of labour.

“There is going to be a major impact on them. The average SME is making a profit margin of only 5% of paid-up capital,” he said, “and the other painful part is that many firms have no solution. Firms with foreign competition are not able to pass the costs to consumers.”

Shamsuddin expects plantations, construction, services and manufacturing to be the worst affected sectors.

There have been arguments that the minimum wage will not impact foreign workers as much as expected because many of them are earning incomes above the minimum.

However, Shamsuddin said this is a misconception.

“While their incomes may be above the minimum, their basic wages are not. Their incomes take into consideration other remuneration, especially overtime pay. However, when the minimum wage kicks in, overtime pay will increase as well because it is set at 1.5 times the basic hourly wage. The total wage bill will increase as a result for the same number of hours worked.”

According to Shamsuddin, foreign employees work on an average of four hours of overtime per day. They also work on rest days and public holidays.

He said the total income for foreign workers has averaged from RM1,500 to RM2,000 in recent years.

“Most of the increase in wages as a result of the policy will be remitted home. Even before the minimum wage, the average foreign worker was remitting home about RM750 per month.”

Shamsuddin does not expect a change in preference to local employees as they are not interested in the jobs in the first place. “After all, when a company wants to hire migrant workers, it has to prove that it tried to get local workers in the first place.”

Dr Yeah Kim Leng of RAM Holdings agrees that the hiring of foreign workers will remain. “Employers have greater flexibility with migrant workers, in terms of hours worked, for example.”

He expects SMEs to cope in the term by passing costs to consumers.

Last year’s partial implementation of the minimum wage policy did not result in the closure of businesses or rise in unemployment as feared, said Yeah.

“The shortage of labour in Malaysia at all levels has muted the impact and SMEs are by nature flexible in managing cost pressures.

“Despite the fact that some businesses such as SMEs with thin profit margins will find it difficult to cope, the minimum wage policy is a positive move overall as it will solve the problem of wage depression at the bottom and over-reliance on cheap foreign labour. That will help Malaysia move up to higher value-added activities,” he said.

This article first appeared in The Edge Financial Daily, on January 15, 2014.