Malaysian Economics: Thoughts on minimum wage and SMEs.

12. Discuss the possible effects following the implementation of a minimum wage of RM1,500 on small medium enterprises (SMEs) in Malaysia.

    The increase in the minimum wage for civil servants is driven by the current situation, especially the people facing the rising cost of living and rising prices of goods.  However, there are possible effects following the implementation of a minimum wage of RM1,500 on small medium enterprises (SMEs) in Malaysia. 

    First, pay rises are the main negative impact of the implementation on SMEs, which will also lead to a wage cycle in which employers will have to boost wages at a higher level.  Any significant and abrupt increase in salary expenditures will have an impact on the SMEs owners' overall cost and competitiveness.  However, according to the findings of the FMM Compensation and Benefits survey, small businesses provided bigger wage increases to non-executive employees in 2010 and 2011 than medium and large businesses, implying that these businesses increased salaries on their own initiative.  Employers, on the other hand, will require time to adjust to minimum wage levels, particularly if they have large salary discrepancies to close.  In this sense, employers should be allowed to have a few years grace period to adjust to the new minimum wage rate.

    Then, the implementation would also kill their business.  The increase forced them to provide more money to pay their employees for the salary.  Hence, the cost of operation increases.  Also, the SMEs owners must increase the price to maintain their profit margins.  When the price increases, the consumer would have to pay more to buy the same goods.  All these causes would make the consumers bear the burden, resulting the sales revenue of SMEs to decline.  Then, SMEs have to shut down their business if they did not meet the breakeven point.

    Next, the implementation will be reducing the job opportunities in SMEs areas.  Before the implementation of RM1,500 minimum wage, the employers may employ more workers.  However, after the raise of minimum wage, the employers have to reduce their workers to balance profit margins and avoid losses.  The less workers with the same work burden as before the implementation will increase the burden of each worker due to lack of manpower.  Even though the minimum wage has been increased, it is still not sufficient considering the workload will also increase.  Hence, less people will be interested in working in SMEs field.  Hence, SMEs employers will face some troubles to find new employees.

    Furthermore, as we all know, small, and medium companies (MSMEs) account for around 98.9% of Malaysian businesses.  Their profit may not be enough to follow the implementation.  The increase of minimum wage may affect them in negative ways.  The implementation will force SME owners to pay wages beyond the productivity level as the minimum wage rate rises to RM1,500.  To make it worst, some of the owners have to take a risk by making another business debt to pay their workers.  If they failed to manage their financial issues, they could not be able to pay off the debt.  The repercussions are frequently devastating, let alone the interest payment they need to pay monthly in which it only increases their burden.  Hence, the government should consider the profitability of the SMEs owners too.

    However, there is also a good side from the rise of the minimum wage.  The Minimum Wage Act and the resulting increased salaries may reduce labour turnover among local workers and reduce reliance on foreign labour. Increased labour costs will also force the industry to invest in more automation and mechanisation in order to become less labour-intensive.  As technology becomes more widely adopted, SMEs may be able to climb up the value chain. SMEs can also mitigate the negative effects of sudden and abrupt pay rises by enhancing training to improve labour skills and productivity, increasing efficiency, reducing waste, and implementing product market strategies to boost competitiveness and yield.

    To conclude, the goal of increasing the minimum salary is to provide laborers with the essential social protection salaries at the lowest possible level.  However, there are so many things need to be considered to minimise the bad impacts.  As all the businesses are still in the recovery period from COVID-19 outbreak, an increase in the national minimum wage to RM1,500 per month the increase in the minimum wage should be postponed to a few more years or after the economy is already stabilise.  Before the implement of minimum wage, workers' performance, and the ability of employers to pay the workers have to take into account.

OR

The increase in the minimum wage for civil servants is driven by the current situation, especially the people facing the rising cost of living and rising prices of goods.  However, there are possible effects following the implementation of a minimum wage of RM1,500 on small medium enterprises (SMEs) in Malaysia.

 

First, pay rises are the main negative impact of the implementation on SMEs, which will also lead to a wage cycle in which employers will have to boost wages at a higher level.  Any significant and abrupt increase in salary expenditures will have an impact on the SMEs owners' overall cost and competitiveness.  However, according to the findings of the FMM Compensation and Benefits survey, small businesses provided bigger wage increases to non-executive employees in 2010 and 2011 than medium and large businesses, implying that these businesses increased salaries on their own initiative.  Employers, on the other hand, will require time to adjust to minimum wage levels, particularly if they have large salary discrepancies to close.  In this sense, employers should be allowed to have a few years grace period to adjust to the new minimum wage rate.

 

Then, the implementation would also kill their business.  The increase forced them to provide more money to pay their employees for the salary.  Hence, the cost of operation increases.  Also, the SMEs owners must increase the price to maintain their profit margins.  When the price increases, the consumer would have to pay more to buy the same goods.  All these causes would make the consumers bear the burden, resulting the sales revenue of SMEs to decline.  Then, SMEs have to shut down their business if they did not meet the breakeven point.

 

Next, the implementation will be reducing the job opportunities in SMEs areas.  Before the implementation of RM1,500 minimum wage, the employers may employ more workers.  However, after the raise of minimum wage, the employers have to reduce their workers to balance profit margins and avoid losses.  The less workers with the same work burden as before the implementation will increase the burden of each worker due to lack of manpower.  Even though the minimum wage has been increased, it is still not sufficient considering the workload will also increase.  Hence, less people will be interested in working in SMEs field.  Hence, SMEs employers will face some troubles to find new employees.

 

Furthermore, as we all know, small, and medium companies (MSMEs) account for around 98.9% of Malaysian businesses.  Their profit may not be enough to follow the implementation.  The increase of minimum wage may affect them in negative ways.  The implementation will force SME owners to pay wages beyond the productivity level as the minimum wage rate rises to RM1,500.  To make it worst, some of the owners have to take a risk by making another business debt to pay their workers.  If they failed to manage their financial issues, they could not be able to pay off the debt.  The repercussions are frequently devastating, let alone the interest payment they need to pay monthly in which it only increases their burden.  Hence, the government should consider the profitability of the SMEs owners too.

 

However, there is also a good side from the rise of the minimum wage.  The Minimum Wage Act and the resulting increased salaries may reduce labour turnover among local workers and reduce reliance on foreign labour. Increased labour costs will also force the industry to invest in more automation and mechanisation in order to become less labour-intensive.  As technology becomes more widely adopted, SMEs may be able to climb up the value chain. SMEs can also mitigate the negative effects of sudden and abrupt pay rises by enhancing training to improve labour skills and productivity, increasing efficiency, reducing waste, and implementing product market strategies to boost competitiveness and yield.

 

To conclude, the goal of increasing the minimum salary is to provide laborers with the essential social protection salaries at the lowest possible level.  However, there are so many things need to be considered to minimise the bad impacts.  As all the businesses are still in the recovery period from COVID-19 outbreak, an increase in the national minimum wage to RM1,500 per month the increase in the minimum wage should be postponed to a few more years or after the economy is already stabilise.  Before the implement of minimum wage, workers' performance, and the ability of employers to pay the workers have to take into account.