What should Malaysia change in its wage-setting system beyond minimum wage?

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Malaysia Needs to Reform its Wage-Setting System Beyond Minimum Wage Adjustments

Bank Negara Malaysia (BNM) has identified a significant lag between Malaysia's wage growth and its productivity growth, necessitating a comprehensive review of the nation's wage-setting mechanisms. This review should extend beyond mere minimum wage adjustments to address how wage increases at the lower end of the spectrum impact compensation across all income brackets, particularly concerning the persistent issue of wage compression. The ultimate objective is to ensure that economic expansion translates into a tangible improvement in the quality of life for the rakyat, marked by reasonable and high incomes commensurate with their contributions and the nation's overall economic progress.
Addressing Wage Compression and Underemployment

A critical concern highlighted by BNM is the phenomenon of wage compression, where nominal increases in the minimum wage do not effectively trickle up to higher income levels. This results in starting salaries for professionals remaining disproportionately close to the minimum wage, thereby limiting upward mobility and the ability for workers to achieve a good quality of life. Compounding this issue is a high rate of underemployment, estimated at 35-36%, where a substantial portion of the workforce is employed in roles that do not fully utilise their existing qualifications. This indicates a structural mismatch between the skills available in the labour force and the demands of higher-skilled job opportunities.
Fostering High-Skilled Job Creation and Labour Force Enhancement

To rectify the imbalance and create more high-skilled employment opportunities, Malaysia must actively attract investments that are geared towards higher value-added sectors. Simultaneously, continuous efforts are required to enhance the quality of the labour force. This involves strengthening programmes such as Technical and Vocational Education and Training (TVET) and Science, Technology, Engineering, and Mathematics (STEM) education, alongside robust initiatives for reskilling and upskilling existing workers. These measures are essential to equip the workforce with the competencies demanded by an evolving global economy and to ensure that individuals can transition into roles that better match their capabilities.
Exploring Alternative Wage Frameworks

In light of these challenges, BNM is actively considering and supporting the implementation of various initiatives beyond the traditional minimum wage framework. These include the adoption of a "living wage," which aims to ensure earnings are sufficient to cover basic needs and provide a decent standard of living, and a "progressive wage" system designed to link wage increases to skills, responsibilities, and performance. Furthermore, there is a strong emphasis on developing wage structures that are directly linked to productivity. Government-linked investment companies (GLICs) and government-linked companies (GLCs) are already piloting some of these measures, such as the living wage, signalling a broader industry shift towards more equitable and productivity-driven compensation models.

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What should Malaysia change in its wage-setting system beyond minimum wage?

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