Why do SMEs in Sabah and Sarawak face bigger risks from the wage hike than urban businesses?

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SMEs in Sabah and Sarawak Face Greater Risks from Minimum Wage Hike Due to Thin Profit Margins

Small and medium enterprises (SMEs) in Sabah and Sarawak are at a higher risk of facing significant challenges, including potential job losses, following the increase in the minimum wage to RM1,700. This heightened risk stems from the fact that businesses in these regions typically operate on significantly tighter profit margins compared to their counterparts in more developed urban centres. While the wage increase aims to provide relief amidst rising living costs, the economic structures in Sabah and Sarawak make it more difficult for businesses to absorb the additional labour expenses without impacting their operations or workforce.
Businesses in Sabah and Sarawak Operate on Razor-Thin Margins

The core of the increased risk for SMEs in Sabah and Sarawak lies in their operational financial structures. Reports indicate that businesses in these states are characterised by "razor-thin margins," meaning their profit margins are extremely narrow. This leaves little room for absorbing increased costs, such as a mandatory wage hike. In contrast, urban centres like the Klang Valley, southern Johor, and Penang already have median wages exceeding the new RM1,700 minimum, suggesting that businesses in these areas are better positioned to manage the incremental pressure of the wage adjustment.
Automation is Not a Viable Solution for Many SMEs

Compounding the issue of thin margins, many SMEs lack the capacity to mitigate the impact of the wage hike through automation. Unlike larger enterprises that might invest in technology to improve efficiency and reduce reliance on manual labour, SMEs often find automation to be an unfeasible or prohibitively expensive solution. This inability to adopt labour-saving technologies means that the increased wage cost directly compresses their already limited margins, making it harder to maintain profitability and sustain employment levels.
Potential for Job Losses and Wage Compression

The combination of thin margins and limited automation options creates a heightened risk of adverse outcomes for SMEs in Sabah and Sarawak. Industry experts caution that this could translate into significant job losses as businesses struggle to adapt to the higher labour costs. Furthermore, there is a concern about wage compression, where the revised minimum wage might inadvertently affect the earning potential of those already earning slightly above the new threshold, potentially benefiting foreign workers more than local employees in certain segments.

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Why do SMEs in Sabah and Sarawak face bigger risks from the wage hike than urban businesses?

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