DBA8105: Minimum Wage Policy Implementation in Malaysia

This report provides a comprehensive review of the implementation and impacts of the minimum wage policy in Malaysia. The study begins with an introduction to the policy's objectives, which include protecting low-wage workers from exploitation and ensuring a satisfactory standard of living. The literature review examines various studies on the effects of minimum wage on employment, fringe benefits, and the hospitality industry, as well as its impact on poverty across ethnic groups. The report highlights that while the policy aims to protect workers, it can also lead to employers reducing fringe benefits, increasing operational costs, and potentially affecting employment levels. The discussion explores the need for strategic wage policies, employee training, and incentives to mitigate negative effects and maintain productivity. The report concludes with a summary of the findings, emphasizing the need for a balanced approach to minimum wage implementation to achieve the intended goals of fair wage distribution and economic development, with references to multiple studies and their findings.

Running head: IMPLEMENTATION OF THE MINIMUM WAGE IN MALAYSIA
Impacts of implementation of the minimum wage in Malaysia
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IMPLEMENTATION OF THE MINIMUM WAGE IN MALAYSIA
ABSTRACT
The main objective of introduction of the minimum wage policy in Malaysia is to ensure that the
employers do not exploit the low salaried employees by paying less. To maintain a proper
standard of living they should get the entitled minimum pay. However, without governments’
restrictions, the employers tend to violate the rights of the workers. This paper aims to give a
review that consists of various studies about the effects of implementation of the minimum wage
policy by the government of Malaysia. The review shows that the employers should revise their
wage policies that can maintain both their profitability rates and employees wage expectation.
The review also reveals that the minimum pay does not adversely affect the workers allowances.
However, percentage of insurance coverage may change with the change in minimum wage and
this induces the burden of employers in terms of increasing investment cost. To handle the
problems, the employees should be given training for up grading their skills. Moreover,
incentives and rewards are motivation for employees to retain their productivity efficiency. Thus,
to maintain profitability rates, firms should implement strategic wage policies to motivate
efficiency within employees.

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Table of Contents
1. Introduction..................................................................................................................................3
2. Literature Reviews.......................................................................................................................5
2.1 Minimum wages implementation..........................................................................................5
2.2 Effects of Minimum Wage....................................................................................................6
2.3 Minimum wages and the hospitality industry........................................................................9
2.4 Minimum wages and poverty across ethnic groups.............................................................11
2.5 Literature Gap......................................................................................................................13
3. Discussions and Suggestions.....................................................................................................14
4. Conclusion.................................................................................................................................16
5. References..................................................................................................................................18

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1. Introduction
The lowest remuneration per hour that a worker may be paid for selling their labor is
known as minimum wage. It is a price cap on hourly basis wage, below which is prohibited by
the minimum wage law. This legally mandated minimum wage helps the workers to maintain
their desired standard of living. Several countries adopted minimum wage policy in order to
protect laborers. The minimum wage requirements of individual localities, cities and states
within a country may different and they may adopt different minimum wage for the workers
(Ahmad, Scott and Abdul-Rahman 2016).
New Zealand and Australia were first countries, who introduced minimum wage laws in
an attempt to increase the wage of unskilled laborers. Presently, several developed and
underdeveloped nations mandated a national minimum wage. Many economic factors like cost of
living, worker’s protection and inflation are taken into consideration to fix minimum wage for
workers. More than 150 nations of the world implemented minimum wage policy (Azman, Alimi
and Rashidi 2014).
The minimum wages policy of Malaysia announced in 2012, which was applicable on the
domestic as well as the foreign workers. However, the policy enforced for the employers with six
employees and more than that on January 2013. The financially vulnerable small and medium
enterprises (SME) are allowed to postpone for another six months. Moreover, the minimum
wages fixed by the government for workers in Peninsula is RM900 per month, whereas for
workers in Federal Territory of Labuan, Sarawak and Sabah is RM800 per month. To protect the
employees from exploitation of the employers and to provide a minimum satisfactory wage, the
formation of minimum wage legislation is initiated in Malaysia. Except domestic workers, all

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other workers are covered under the system of minimum wages. However, the application of
minimum wage policy among some small and medium enterprise (SME) postponed for their
financial crisis. In 2009, about 33.8 percent workers out of 1.3 million workers of private sectors
earned below RM700 per month, which was lower than RM800 per month that is considered as
line of poverty. The impact of new wage rate was huge in Sabah and Sarawak, where new wage
rate was higher than the previous one. However, the new wage rate, in case of Peninsular
Malaysia, was 20.4 per cent below the average pay.
To achieve the goal of 2050 National Transformation, Malaysia need to emerge as a
developed economy with high-income jobs and technological advancement. The minimum wage
policy of the Malaysian government will help to achieve the goal of 2050 National
Transformation (Chong and Khong 2017). It will promote the fair distribution of labor wages
and help the low-income workers to maintain their standard of living.
However, the role of minimum pay on the development of the country is very important.
There are also some disadvantages of minimum wage policy. In some cases, the price floor of
minimum pay leads to unemployment. The elasticity of demand for unskilled labor is usually
high. Therefore, a small change in wage will influence the demand for unskilled labor and it will
raise unemployment rate in the country (Devadason and Meng 2014). There are several views on
the minimum wage of Malaysia. Thus, the negative impacts of minimum wages have found in
various studies. This paper will review the effects of implementation of minimum wage based on
previous researches. The required measures that the government of Malaysia should take to
mitigate the adverse effects of the minimum pay is good.
Several studies has helped in identifying the effects of implementing a minimum wage
rate on reducing the poverty of the ethnic group of Malaysia (Sangaran and Jeetesh 2015). In

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addition to this, several studies suggests different opinions about the impacts of the minimum
wage policy on the poverty alleviation of the Malaysian ethnic group. Moreover, it is found that
the imposition of the minimum wage policy improved the income growth of the individuals from
the ethnic group. In contrast to this, several other researches suggests that the imposition of
minimum wage rate has induced the cost of final goods and services that has raised the cost of
living and production (Zainol et al. 2015). Studies also analyses the impacts of the introduction
of minimum wage on the hospitality industry of Malaysia. However, several studies found that
employees think minimum wage policy can affect their salary structure. Moreover, evidence
found that minimum wage can force the employer to curtail the benefits like fringe and training.
2. Literature Reviews
2.1 Minimum wages implementation
According to the Ling et al. (2014), to solve the problem of disparity in wages, more
efforts that are concerted needed. It is clear that many economic and social factors are taken into
consideration, while fixing the minimum wages. Other than those factors such as
competitiveness, cost of living, employment and productivity, the wage policy alone is not
effective. Training is required to brush and polish the skills of the employees. Introduction to
new software and techniques are required for increasing efficiency. In 2009, about 33.8 percent
workers out of 1.3 million workers of private sectors earned below RM700 per month, which
was lower than RM800 per month that is considered as line of poverty. For long time, wages
have been well below the growth of productivity of 6.7 per cent annually, whereas it was rising
at 2.6 per cent annually. The impact of new wage rate was huge in Sabah and Sarawak, where
new wage rate was higher than the previous one. However, the new wage rate, in case of
Peninsular Malaysia, was 20.4 per cent that is below the recent average salary. This fall in the

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average salary of the employees can adversely affect their efficiency level. This can lead to a fall
in the employment levels, because lower salaries demotivates employees and induces them to
leave the job.
2.2 Effects of Minimum Wage
According to Ghee, Mooi and Sang (2015), the introduction of the minimum wages
policy will bring some bad effects. To escape from the policy restrictions, employers may hire
part time employee, as they are not protected by the policy of the government. However, it will
depend on the scope of the implementation of law. As stated by Ibrahim and Said (2015), the
implementation of the policy decreased the number of full time workers and raised the number of
part time workers in the developing economies such as Indonesia and Brazil. The entrance of the
large numbers of employees will raise the burden of the labor market. The employment of illegal
workers will also induce because of the policy, as they are not shielded by social security, work
security and employment security. Strong empirical evidence is there that minimum wages have
helped the economies to grow and be socially more secured, if the wage rate is above the level of
market equilibrium. However, there will be some negative effects as well.
As analyzed by Senasi and Khalil (2015), several countries conducted studies to
interpret the effects of the minimum wages on employment, work demand and fringe benefits.
Hence, the focus of the study was to pinpoint the obstacles faced by the employers in
implementing the policy and the effects of the policy on workers’ insurance coverage, allowance
and training and fringe benefits. The research done by Herath and Leeves (2015) explained that
the minimum pay could save workers from low pay and employers’ exploitation. In the free
market system, the employee got lower pay than their daily output. There is similarities between
the effects of implementation of minimum wages in Malaysia on fringe benefits of workers and

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Karl Max’s theory on exploitation of capitalist. Here Idris (2014) focused on a different negative
aspect of minimum wage policy. The employers have the power to exploit the employees by
decreasing fringe benefits like training provision, insurance coverage, length of working hours
and allowances.
The neoclassical and market theories suggest the significance of fringe benefits in
retaining and attracting employees but there is few standard theoretical studies on the employees’
fringe benefits (Rahim et al. 2014). The Neo-classical thinkers stress the importance of monetary
benefits of the non-wage benefits. In addition, the cost of employers raised due to fringe benefits.
Therefore, the employers may try to decrease the wage rates to substitute the cost of non-wage
benefits.The main purpose of setting minimum wages were to protect the unskilled workers from
the exploitation of the employers and provide them a standard wage for sustaining, which
contradicts with the declination of fringe benefits. The reduction of fringe benefits leads to a new
way of exploitation by the workers. This might create loss of productivity in the long run due to
dissatisfaction among the workers. According to Ibrahim, Suhaimi and Chong (2015), the main
reason behind employee dissatisfaction are company policies and salary. Therefore, the
dissatisfaction among the employees will be there for the decrease in fringe benefits. Several
studies have assessed the effects of minimum wage on fringe benefits. The Isaacs and Fine
(2015) argued that the employer would shift the burden of the minimum pay to the employees.
The restriction of minimum pay increased the wage cost of the employers and the
employer provide less fringe benefits to the workers. Further, Ismail, Zaidi and Anuar (2015)
concluded that, though the minimum pay raised the earnings of the unskilled workforce but it
minimized the welfare coverage of the workers. For instance, the imposition of minimum pay in
Hong Kong resulted in cost cutting through bonus reduction, work force streamlining and fringe

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benefits. The reduction in fringe benefits could demotivate the employees and hamper their
performance in the workplace. Many studies have found that the minimum wage policy
legislation affected the employees’ allowances like transport, phone and meals. For instance,
developed country like UK has also witnessed the changes in new rules on distribution of tips,
reduction of overtime and cancellation of paid food, known as compensatory changes in the
terms and conditions of the work for the minimum wage policy (Saari et al. 2016). Hence, it is
necessary to examine the effects of minimum pay in the context of Malaysia. The role of medical
or health insurance is very significant in the organizational context, as it can solve workers’
health related problems; raise their productivity at work and in the long run decrease the turnover
of the organization.
One of the most important fringe benefits is training, which affected because of
implementation of minimum wage policy in the country. As predicted by the human capital
theory the investment on workers’ training will minimize by the enforcement of minimum pay at
work. The competitive labour market believes that the productivity of the workers depends on
the training provisions provided by the employers. The employers usually take the decision of
employee training. Most of the time, the employers entitled learning phases like training to
increase productivity and boost career progress for the subordinates (Irpan et al. 2016). However,
the legislation mandated minimum pay by the government curtailed the incentives to conduct
proper training program for the workforce.
Moreover, Joo-Ee (2016) confirmed that the elimination of training of the workers would
reduce productivity and the up gradation of workers’ skills due to application of minimum wage
policy in the firm. There are various studies, which also suggested that mandated minimum wage
by the government would affect the training provisions of the employees. In addition, Ismail and

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Yuliyusman (2014) agreed that the training program intended to boost knowledge and skills of
the ongoing job, which affected in response to higher wage cost for the mandatory minimum
pay.
For instance, many employers believe that offering good training will enhance their skills
and they like to leave the organization for the better pay and jobs. Hence, this concern of the
employers prevented them from providing proper training provisions. Moreover, dual labour
market theories suggest that the training opportunities of the subordinates is controlled by the
organization. Therefore, in the future, the obvious problem of the organization will be shortage
of skilled workforce due to lack of training provisions within the organization. This will lead to
brain drain from one organization to another, as the employees like to leave the present
organization for higher wage and better future prospects. For instance, training investment of
some low wage industry like hospitality industry has curtailed for the implementation of
minimum wage policy (Islam et al. 2015). Thus, the minimum pay has few positive impacts on
the training strategies of a firm. On contrary, many firms have prompted to introduce strategies
to upgrade their training program after the imposition of minimum wage rate. Some studies
found that training opportunities of female or male workers would not change with the change in
minimum wage rate. Therefore, various studies had different suggestions about the effects of
introduction of minimum wage policy.
2.3 Minimum wages and the hospitality industry
The minimum wage policy became operative on October 2013 in the hospitality industry
of the Malaysia (Loo and Nasruddin 2015). This study suggests the effects of the minimum wage
policy on the employee of hospitality industry. These findings shows that salary of the
employees of hospitality industry will not improve due to the implementation of the minimum

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wage policy. Here, the employees of hospitality industry believes that the price floor fixed
through minimum wage policy will not influence their income. Indeed, there are some
government regulations for the hospitality employers to balance other components to provide the
minimum wage rate. According to Marouani and Nilsson (2019) believes that part of the benefits
will be adjusted to meet the minimum pay standard by curtailing the cost. Some studies suggests
that the employers of the hospitality industry may eliminate or decrease the training provisions
and fringe benefits of the employee to adjust the legislation mandated minimum wage. On
contrary, Nixon, Asada and Koen (2017) argued that partial service charge could be converted to
be part of the basic salary. Consequently, the total salary may not necessarily increase because of
the rise in basic salary of the workers.
The productivity of the employees depends on the training provisions provided by the
employers. Most of the time, the employers entitled learning phases like training to increase
productivity and boost career progress for the subordinates (Yee and Yuen 2014). However, the
legislation mandated minimum pay by the government curtailed the incentives to conduct proper
training program for the workforce. The elimination of training of the workers will reduce
productivity and the up gradation of workers’ skills due to application of minimum wage policy
in the firm. The obvious problem of the organization will be shortfall of skilled workforce due to
lack of training provisions within the organization. The shortfall of the skilled workforce will
further affect the growth of the hospitality industry. The main purpose of setting minimum wages
were to protect the unskilled workers from the exploitation of the employers and provide them a
standard wage for sustaining, which contradicts with the declination of fringe benefits. The
reduction of fringe benefits leads to a new way of exploitation by the workers. This might create
loss of productivity in the long run due to dissatisfaction among the workers of the hospitality

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industry. The reduction in fringe benefits could demotivate the employees and hamper their
performance in the workplace.
This findings suggests that the hospitality sector of the Malaysia may adversely affected
by the implementation of the minimum wage policy (Martorano and Sanfilippo 2015). Therefore,
the income of the employees of hospitality sector will not significantly improved due to
minimum wage rate. They may need to sacrifice some other wage allowances such as travel
allowances, uniforms, meal allowances due to application of minimum pay. To curtail the excess
cost of minimum wage, hospitality operators reduce the fringe benefits and training programs,
thus, negate the benefit of the minimum wage.
2.4 Minimum wages and poverty across ethnic groups
According to Noor and Mohd (2015), most effective means to boost the income of the
underprivileged people and thus, alleviate poverty is by improving the conditions of the labour
market. The major source of the household income is the labour income. For instance, the most
effective policy tool for redistribution of income is the introduction of minimum wage legislation
as suggested by the conventional wisdom. Various studies conducted on the impacts of the
minimum wage policy on poverty of Malaysian ethnic group. In addition, this study shows the
co-relation between the increases in minimum wage with the poverty reduction. On contrary,
Pillaiyan (2015) suggested that for several reasons using minimum wage as a redistributive tool
is troublesome. First, the workers of the informal sectors are not shielded by the minimum wage
legislation of the government. The workers from the formal sectors are only shielded by the
legislation-mandated minimum wage, which mitigate the effect of fair distribution of wage.
Second, many sectors of the country are not complying with the minimum wage legislation.