Progressive Wage Model: The Silver Bullet to Malaysia Wage Problems?

Nottingham Economics Society
Oct 17, 2023
9 min read

1.0 Introduction

A wage system is a key determinant of economic growth and situations for a country. The main wage systems consists of the minimum wage model, wage setting model and progressive wage model. Among these systems, the progressive wage model (PWM) stands out as a unique approach to improving the financial situation of low-wage workers progressively. PWM originated from the convergence of various existing schemes and initiatives in the labour movement over the years, even though it was first introduced in June 2012. Rather than the minimum wage model setting a floor wage, PWM provides an integrated way of linking wage increases to skills enhancement and job responsibility, seeking to ensure a balance between a decent living wage for workers and promoting economic development. Certainly, PWM will take a lot of time and cost to implement, and there are many risks that may be encountered in doing so, such as lack of stakeholder participation and inflation, at the same time that PWM will not solve the wage problem for all types of workers. Malaysia has been looking for ways to solve wage-related problems and promote the Malaysian economy after the COVID-19 crisis, and the primary issue is to increase the median wage, and PWM may be one of the solutions. However, what has to be considered is the implementation of PWM has many uncertain risks and costs, such as higher underemployment and the size of PWM. This article aims to delve into the PWM and explore the benefits, criticism and challenges, based on real-life examples to examine whether it is applicable to Malaysia.

2.0 Benefits of Progressive Wage Models

Unlike the other traditional wage models, the PWM prefers to reward individuals who make progress in their careers or who enhance their productivity. As this system brings significant benefits to workers, employers, government and even Civil society groups, the economy and society become more efficient from it (Ong & Yao, 2021). First of all, the PWM facilitates harmony between workers and employers by increasing work skills and productivity. The PWM allows workers who improve their skills or gain experience to be paid more, which allows workers who improve their skills and contribute more to their jobs to receive higher wages. This not only provides incentives for workers to be more productive and achieve better performance but also promotes fairness and reduces the wage gap between workers at different skill levels (Saari, 2023). As an employer, employee skill development will encourage employers to invest in skills development and employee training. The PWM guarantees higher wages in anticipation of gaining new skills, giving employees an incentive to participate in training programmes to improve labour force skills and productivity, which benefits both workers and employers. Additionally, PWM can help companies discover and identify gaps in the areas of wages, skills, productivity and career progression. Through these gaps, PWM allows companies to make better use of their labour and ensure that there are competitive wages that can be matched with a wider work range and higher levels of productivity (Ucarecentre, 2023). For the governments and civil society groups, the PWM development goals are compatible with those of government and civil society groups. By reducing the wage gap and promoting economic development for workers, it helped accelerate progress by the government to address issues of low wages, poverty, etc., and provided more opportunities for low-wage individuals, allowing the government to invest more of its money and resources in other areas. It can be seen that PWM has significant economic and social benefits. Reducing wage inequality can reduce poverty rates and increase consumer purchasing power, which can stimulate economic growth. At the same time, reducing inequality also enhances social cohesion and stability. In addition, the promotion of skills enhancement by PWM drives productivity gains, making firms more competitive and the economy stronger.

3.0 Criticisms, Challenges and cost

While the progressive wage model (PWM) has its merits, it is not without its criticisms and challenges. PWM is complex and takes a long time to implement. This is because there are many factors and risks that need to be taken into account in the implementation of PWM, such as extensive data collection, stakeholder engagement, inflation, and living costs. Progressive wage models often attempt to link wages to skills, productivity and experience. This requires a detailed assessment of an individual's capabilities and their value to the market. It is not only about how long a person works but also about their level of work and ability to adapt to the PWM. From the workers' perspective, the time cost of realising the PWM on a large scale is also very high. As the idea of PWM was introduced in 2012, by 2021 it will only be mandatory in three areas: cleaning, landscaping and security, and will only cover about 15 percent of workers in the lowest income quintile during this period (Heng, 2021). This indicates that the success of PWM will take a lot of time to achieve. In addition to time, companies may need to invest heavily in employee training and development to enable them to actually be competitive in the labour market after the implementation of PWM. They may also need to implement new HR systems to accurately track skill acquisition, productivity and wage growth. However, there are risks associated with stakeholder engagement, which not every company is willing to do, as progressive wage models may also inadvertently lead to inflation. As the progressive wage model is implemented, companies may offer higher wages to retain or attract talent, which could prompt competitors to catch up with or exceed those wages, leading to wage inflation. If the model calls for automatic wage increases without a corresponding increase in productivity, it could lead to higher costs for industries, many of them then reluctant to do so. In addition, as wages rise, higher production costs would be passed to consumers, creating a vicious circle of rising prices and wages. This trend will exacerbate inflation in the economy. At the same time, PWM does not solve the problems of all types of workers, however, and certain types of workers are not always able to sustain productivity gains, such as older workers. Older workers have a relatively difficult time upgrading their skills, therefore, the government can provide tailor-made training programmes for older workers so that their wages can keep up with the labour market and the cost of living. In addition, the implementation of PWM should also take into account the unemployed and those outside the labour market, as wage increases lead to price changes, to ensure the livelihood security of the unemployed and those outside the labour market, it is important to constantly monitor the affordability of these people to bear the costs of other public services and facilities such as housing, food, health care, etc.

4.0 Examples of the Progressive Wage Policy (PWM)

The Progressive Wage Model is relatively new in its implementation. Thus, only 1 country has implemented this policy, which is Singapore. The Ministry of Manpower explains that the PWM helps to increase wages by upskilling and improving efficiency ( mom.gov.sg, 2023). The progressive wage model has been used in several sectors, starting with lower wage work, first made compulsory in the cleaning sector in 2015, then to landscaping and security in 2016. In these two examples, the PWM has given low wage workers the ability to improve their pay by improving their skills. Wage negotiation with the Tripartite Cluster for Cleaners (TCC) sees cleaner wages increase by 20% in 2023. (Straits Times, 2023). Although cleaners are not yet a high-paying job, this increase can surely help them to improve or maintain their quality of life. These meetings which are chaired by 3 parties, including the business owners, allows for a clearer means of communication which prevents market wage shocks, which employers often complain about during minimum wage debates.

5.0 PWM in Malaysia?

On August 7th 2023, Prime Minister Dato’ Sri Anwar Ibrahim announced that the PWM implementation in Malaysia will be ‘voluntary, incentive-based and productivity linked’. (New Straits Times). Although the specifics of PWM are yet to be announced, the statement from the Prime Minister seems to echo similarities between PWM in Singapore. This begs the question, how suitable is Singapore’s model compared to Malaysia.

To assess the suitability of PWM in Malaysia, we would have to consider several factors. Firstly, the economic situation of Malaysia. As the GDP rises quarter by quarter, Malaysia has tracked well after the COVID-19 crisis which affected the world. Malaysia is also welcomed by news of new foreign direct investments from firms from Europe and Japan. This seems like a good state for the country. However, these achievements are not seen by the lay people. Recently, the Department of Statistics Malaysia (DOSM) has published that 35% of workers earn less than RM2000 a month. (DOSM, 2023). The study also shows that the median wage does not get higher as the common Malaysian grows older. The discussion for PWM, has to take into account the state of Malaysian workers' salary. There is a need for Malaysia to find ways to increase the median wage, whilst preventing any shocks to the unemployment rate, which theoretically, a voluntary PWM can help. Although inflation has reduced, a lot of Malaysians are affected by rising cost of living. With a GDP to wage ratio of 34%, Malaysia lag behind other countries nearby like Singapore, Philippines and South Korea. PWM provides a suitable method to increase wages as it guarantees increases for higher skilled workers. This can put more money into Malaysian pockets so that they can cope with rising costs and provide a better image towards the Anwar administration from the working class. Besides economic situations, Malaysia's employer perspective has to be assessed. Many of the industry players are worried about sudden increases in wages, and about their ability to increase wages. They are worried that a PWM can make the cost of labour even higher, leading to higher underemployment. Worse so, some businesses might need to cut down operation and reduce workforce due to rising costs. This can lead to more poverty because there are less jobs to guarantee income. The Malaysian government might have to provide more help to even more jobless or affected individuals.

Another issue is the scale of PWM. In Singapore, for example, 41,000 (HR Online, 2023) of Food and Beverage (F&B) workers are to benefit from PWM. This is compared to 620,497 (DOSM, 2023) in Malaysia. How much would the scale affect the implementation of PWM is a question to be answered. Would there be an increase in the workforce, as F&B workers struggle to find decent pay, or would the market react by closing down more shops? These are questions to be answered. The Malaysian government is also faced with difficulty in finding representations for the drafting and suggestions of these laws. This is because the declining and low number of union memberships results in reduced voice of the common worker in the discussion.MTUC secretary-general Kamarul Baharin Mansor told Bernama the number of members now stood at between 500,000 and 800,000, out of 15 million workers nationwide. (Free Malaysia Today, 2023). If a similar implementation in Singapore is done, would the Malaysian Trade Union Congress (MTUC) struggle in negotiating as their power and voice becomes weaker? Besides that, constant pressure from NGOs, unions and civil society groups about workers pay and issues would lead the government needing to update the minimum wage according to the level of inflation, which can take up strenuous amounts of time for lawmakers. The continuous increase in minimum wage from RM1200 (2020) to RM1500 (2022) often makes employers worry about sudden spikes which often transfer to consumers. A PWM can reduce the need for continuous increases if it is successful to increase the median wage against rising cost of living.

Last but not least, a voluntary PWM also implies the possibility of the policy to be underwhelming in terms of success. Employers, if not given incentives which are worth it, might choose not to adhere to PWM since it is not compulsory. This is due to the lack of incentives to do so. If the costs outweigh the benefits of increasing pay to the workers, the PWM proposed might choose not to implement it. Moreover, how would this affect the fiscal situation of the government when it has to provide incentives and tax breaks to employers. How would this improve the budget and high debt? Where would the money for these incentives come from? These are some questions that would arise from the PWM discussion.

6.0 Conclusion

The Progressive Wage Model (PWM) is a wage policy that increases wages according to skill and adjustments; subsequently increasing the welfare of low skilled workers while promoting beneficial productivity increase. On a macroeconomic standpoint, the increase in wages would help to increase output as it improves productivity and promotes consumer spending, while increasing low-wage labour demand as workers see viability in the sector, provided there are no changes to labour demand. While it is able to boost GDP and productivity, it also has the issue of leading to higher cost of products as producers transfer cost to customers. Moreover, it can be more complicated than the current system, and the system does not translate to higher wages for older workers. We should also consider how Malaysia’s economic situation differs from Singapore, and how some parts are similar. Do we need to strengthen union memberships? Is our wages enough? Is the scale an important thing to consider? Before the tabling of the allocations on the next Budget 2024, these things can be considered.

Article by Evan Lee and Tu Yizhi

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Progressive Wage Model: The Silver Bullet to Malaysia Wage Problems?

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