FOR YEARS, Malaysia has implemented a minimum wage policy. While this policy has undoubtedly provided some relief, rising costs of living have often outpaced wage hikes, leaving many workers struggling to make ends meet. In addition, minimum wage policies have not addressed the needs of semiskilled workers, who are often trapped between the minimum and higher-paying jobs.

In light of this, Malaysia is exploring a new approach—the Progressive Wage Model. On 30 November 2023, a White Paper on the policy was tabled and approved in Parliament. Unlike minimum wage, which sets a single baseline, the Progressive Wage Model establishes a ladder of wages tied to specific levels of productivity, skills and experience. It seeks to ensure that workers are rewarded for their contributions and are incentivised to develop their skills. It is hoped that this will ultimately lead to a more skilled and productive workforce.

Notably, the implementation of this policy will be voluntary, incentive-based and productivity-linked. Companies will be encouraged to participate through government incentives. Additionally, the focus on productivity aims for wage increases to be sustainable and contributory to the country’s overall economic growth.

A pilot run of the Progressive Wage Model will occur between June and September 2024, involving around 1,000 companies that meet the necessary criteria. Small and medium enterprises (SMEs) are encouraged to participate; meanwhile, multinational and government-linked companies (MNCs and GLCs)—which often do ofer competitive salaries—are exempted. The policy will target Malaysian workers in the formal sector earning between RM1,500 and RM4,999 monthly, which covers about four million workers. The full implementation of this policy is yet to be determined. [1]

Why Does Malaysia Need This Policy?

Though workers in Malaysia saw a slight bump in median monthly salary—from RM2,250 in 2021 to RM2,424 in 2022, this remains woefully inadequate. In 2016, a single adult living in KL already needed an estimated RM2,700 to survive; [2] the median salary set at a paltry RM2,000 thus fell short of a living wage.

Fast forward to 2022, the gap persists: the (slightly increased) median monthly salary of RM2,424 still lags behind the 2016 living wage as well as the government’s target of RM2,700 by 2025 under the 12th Malaysia Plan (Figure 1).

While Malaysia’s 2012 minimum wage policy successfully increased the salaries of low-skilled workers by an average of 5.7% between 2010 and 2022, it inadvertently left semi-skilled workers behind. Their wage growth during the same period was only 3.5%, significantly lower than for both low-skilled (5.7%) and high-skilled (4.7%) workers. This disparity has resulted in a widening wage gap between semi-skilled and high-skilled workers, raising concerns about the effectiveness of the minimum wage policy in addressing income inequality (Figure 2).

The share of Malaysia’s GDP flowing to workers has dipped to a worrying 32.4% in 2022, down from 35.8% in 2018. This stark contrast with developed nations like the US (53%), the UK (52.9%) and South Korea (47.6%) underscores a growing concern: the shrinking share of wages in Malaysia’s economic pie. Despite the government target to raise the share of compensation of employees (CE) to 40% of GDP by 2025, the current trajectory indicates a significant shortfall (Figure 3). This raises questions about the distribution of economic prosperity, and the need for policies that bridge the widening gap between capital and labour income.

In a landscape where the median monthly salary falls short of both the living wage and the 12th Malaysia Plan target, the Progressive Wage Model emerges as a crucial policy to address Malaysia’s wage dilemma.

What Do Employees and Employers Think of this Policy?

Employees

According to the White Paper, around 60% of surveyed employees agree with its implementation. In engagement sessions, they expressed dissatisfaction with their current salary levels and the difficulties meeting their living costs. They are willing to improve their skills and productivity by participating in courses and training as a condition for getting a raise.

We spoke with two workers who shared their thoughts on the Progressive Wage Model. One of them, a cleaner, gripes that her current salary is too low and does not even meet the minimum wage. The rising cost of living makes it hard for her to meet her needs.

Similarly, a hotel worker voices his support for the policy, acknowledging its potential in improving wages and incentivising skills development. However, he expresses concerns about the voluntary nature of the policy, and the possibility of his employer not participating. He also has doubts about the type and duration of the training programmes offered.

Employers

On the other hand, engagement sessions with employers show that most are willing to participate in the Progressive Wage Model provided it is voluntary, and they have the chance to evaluate the company’s financial ability and performance before participating. Employers also support the suggested financial incentives that would assist them in coping with rising labour costs. Overall, they are willing to raise workers’ wages if the wage growth aligns with the labour productivity growth. [3]

The Federation of Malaysian Manufacturers (FMM), too, welcomes this initiative and believes that the trial will address challenges and gaps that arise. While the industry appreciates the incentive approach that may encourage SMEs’ participation, whether the incentives are sufficient remains unclear due to undetermined salary increments. The industry suggests extending the 12-month incentive period as the time limit may be insufficient for adjustment, and for evaluating incentives during the trial. The industry supports training certification requirements to maintain quality, and emphasises accessibility as well as private sector representation in preparing salary guidelines. [4]

Meanwhile, the Small and Medium Enterprises Association (SAMENTA) suggests that the government get feedback from SMEs on the Progressive Wage Model before its trial. Though they support any effort to increase the income of Malaysians, they are concerned that the policy discussion might not fully capture SMEs’ unique needs and challenges. Specifically, it highlights the potential disparity between the suggested wage increments advocated by trade unions and large-scale employers and the financial capacity of SMEs.

With the Progressive Wage Model, SAMENTA supports no further increase in the minimum wage, and argues that mandatory wage hikes may not be the only solution to address income inequality. [5]