In the view of increased competition resulting from globalization of economics, the Malaysia government has placed much emphasis on the importance of the wage determinant. Wages is define as ‘remuneration or earnings which are payable in virtue of a written or unwritten contract of employment by employer to an employed person’ (International Labour Organization). The government recognized that wage levels must increase in order to improve the standard of living and reduce poverty. However, increase in wages without appropriate policies could put pressures as well as erode the country’s international competitiveness and its attractiveness as a profitable Centre for foreign investment. One of the reasons of the decline in FDI in Malaysia is that the country has been losing its competitiveness due to pressure on wages. Malaysia is no longer a center for cheap labor and low cost production when compared to countries like China, India or Vietnam (Yusof, 2006).
Since wage serves as a vital role in the economy, there are a number of empirical studies concerning wages in Malaysia industries. Ho and Yap (2001) investigated wage formation in the Malaysian Manufacturing industry from 1975 to 1997. They found a big positive significant relationship between wages and productivity where the increase in real wage exceeded the increase in labor productivity in the long run. Nijhar (1976) and Chan (1991) have conducted studies on wage structure but very little attention was paid to explaining the mechanism of wage formation at sectoral levels in the Malaysia economy.
This study analyse both the long-run and short-run dynamics of wage formation in Malaysian manufacturing industry. The determinants are inflation, unemployment rate, foreign direct investment (FDI), productivity, import, export in manufacturing and unemployment.
1.1 Research Background
The global economic crisis has had devastating consequences on labour markets. Unemployment increased the highest level ever recorded, and many millions more have simply dropped out of the labour force because they are too discouraged to continue looking for work. The world economy slowed down in 2008 and contracted by –0.6 per cent in 2009, primarily because of the collapse in international trade and foreign investment that followed the financial crisis. As a result, paychecks have been affected too. However, while growth in advanced economies and in the world as a whole turned negative in 2009, this has not generally been the case in emerging and developing economies, where growth has merely decelerated.
Today, the biggest challenge of Super Powers like USA and UK, are the declining trend of their manufacturing and assembly facilities. At the same time, Countries like China, India and Brazil have their drivers as Manufacturing Industries. Today, China seems to be the single largest nation termed as the "Manufacturing Hub of the world" and there are very large amount of products manufacturing only in China today. 90% of computer and laptop parts are produced in China. 70% of world's subsidiary and ancillary production is happening in China and India. Yet the irony is that these countries are still to get into the spectrum of realistic development coined with the people's growth inside the countries. But surely in the next few years and less than a decade, these countries will enrich in to the global trajectory of growth as Economic Super Powers (Raghunath, 2010).
The manufacturing industry, Malaysia’s largest employment sector, employed 1.94 million people in 2008, representing 18 per cent of total employment in Malaysia. Despite the important share of the industry in Malaysia’s overall employment levels, manufacturing has declined overall since 2001, when 2.1 million people were employed. Overall the structure of the manufacturing industry is concentrated in small scale enterprises which employ less than 50...