A minimum wage is the minimum amount of compensation an employee must receive for performing labour. In economic term, minimum wages is the price floor of the pay of the labour that set by the government. The minimum wages rate normally was fixed by legal authority as such, it is illegal to pay an employee less than the minimum wage. Our economic transformation goal is to make Malaysia a high-income nation by 2020, with a per capita income of US$15,000 a year, however there are still around 30% of the people in Malaysia are still living below the poverty line. The general purpose for the implementation of the minimum wages is to ensure that the wages of a labour is able to meet the basic standard of live which is be at or above the poverty line so that they can survive with their salary. In Malaysia, The Prime Minister YAB Datuk Seri Najib Abdul Razak announced the rates of national minimum wages in Peninsular will be RM 900 while Sabah, Sarawak and Labuan will be RM800. This implementation of minimum wages in Malaysia was the decision under the National Minimum Wages Consultative Act 2011. The national minimum wage is the first ever in Malaysia. This will benefit about 3.2 million low-income workers in Malaysia, by ensuring they receive a basic salary per month. But at the same time it will also causes some impacts in the economy.
Inflation is the sustained rise in the general level of prices that affect individual, business firm and government. There is a close relationship between setting the new minimum wage and the inflation rate in the country. Based on the Employment Act 1955, all the small and medium enterprises (SMEs) had been urged to start adjusting the salary of the workers to meet the minimum wages of RM 900 starting from 30 April 2012. When the wages of the labour increase, the business firm will face a higher cost of production as the wages of the labour is also one of the element of the business expenditure. In order to maintain the cost of production, the firm will shift the burden to the household by increasing the price of the goods and services. Then, the general price level will hike up and this causes the cost push inflation as the sustained increase in prices that occur is due to the higher cost of production. During inflation, the household have to pay a higher price for the final goods and services. This will reduce the purchasing power of the household that also causes the drop of the real income and the living standard as with the fixed amount of money, the household can only buy less goods compared to the previous time. In long term, the implementation of minimum wages will cause high inflation rate that weakening the currency of the country thus decline the economic growth. Based on the statistic, the Consumer Price Index (CPI) for the period January to April 2013, which is the time of the announcement of new minimum wages policy increased by 1.5 per cent to 106.1 compared with that of 104.5 in the same period last year.
The Market achieve the equilibrium when aggregate supply (AS) is equal to aggregate demand (AD). However, when the minimum wages was implemented, the cost of production increase, then the firm will reduce the production of the goods. As a result, the aggregate supply decreases, the AS curve shift inward and leftward from AS from AS1. The economy is now become disequilibrium as the aggregate supply is lesser than the aggregate demand, AS<AD. The lower level of aggregate supply will cause a shortage in the market therefore it push up the price from P to P1. The pressure on price will then cause a inflation to occur.
Besides inflation, minimum wages also give a large impact to the Gross Domestic Product (GDP) growth in Malaysia. The impact implementation of minimum wage on GDP is ambiguous therefore we must study it on two sides, which is the demand side that referred to aggregate demand and the supply side that referred to the...
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