[COLUMNIST] Uplifting middle-wage workers using a progressive wage model

WAGES have always been debated as a measure of how the benefits of growth (commonly measured by gross domestic product) are fairly distributed between workers and employers. Workers receive wages while employers earn profits. In national accounts, labor compensation and operating surplus are the terms used to represent wages and profits, respectively.

In the Malaysian context, raising wages in a low-wage economy is undeniably crucial to uplift living standards and reducing income inequality. In 2021, for every Ringgit generation of GDP, only 35 cents are received by workers while 65 cents are earned by employers. Our estimation shows that a 1% increase in GDP growth contributes to a 1.05% growth in operating surplus, whereas the growth of wages only sees a 0.63% increase. This indicates that the advantages of economic growth are predominantly attributed to employers.

The next paragraphs provide brief guidance to uplift the overall wage in the economy.

Well-designed wage intervention policies. However, it is essential to recognize that implementing wage increases without a carefully designed and well-balanced wage policy could lead to adverse effects. A poorly structured wage policy may potentially result in unintended consequences, such as inflationary pressures, reduced business competitiveness, and potential job losses. To achieve the desired positive outcomes, it is imperative for policymakers to adopt a comprehensive approach that considers various factors, including productivity levels, industry-specific dynamics, skills development and the capacity of businesses to absorb higher labor costs.

Uplifting middle-wage workers. Careful consideration must be given to wage intervention policies to avoid unintended consequences on the economy. At present, a critical priority is to bolster wages for the middle-income group, particularly semi-skilled workers, as their wage growth has been the slowest compared to high-skilled and low-skilled counterparts (see Figure 1). Alarming data reveals a rising percentage of wage earners below the median wage from 2015 to 2021. In light of these challenges, the implementation of a progressive wage model tailored to this group emerges as a sustainable and effective solution. Such a model can foster equitable wage growth, bridge income disparities, and promote long-term economic stability, ultimately leading to a more prosperous and inclusive economy.

Figure 1: Average monthly wages and composition by skill categories, 2010-2021

Potential application of a progressive wage model. The term “progressive” in this context refers to the idea of moving forward or advancing. Under the progressive wage model (PWM), wages are not solely determined by the wage level but also take into account factors such as skills, experience, and productivity. As workers acquire more skills, gain experience, and demonstrate improved job performance, they become eligible for higher wages, progressing along a wage scale.

PWM provides a structured framework for career advancement and income growth. By linking wage increases to skills development and productivity improvements, workers have the opportunity to enhance their skills, increase their earning potential, and enjoy improved job security. Firms benefit from a more motivated and skilled workforce. The model encourages investment in employee training and development, leading to higher productivity and efficiency. It also helps attract and retain talent, as employees are more likely to stay with companies that offer a clear path for advancement and fair compensation.