In the Malaysian social economic sphere, there is always a hardwired perception on certain issues that sometimes go unchallenged because it seems to be regarded as a self-evident truth.
One of those issues is the minimum wage where the usual argument would be that the increase of minimum wage would result in unemployment and inflation since an increase of wages did not commensurate with productivity.
Such an argument has gone on for a long time but results have shown otherwise. For example when the minimum wage was implemented in 2012, many employers protested saying business would close down, and yet we did not see massive closure of businesses at that time unlike what was seen during the Covid-19 Pandemic.
If Malaysia wants to move up the value chain, it needs to challenge the existing dominant thought patterns on minimum wage.
For instance, the United States in the 90s was of the thought that any increase in the minimum wage would post higher unemployment because it would increase wage cost for businesses.
It followed a natural experiment done in the State of Pennsylvania and New Jersey that had similar labour markets. Pennsylvania did not increase the minimum wage while New Jersey increased it from USD4.25 to USD5.05.
That put the New Jersey wage as the highest state minimum wage rate in the United States and it was strongly opposed by business leaders. The survey was done on the basis of comparison of similar labour markets and nothing is going to change except the rise of minimum wage.
What the researchers found from 410 fast food restaurants in New Jersey and Pennsylvania before and after the rise in minimum wage challenged the economic orthodoxy.
Relative to stores in Pennsylvania fast food restaurants in New Jersey increased employment by 13% after the rise of minimum wage. Another interesting element in the research was New Jersey’s rise of minimum wage occurred during a recession.
Such a natural experiment exposed the flawed argument that the increase in minimum wage would increase unemployment.
It is not the increase of minimum wage per se that will cause unemployment. There are various variables that need to be taken into consideration on the given issue of unemployment.
The rise of employment in New Jersey after the rise of minimum wage could be due to other variables such as the abundance of skill workers that could increase productivity, beside the type of food and beverage serve that could increase demand that would naturally create employment opportunities
Therefore, it is time that proper research is done on the minimum wage in this country to ensure certain simplistic notions that an increase of minimum wage would result in unemployment could be tested and determined through natural experiment.
There is also a need to differentiate the context of minimum wages between different States to ensure the actual cost of living is taken into consideration.