Impact of minimum wage policy from an economics perspective

Continue from previous post on "New Minimum Wage Policy", here we analyze the impact from an economics perspective. Many people said the new policy will jack-up the inflation figures due to higher production costs. Subsequently, it will dampen the GDP growth numbers. Is it true?

The impact on inflation and GDP growth is ambiguous. Setting a minimum wage would boost wages and consumption for workers who remain employed (likely to be the more productive workers, working in companies that have higher profit margin), but would hurt the profitability of businesses that are labor intensive and could potentially lead to higher unemployment rate.

The impact on growth will likely be a net negative in the short-run as it might result in raised cost without an increase in productivity. In the long-run, this policy may bring about a positive impact if it succeeds in encouraging workers to upgrade their skills or for companies to invest more capital to boost productivity.

From an economic standpoint, the minimum wage policy is not the best way to help the lower income households. A gradual phase-in of the minimum wage should help reduce some of the negative impact.

Unless the introduction of the minimum wage policy leads to a widespread upward adjustment in wages, there shouldn't be a significant impact on inflation.

Some SMEs claim that a minimum wage would bankrupt small firms which rely on cheap labor, from Indonesia, Myanmar and Bangladesh. The Malaysian Federation of Employers, whose members collectively hire 2 million workers, said it wants an exemption for the smallest employers and for the policy to be implemented over several years. Ex-PM Mahathir Mohd, who is very influential in the political scene, is also against the minimum wage policy as he believes that it would hurt Malaysia’s competitiveness, especially during economic challenging times.

Source: Credit Suissue report dated 19th March 2012